SCOREBOARD: China kick-on

Markets rallied as China cut interest rates for the first time since 2008, but a speech from Ben Bernanke dampened enthusiasm.

In the first move since 2008, China’s central bank, the PBOC, cut rates 25 basis points to 6.31 per cent (for the one year lending rate) but it doesn’t seem to have had a lasting impact. There was a bit of a boost to risk initially, more so in the European session where we saw a decent rally. The Dax closed 0.8 per cent higher, the CaC was up 0.4 per cent while the FTSE rose 1.2 per cent. But in the US things fizzled, perhaps because Fed chair Ben Bernanke eventually came out and ruined everything with crazy talk of not necessarily printing more money (in testimony to Congress).

I say crazy only because I don’t think too many analysts really believe him. But in his speech, and while not really saying too much, he did imply that Europe would need to implode before they printed again, stating the Fed would merely "take action as needed" which was seen as a step back from some of the more dovish commentary lately. It certainly wasn’t a call to arms which I think is what some punters had been looking for. So there were some huge moves after, especially on gold which was down some $30 to $1589, while crude, having hit a high of $86.8 on WTI fell down to $83.8. Copper was down smalls.

Wall Street, too, reversed some of the gains that had built up. At the high for instance, the S&P500 was up 1 per cent on all the positive sentiment that the PBOC move brought. But after Bernanke's speech those gains were lost and the index was flat (down 0.01 per cent to 1314.99). The Nasdaq was off a bit more than that (down 0.5 per cent to 2831), while the Dow rose 0.4 per cent (12460) with industrial and utilities outperforming.

Outside of that, some of the more interesting news flow was in regards to Spain. They had a debt auction last night, €2.4 billion of the 2s, the 4s and the 10-years I think, and the auction was widely regarded as a huge success. They are paying more for their debt, sure. Spreads are high. But what the market is telling you is that they don’t think there is any real risk of a huge, rich country like Spain really defaulting. Check some of these figures.

On the 10-year bond, Spain auctioned off €611 million, which was more than three times over subscribed. The 2-year was over four times oversubscribed. That’s very strong demand. They’re paying more – 6.04 per cent from 5.73 per cent in April on the 10-year and 4.33 per cent versus 3.365 on the 2-year. But, as I have highlighted before, these are not historically onerous rates. Yet Fitch came out and downgraded them anyway – three notches to BBB. No credibility, these guys. Thankfully, investors seem to have downgraded the ratings agencies to junk and demand at the auction was still very strong.
As for the bond action in the US, there wasn’t really any in the end. With a high yield of 1.68 per cent, the 10-year settled down to 1.64 per cent which is down almost a basis point. It’s the same story on the 5-year which is at 0.71 per cent, while the 2-year is at 0.27 per cent. Finally for the forex markets, the Australian dollar, having just managed to push through parity, eased off and now sits at around 0.9889. Euro ended up falling about a big figure to 1.2556 while yen and sterling are at 79.6 and 1.5527 respectively.

In terms of other news and data, there wasn't a great deal. US jobless claims remained at that 377,000 level. Officially down from 389,000 but it’s been around that mark for some time now. In England, the BoE kept rates unchanged at 0.5 per cent and kept their money printing to £325 billion and I think that’s about the lot.

The calendar for Australia today includes home lending at 1130 AEST and the trade balance. Both data points are for April. There isn’t much else till this afternoon when we see German trade figures and then this evening UK producer prices. For the US tonight, we have the excitement of the US trade figures and wholesale inventories. I think over the weekend we get Chinese inflation figures as well. Have a good long weekend.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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