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Hope Shifts To China Central Bank Stimulus!

  • Written by Syndicated Publisher No Comments Comments
    September 29, 2012

    With no follow-through so far to the initial two-day spike-up global rallies in response to the ECB’s ‘whatever it takes’ program, the U.S. Fed’s QE3 announcement, and Japan’s additional stimulus plan, hopes for more market support have shifted to China.

    After five straight down-days for the S&P 500 in the U.S., downside reversals in Asia since the initial spike-up peaks, and a big plunge in European markets yesterday as the rescue of the eurozone debt crisis runs into stumbling blocks, markets are bouncing back today, reportedly on new hope that China will join the stimulus parade.

    The hopes come on the report last night that the plunge in corporate earnings in China continues to accelerate. The combined profits of China’s major industrial companies fell 6.2% in August, even steeper than July’s 5.4% decline, and the 2.7% decline over the first 7 months of the year.

    China’s stock market bounced 2.6% last night after hitting a new 3 1/2 year low Tuesday night as China’s central bank again injected liquidity into the banking system, reaching a record amount for this week through short-term reverse currency repurchase operations.

    Previous similar short-term operations have had no discernible effects, and markets have been hoping for something more permanent like further cuts in interest rates and in required reserve ratios (RRR) for banks. China lowered RRR three times since 2011 and cut interest rates in June and July, but has done only short-term currency repurchase operations since.

    China has been reluctant to ease monetary policies in those more traditional ways of cutting interest rates and RRR, reportedly waiting until the new government leaders take over later in the year. However, there may be more to the reluctance than that. China is concerned about its real estate sector and the potential for lower interest rates and RRR to set off another round of real estate inflation that has been such a problem in recent years.  

    However, with last night’s report on a still accelerating decline in corporate earnings that has China’s stock market in a severe bear market, hopes are high that China’s central bank will be forced to try to come to the rescue.

    An advisor to the People’s Bank of China (PBOC) told reporters, “We have indeed underestimated the severity of the external economic situation.” And added that further stimulus will depend on “the degree of deterioration of the external situation”, by which he apparently means the worsening economic slowdowns in Europe, the U.S., and the rest of the world.

    But the Vice-governor of China’s Central Bank says, “Monetary policy faces a dilemma. On the one hand the central bank needs to stabilize economic growth, but on the other hand it is very worried about the problem of property prices.”

    However, at least today, markets are apparently convinced aggressive easing will finally take place in China as soon as next week.

    China’s stock market could sure use a lift. Even last night’s big rally of 2.6% is hardly a blip on the chart.

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    Global slowdowns support hoped-for easing by China.

    If further easing by China’s central bank (PBOC) depends on “the degree of deterioration of the external situation”, as stated by an advisor to the PBOC, it is seeing the degree of global deterioration worsening.

    Not only in its own country’s reports, but pretty much globally.

    In Europe, as the Financial Times puts it this morning, “Every time Europe’s leaders are given a breathing space by the European Central Bank, they return to their petty disputes and progress stops.”

    Pretty much the same thing can be said about the U.S. Congress.

    Fed Chairman Bernanke has warned that the Fed has only limited tools from the monetary side to help the economy, that Congress needs to come in with help from the fiscal side, particularly to resolve the fiscal cliff concerns that kick in with the new year. But the Fed provided another attempt with QE3, taking the pressure off Congress, and Congress recessed until after the November elections.

    They will no doubt get the fiscal cliff resolved, or at least kicked down the road at the last minute, but it’s going to take some panicked late-night and weekend sessions when they get back to get the issue resolved in time.

    Meanwhile, this week’s economic reports include that the Chicago Fed’s National Business Index fell further in August, dropping to –0.87 from – 0.12 in July. More ominous, the more important three-month moving average fell from –0.26 in July to –0.47 in August, its 6th consecutive negative reading. And this morning it was reported that Durable Goods Ordersplunged 13.2% in August, much worse than the forecast of a 5.3% decline. And 2nd Quarter GDP was revised down to just 1.3% from the previously reported 1.7%.

    Meanwhile, the Business Roundtable reports that confidence among U.S. corporate chief executives has hits its lowest level in 3 1/2 years.

    Do we even have to wonder why?

    Subscribers to Street Smart Report: There is an in-depth U.S. Markets Signals and Recommendations Report from yesterday in your secure area of the Street Smart Report website. And there will be an in-depth ‘Global Markets’ Update there later today.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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