- China deploys stimulus,
- ECB and SARB keep interest rates on hold,
- Oil trades near two-month highs,
- US economy overshoots expectations.
IN THE KNOW
China’s central bank unleashes massive capital stimulus
In a strategic move to counter the economic headwinds, the People’s Bank of China (PBoC) has announced a reduction in the reserve requirement ratio (RRR) by 50 basis points, unlocking a staggering one trillion yuan ($139.8 billion) in long-term capital. This decision, revealed by PBoC Governor, Pan Gongsheng, in his inaugural press conference, marks a departure from previous reactive measures and hints at a potential policy pivot.
The magnitude of the RRR cut exceeded expectations, signaling the PBoC’s growing concern about the ongoing economic dip, a sentiment echoed by experts like chief China economist at Nomura, Ting Lu, Pan’s transparent reveal of this policy change, a rarity in itself, underscores the urgency prompted by troubling economic data and a stock market crisis.
Beyond the RRR cut, the PBoC unveiled additional measures to strengthen the property and stock markets. These include broadening the use of commercial property loans for developers and deepening financial ties with Hong Kong and China equities. Pan also emphasised a reduction in interest rates on relending funds, incentivising loans to the agricultural sector and small firms.
Despite concerns about yuan volatility and uncertainties surrounding the United States (US) Federal Reserve’s actions, Pan expressed optimism about an impending pivot in US monetary policy, thus expanding the room for China’s monetary policy operations. He reassured that the PBoC would maintain the yuan at a reasonable level, ensuring a balanced amount of credit. Pan also highlighted the potential for a proactive fiscal policy, emphasising the manageable nature of the nation’s financial risks.
As China faces a significant challenge in its stock markets – which have lost over $6 trillion in three years – the government is considering emergency measures totaling two trillion yuan ($278 billion) to stabilise them. The central bank’s move to lower the RRR injects liquidity into the market, supporting economic growth through increased lending and bond purchases. The effectiveness of these measures remains uncertain, but the PBoC’s decisive actions reflect a commitment to navigating the complex economic landscape.
Central banks hold steady
In a world where interest rates seem to have taken up permanent residence in the headlines, the European Central Bank (ECB) and the South African Reserve Bank (SARB) have both opted for a “steady as she goes” approach.
The ECB’s first meeting of 2024 saw it keep interest rates unchanged at record highs, with a resolute commitment to maintaining the restrictive levels until inflation falls back to its 2% target. Despite whispers of a looming recession and easing inflationary pressures, the main ECB refinancing operations rate remained at 4.5%, and the deposit facility rate stood tall at an all-time record of 4%.
Meanwhile, looking locally, the South African Reserve Bank (SARB) unanimously decided to keep its key repo rate at 8.25%, maintaining borrowing costs at levels reminiscent of 2009. Citing persisting inflation risks and a cautiously balanced evaluation of medium-term growth risks, SARB seems determined to navigate the delicate dance between inflation and economic activity. With inflation forecasted at 5% for 2024 and 4.6% for 2025, SARB is keeping a watchful eye on the economic stage, maintaining growth projections at 1.2% for 2024 and 1.3% for 2025.
A CLOSER LOOK AT MARKET MOVEMENTS
Global markets navigate mixed signals
Global markets experienced mixed sentiments on Thursday as investors grappled with a slew of earnings reports and economic indicators, all of which are creating a landscape of uncertainty.
In the US, stocks hovered around record high levels despite a seesaw of economic data. While the US’s fourth quarter GDP expansion exceeded forecasts at 3.3%, initial jobless claims surpassed expectations, and durable goods orders unexpectedly plateaued. Alternative energy and electric car manufacturer, Tesla, faced an 8% drop due to lower-than-expected earnings and a cautionary outlook, contrasting with multinational tech company, IBM, which surged 8% after reporting revenue growth fueled by artificial intelligence. Alternative asset management firm, Blackstone, also climbed 2.1% following a 4% profit rise.
In the United Kingdom (UK), the FTSE 100 remained relatively steady after a previous 0.6% gain, with market attention focused firmly on corporate updates. Online trading platform, IG Group, tumbled over 9%, citing unfavorable market conditions, while specialty chemical company, Elementis, rose over 8% amid reports of potential acquisition interest.
Frankfurt’s DAX 40 faced a 0.2% dip, retracting from record highs, as the ECB opted to maintain current record-high rates to rein in inflation and as German business morale unexpectedly worsened in January.
In the Asia-Pacific region, Japanese shares rebounded with the Nikkei 225 and TOPIX Index posting modest losses after a two-day decline. China’s commitment to reduce the country’s banks’ RRR provided a boost, freeing up one trillion yuan for the economy.
On the local front, the JSE All Share index edged down as investors processed SARB’s decision to maintain the benchmark interest rate at 8.25%. The central bank emphasised its commitment to addressing rising inflation expectations.
Brent Crude futures soared to over $81/barrel, reaching a two-month high, propelled by a sharp decline in US crude stocks, marking the largest drop since August. US crude oil inventories fell by 9.233 million barrels, surpassing expectations and reflecting optimistic market sentiment. China’s decision to pour liquidity into its economy further added to the positive momentum. Meanwhile, concerns over supply disruptions persisted as a US and UK coalition launched strikes against Houthi fighters in Yemen who are targeting commercial shipping in the Red Sea.
In the precious metals arena, gold rebounded to around $2,020/ounce after hitting a one-week low, driven by traders assessing the timing and extent of potential interest rate cuts by the US Federal Reserve (Fed). Despite robust US gross domestic product growth, market participants are still betting on a more than 45% chance that the first US rate reduction will come in March. This expectation boosted gold’s appeal as a safe haven asset.
Currency markets volatile
As major central banks, globally, exercise caution in an uncertain economic environment, currency markets remain fluid, reacting to nuanced signals and central bank policies.
In this dynamic currency market, the US Dollar Index hovered around 103.2, responding to a mix of varied economic data. Despite a robust expansion of the US economy in the fourth quarter, the core personal consumption expenditure inflation held steady at 2%, while initial claims exceeded expectations at 214,000. Traders are now assessing the probability of a Fed interest rate cut in March, keenly awaiting hints from Fed Chair, Jerome Powell, during the upcoming meeting.
The euro faced a dip to below $1.84/€, its lowest level in six weeks, as the ECB maintained historically elevated interest rates, reiterating its commitment to combating inflation despite economic concerns.
Conversely, the British pound strengthened, reaching $1.28/£ against the dollar and hitting a near five-month high against the euro. Stronger-than-expected Purchasing Managers’ Index data fueled expectations for a gradual approach by the Bank of England in cutting borrowing costs. With a buoyant private sector and potential tax cuts in the upcoming budget, the pound showcased resilience despite a sharp decline in UK retail sales and an unexpected increase in inflation.
In South Africa, the rand set its sights on R18.80/$ on Thursday, reaching its strongest level in over a week, assisted by Chinese stimulus and the hawkish tone of the SARB, which highlights the Central Bank’s concerns about inflation risks, particularly in food, power, and logistics.
Brent Crude: $82.09
Sources: Bloomberg, Reuters/Refinitiv and Trading Economics.
Written by: Citadel Global Director, Bianca Botes.