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Tuesday, August 25, 2015
Markets rally after China cuts interest rates
Dow rebounded 300 (over 16K) , advancers over decliners a relatively mild 4-1 following yesterday's high volatility & NAZ rose 120. The MLP index recovered 8+ to the 238s (still down 220 from last year's record) & the REIT index went up 2+ to the 302s Junk bond funds found buyers & there was selling of Treasuries. Oil is up, back to the 39s, & gold retreated.
China fell back on its major levers to stem the biggest stock market
rout since 1996 & a deepening slowdown, cutting interest rates for
the 5th time since Nov by lowering the amount of cash banks must
set aside. The one-year lending rate will drop by 25 basis points to 4.6%
effective tomorrow, the People’s Bank of China (PBOC) said,
while the one-year deposit rate will fall a quarter of a percentage
point to 1.75%. The required reserve ratio will be lowered by 50
basis points for all banks to cover funding gaps, it said.
China’s
surprise yuan devaluation on Aug 11 led to a tightening in liquidity
as the PBOC subsequently bought its currency to stabilize the exchange
rate & curb capital outflows. The yuan may face more downside pressure
as a result of the latest monetary easing, making it harder to keep
depreciation in check. A 22% stock market plunge over 4 days
added pressure for broad stimulus as authorities pull back from other direct efforts to boost equities. China’s acceleration of monetary easing
underscores policy makers’ determination to meet Premier Li Keqiang’s
2015 growth goal of about 7%. The economy’s fundamentals haven’t
changed, Li said, adding
there’s no basis for the yuan to depreciate continuously, & that China
is able to keep the exchange rate basically stable at a reasonable
level. The economy still faces downward pressure & the task of stabilizing
growth, adjusting its structure, pushing reforms & improving living
standards is very challenging, the PBOC said. Given volatility in global financial
markets, “we need to use monetary policy tools more flexibly,” it said.
Purchases of new homes in the US rebounded in Jul, bolstering signs the real-estate market is picking up. Sales climbed 5.4%, the biggest gain this year, to a 507K
annualized pace from a 481K rate in the prior month, according to the Commerce
Dept. The forecast called for 510K. Demand had
declined 7.7% in Jun & demand for new properties is likely to keep expanding amid strong
employment, low borrowing costs & a lack of available existing homes
from which to choose. The improving outlook may spur more residential
construction, contributing to the economic expansion in H2. The median sales price increased 2% from Jul 2014 to $286K. Purchases rose in 3 of 4 regions, led by a 23%
increase in the Northeast. Demand in the Midwest declined 6.9%. The new-home sales report follows other recent data that indicate the
industry is making progress. Existing-home sales rose in Jul for a 3rd straight month to reach the highest level since Feb 2007.
Residential starts rose in Jul to a 1.21M annualized rate, the
most in almost 8 years. Buyers are getting help from a strong job market & low borrowing costs.
Russia lowered its economic
forecasts for this year & next year as a renewed plunge in energy
prices sank the ruble & sanctions over Ukraine looked set to persist. GDP will
fall 3.3% in 2015 before rebounding as much as 2% in 2016,
Economy Minister Ulyukayev said. The ministry had earlier projected a 2.8% contraction followed by 2.3% growth. Russia’s slump reached a “fragile” bottom last month, Ulyukayev said,
predicting an improvement in the economy in Q4. “I
don’t think we’ll go any lower but it’s hard to say when we’ll see
significant growth.” Russia, mired in its first recession in 6 years, is battling a new
wave of oil-price weakness that’s sent the ruble to its lowest level
against the dollar in 7 months. Adding to the pain, Foreign Minister Lavrov said that sanctions over the
conflict in Ukraine will stay in place for a “very long” time. He added the measures, which curb access to capital markets, will remain
thru 2018. Low oil prices are stoking inflation, which accelerated to a 13-year high of
16.9% in Mar. Consumer-price growth will ease to somewhere above 11% on an
annual basis by year-end. GDP may
contract 5.7% in 2015 under that scenario, the regulator said.
There is a sense of relative calm today after all the turmoil yesterday. But stocks are not out of the woods. Intl financial markets are still a mess & a mere interest rate cut in China will not solve problems. That economy is still under pressure to perform better. More importantly, the US economy is not showing vigorous growth & that trend is unlikely to change any time soon. At least the bleeding has ended for awhile.
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