Hang Seng, China A50, SGX iron ore: Rate cuts, lots of them, but does it solve China’s problem?

Chinese regulators announce swathe of stimulus measures to boost growth and inflation
Interest rates and RRR cut, continuing moves which have failed to boost demand to date
Measures to boost Chinese stock market flagged, specifics to arrive later
China A50, Hang Seng, SGX iron ore pushing higher

Overview

Chinese regulators will slash wholesale and mortgage interest rates, free up cash for banks to lend and implement measures to support the stock market, designed to help address flagging economic activity which is weighing on inflation. However, none of the moves directly boost demand, raising questions about just how effective they may be in delivering a sustainable improvement in economic sentiment.

China delivers swathe of stimulus measures

In a joint press conference with leaders from the People’s Bank of China (PBOC), National Financial Regulatory Administration and China Securities Regulatory Commission, regulators announced they will cut the reserve requirement ratio for Chinese lenders by 50 basis points, releasing additional financial liquidity that can be used in the economy.

Wholesale interest rates such as the seven-day reverse repo and one-year medium-term (MLF) rate will be reduced by 0.2% and 0.3% respectively, with loan prime rates also cut by 0.25%.

Reductions to mortgage and deposit rates were also flagged along with the potential for further cuts to the RRR. Down payments for second home purchases were also reduced.

Regarding China’s spluttering share market, the regulator flagged moves to promote mergers, acquisitions and corporate reorganisations, along with guidance to promote medium and longer-term funds to enter the market.

But is it enough to boost economic activity?

While plenty for traders to digest, none of the moves should be deemed as unexpected. Perhaps them arriving simultaneously, yes, but further cuts to rates and the RRR were already expected. And while the initial market reaction has been positive, what stands out is that it’s just a continuation of policies we’ve seen previously: providing ever lower financing rates to borrowers. To date, that strategy has not delivered a meaningful improvement in demand, nor addressed glaring supply-side overcapacity across several key sectors.

Rather than looking at the immediate reaction in more liquid Chinese markets, one of the best indicators as to whether markets think these measures will work is the shape of China’s yield curve. As seen in the following chart, despite all the monetary easing seen so far, including today, longer-term yields continue to collapse towards shorter-dated yields, delivering a clear signal on where investors see growth and inflation in the future: lower.

If traders thought the policy measures would work, you’d expect longer-date yields would be moving in the opposite direction. It’s telling they aren’t.

China A50 bulls eyeing downtrend retest

Looking at China A50 futures, momentum has swung around to the upside with big volume accompanying the recent bounce. MACD and RSI (14) have confirmed the bullish price signal, pointing to a possible near-term test of key downtrend resistance and the 50-day moving average.

If that zone were to be broken, it may facilitate a push towards the 200-day moving average and horizontal resistance around 11900. But if the downtrend and 50DMA hold, the price may reverse back towards the recent lows with only minor support at 11375 located in between.

Risks look biased higher in the near-term given the threat that state support may be called upon if the initial bullish reaction falters.

Hang Seng extends bullish run

Hong Kong’s Hang Seng has extended its bullish run on Tuesday, rallying briefly above resistance at 18733 before revering lower. With MACD and RSI (14) providing bullish signals on momentum, the bias is to buy dips near-term.

Support is located at 14476, 18160 and 17582. A clean break above 18733 may open the door for a push towards 19559.

SGX iron ore remains heavy

Turning to the industrial metals space, SGX iron ore tried to rally on the announcements but has since reversed towards long-running support at $89.30. A decisive break below this level may bring a flush towards $85.50. On the topside, resistance is located at $95.40 with a far tougher test located just above with downtrend resistance accompanied by the 50-day moving average. If that zone were to be broken, the contract could squeeze up towards $99.95 or even $105.75.

Even though RSI (14) remains in an uptrend and is diverging from price, the bias remains to sell rallies until the downtrend is broken.

-- Written by David Scutt

Follow David on Twitter @scutty

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.