Thu, Dec 09, 2021 @ 10:25 GMT
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EU Morning: China Cash Saves The Day

PBOC to the rescue

Chinese markets have managed to stay afloat on day 2 of trading after the one day biggest gross cash injection from the PBOC. The injection comprised of RMB500bn via 14d and 7d term repo markets, and was able to take the edge of Coronavirus fears, which granted, haven’t exactly disappeared yet, with infection levels soaring to 20,589 and new cases reported outside of the virus’ epicentre.

My concern, outside of Coronavirus fears, is that Stabilisation measures from the PBOC have a striking similarity to what the Fed’s been doing as of late in “Not QE”. Today’s liquidity injection combined with yesterday on a net basis amounts to around $90bn. It begs the question: whenever there’s an issue, is the solution to just throw money at the problem?

Chinese 10y bond yields are trading at multi-year lows of 2.88% not seen since 2016. That’s staggering and goes to show just how squeezed duration is. If it continues to fall, it looks likely to help prop up portfolio flows into Chinese equities searching for yield, and continue blurring appropriate risk premiums for risky Chinese equities.

Asia bounces back

Back on the front foot, Asia risk reversed some of yesterday’s weakness, with outperformance seen in FX space against a moderately weaker dollar. USDKRW gained +0.6% though above consensus CPI is helping here. USDCNH dropped back below the 6 handle. PHP, THB, IDR and TWD have all made gains in the region of 0.1% – 0.3%, with lower oil prices somewhat responsible. Interestingly SGD underperforms relative to Asia.

Equities in the region also saw a stark difference compared to yesterday’s bloodbath after finding easier buyers. The Shanghai Composite finished 1.34% stronger, while CSI 300 and A50 futures delivered over 4% returns. Not too far away, PSI (+1.66%), Kospi (1.84%), and KLSE (1.10%) have bounced back at time of writing.

However, Chinese commodities remain slumped across the board with Iron ore futures, trading on the Dalian Commodities Exchange, gapping down some 4% at the open. While a pullback was seen on the broader recovery, they still finished off 2.5%.

Europe points up

Walking into Europe, FTSE and DAX are set for gains according to futures, with both major benchmarks trying to put some distance between themselves and Jan 31 lows. Top-tier data is limited to Markit Construction CPI (9.30am GMT), which has been scraping post-crisis lows since June 2019. A better than expected print could be instore here as sentiment improves post-election and previously stalled infrastructure projects are realised.

The most interesting scenes though revolve around Sterling at present time, which has steadily declined overnight to trade below key 1.3 levels, hugging multi-month lows. This is likely a short-term squeeze given how big long GBPUSD positioning has been in recent times across the leveraged and real-money community. I don’t think this changes the medium-term thesis of Sterling strength, but it is important to note that soundbites around the trajectory of UK-EU negotiations could cause a bit of a short-term stir in the currency.

Up ahead on the reporting radar, markets catch UK-domiciled BP (BP) which is down 4% on the year. The multinational oil and gas giant currently finds itself extremely challenged, having seen oil prices precipitously decline over the last couple of weeks amid growing fears that nCoV’s impact on Q1/Q2 oil demand could be larger than expected. Like many in the industry, longer-term capex is likely to come off a bit given lower yields on projects. Companies continue to seek mergers in order to cut costs.

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