China’s Easing Hat Trick Surprises Markets, Again
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(eToro Blog) Markets got exactly what they expected and more from the major central banks today, with the Bank of England and the European Central Bank both taking a more dovish stance, but it was the Peoples Bank of China which caught traders flatfooted. Just after the BoE decision and prior to the ECB’s, the PBOC announced that it would cut its benchmark 1-year rate by 31 basis points to 6%, while its deposit rate would be reduced by 25 basis points to 3%.
This is the Chinese central bank’s second surprise rate cut and comes less than a month after the first; analysts say that it is a clear indication that Beijing is unhappy with the pace of Chinese growth. One analyst explains the significance of the rate cut, suggesting that it means Beijing believes that rock bottom hasn’t yet been reached and only additional stimulus can engineer China’s economic recovery. Like the previous rate cut, and has been their predilection, the PBOC decision is broadly seen as a preemptive move to quell market jitters in anticipation of what is likely to be disappointing economic data releases next week.
Over the past few months China has introduced new measures intended to encourage growth; that includes more grant approvals for infrastructural and large-scale industrial projects. Between these policy changes and the monetary accommodations, many analysts believe that the efforts will pay off with a rebound in third quarter growth. Some, however, believe that growth could still disappoint unless Beijing works to revive its real estate sector.
As of this writing, gold prices have dropped to about $1600 per ounce, but that decline is attributed directly to a profit taking frenzy after the day’s high of $1.623.80 was struck which came shortly after China’s central bank made its announcement. Analysts concur that the central banks’ easing is good for gold prices as well as other precious and industrial metals in the long run. One analyst believes that gold prices may get enough impetus from today’s several announcements to start the uptrend and believes that $1900 per ounce by the end of the year is achievable.
On OpenBook, gold trade is being driven predominantly by bulls, with 89% buying to 11% selling. Just after the announcement, OpenBook’s gold guru MIB1984 closed two long and four short positions with an average gain of more than 18%. The guru, who now has 1050 copiers, has since placed an order to buy at 1625 and an order to sell at 1620.
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I think China has reduced the rate purposefully to achieve something at the end of the year