The markets where on the defensive from the beginning of the trading session based on the news that the PBOC (China’s central bank) raised reserve requirements further signaling that a tightening of interest rate policy is on the horizon. The S&P 500 Index fell 3 points to 1075 and the dollar rallied against the Euro. The equity market rebounded very late in the trading session after being down as much as 13 points.
The euro is being punished for the European talk instead of actions. The euro has been sold to new nine-month lows. After talk of financial support of one kind or another circulated, fanned sometimes by official comments, European leaders managed to agree on a strongly worded statement of political intent. But it strikes many as disingenuous. The commitment to “determined and coordinated action if needed” rings hollow and seems to be a dangerous course, reactive rather than proactive. Next week the EU finance ministers meet. They can essentially be counted on to ratify what has already been agreed, and perhaps call on Greece to take even more measures.
China’s Central Bank has just raised its reserve requirement by a further 50bp (to 16.5% for big banks). It is the second time the central bank tightens monetary policy this year and the timing of this second move comes as a surprise. Indeed, this decision comes just one day after China’s Jan new Yuan loans more than tripled to JPY1.29 tln (vs. CNY1.375 tln expected). The market had focused on the softer than expected January CPI (+1.5% y/y from +1.9%.) The PBOC move also comes a couple of days after the January trade figures confirmed a positive contribution to growth from external demand, but the surplus was actually weaker than expected, at $14.17bn (from $18.4bn) with export growth running at 21% y/y (from +17% y/y). While the economy is expected to expand by almost 10%, today’s policy decision confirms the strong commitment to moderate buoyant lending growth.