All market activity and fundamental influences are still consistent with our previous analysis of continued equities’ risks with govvies also now getting the bid back on weak economic data. And data elsewhere being weaker than the U.S. has managed to restore the U.S. dollar bid after slippage last week.
Much of that has to do with the massive quantitative easing programs being pursued by the European Central Bank and Bank of Japan in the wake of the Federal Reserve’s program lapsing last year. And now the People's Bank of China has jumped back into the central bank accommodation pool in a significant way over the weekend with a full 1.00% cut in their banks’ Reserve Requirement Ratio.
That is no doubt due to the very weak data out of China that was accentuated by the surprisingly abysmal Chinese Trade Balance last Monday morning, with export figures particularly weak. While expectation for a still very positive overall Trade Balance was predicated on lower imports as well as exports remaining up, even imports were weaker than expected. And exports (for lack of a better term) "tanked."
As the expectation was for them to still rise 10.0% year-on-year, the drop of 15.0% was especially disconcerting. That was exacerbated last Wednesday by GDP coming in as expected at 7.0% year-on-year, yet with weak Industrial Production and Retail Sales figures; with the latter being especially troubling in light of China’s stated desire to move from an infrastructure investment economy to a stronger retail consumer culture.
So maybe it shouldn’t be so much of a surprise that the People's Bank of China should attempt to address the situation with its next cut in the Reserve Requirement Ratio for banks. That said, the size of the full percent cut to 18.50% caught observers by surprise.
It also highlights the cross currents PBOC is faced with. The struggling property sector desperately needs all the help it can get. On the other hand, it is of note that new limits on speculative trading were introduced last week to offset extreme equities strength. Unlike other central banks, PBOC must be a bit more cautious in its stimulus activity. In the meantime, the market activity so far appears to be a reaction rather than a reversal.
Equity market implications
That is true due to the key market activity only partially reversing last Friday’s impressive movements. In the equities the recoveries in Asia and Europe are only partial recoveries from last week’s late week softness. And that is thoroughly consistent with the June S&P 500 future failure from a couple of tests of extended interim resistance at 2,100 without ever getting above the more critical levels into the June contract 2,107 early March all-time high, and the lead contract 2,117.30 all-time high from just prior to that. While it held on the initial resurgence of Greek Debt Dilemma concerns on Thursday, by Friday it gapped below 2,090-88 support and even slipped below more important 2,075-78 for a while prior to recovering to Close the week at the low end of that range.
And in addition to the PBOC boost this morning carrying it back up above the 2,088-90 area, the general ‘bad news is good news’ psychology remains in force based on previous market reactions to weak news. And by the way, we have more of that this morning. While there is not much in the U.S. today, all of the data out of Japan, Europe and the UK is anywhere from weak to very weak.
The question is just how much of the weak news is still constructive, as opposed to demonstrating the degree to which all of the central bank Quantitative Easing cannot provide strong economic growth where other aspects like meaningful reforms are lacking. Please see our Thursday www.rohr-log.com post for an extended review of what Mario Draghi had to say at last week’s ECB press conference. It is compelling.
Rohr International’s active analysis of how short-term activity fits in with the intermediate- and long-term trend indications is another FUTURES advantage.