LDN - Business

Marketmind: Shoring up confidence in fragile China

[January 24, 2024] A look at the day ahead in U.S. and global markets from Dhara Ranasinghe

China appears to be waking up to the need to restore confidence in the world's number two economy, bringing respite to battered domestic equity markets.

The country's central bank will cut the amount of cash that banks must hold as reserves from Feb. 5, the first such cut for the year, as policymakers extend efforts to shore up a fragile economic recovery.

It also said it will maintain credit support for the economy, a day after media reports of Beijing preparing a package of measures worth $278 billion to stabilise a slumping stock market.

Hong Kong's benchmark index soared over 3% and the yuan hit its highest since Jan. 12 but was largely steady against the dollar in offshore markets.

Chinese stocks, while up over 1% on Wednesday, are down over 4% this month and set for their worst performance since August.

Yet a heavy dose of scepticism remains as to whether a rate cut, anticipated by many analysts, will be enough to shore up sentiment in the longer term, with some emphasising the need for the more targeted measures.

U.S.-based Yardeni Research believes China is at the start of a "major debt crisis." It notes Chinese bank loans have soared eightfold by $28 trillion since December 2008 to $33.4 trillion last month. In contrast, U.S. bank loans have doubled to $12.3 trillion over the same period, it says.

Speaking of the U.S. economy, Wednesday brings the release of the S&P Global PMIs, with ING pointing out that markets have become gradually more sensitive to the U.S. survey, even though the ISM index remains a key reference.

In Europe, preliminary PMI data has shown a downturn in euro zone business activity eased this month, but an improvement in the manufacturing outlook was partly offset by a steeper decline in the bloc's dominant services industry.

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A woman walks past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. REUTERS/Jason Lee/File Photo

Later in the day, the Bank of Canada is expected to leave its key rate unchanged, but stubborn inflation has markets delaying the timeline for the first rate cut in almost four years.

Any hawkish commentary from Canada's central bank could reinforce the view that big central banks such as the U.S. Federal Reserve are likely to move later than markets anticipated on monetary easing.

And after Donald Trump cruised to victory in New Hampshire's Republican presidential contest on Tuesday, marching closer to a November rematch with Democratic President Joe Biden, there's more attention on the implications of a possible Trump win for markets.

The underperformance of the Mexican peso since the start of the week may indicate markets are pricing in a larger chance of Trump winning the presidency, analysts said.

Goldman Sachs analysts said the prospect of tariffs on exports to the United States and any reduction in funding for Ukraine would be significant negatives for European stocks.

Trade in U.S. stock futures point to a positive open for Wall Street, with Netflix rallying 8% in extended trading on Tuesday after the video streaming service handily beat subscriber estimates in the fourth quarter.

Key diary items that may provide direction to U.S. markets later on Wednesday:

- Canada central bank rate decision

- Flash January PMIs globally

- U.S. 5-yrar note auction

- Europe earnings: Christian Dior, Abrdn, Alstom, ASML, SAP, Banco de Sabadell

- US earnings: AT&T, Abbott, Kimberly Clark, Tesla Motors, IBM

(Reporting by Dhara Ranasinghe; editing by Nick Macfie)

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