China cuts interest rates

Publication date: 8 June 2012
Author: Mark Deans, Moneycorp

A chap in America was struggling through War and Peace on his new “Nook” ebook reader. In the novel, enthusiastic arsonist Leo Tolstoy makes frequent reference to the making of fires. Our American bookworm was surprised, then, to read how Shcherbinin ‘Nookd’ the flame and Prince Dolgorukov ordered the rearguard to ‘Nook’ fires. The ebook’s manufacturer had apparently hard-coded its product to usurp any mention of a certain competitor. Perhaps they could do something similar with the Madrid stock exchange, at least with that part of it that handles Spanish government bonds. If every mention of “sell” were to be overwritten with “buy” the country’s funding problems would be over in a day.

Having said that, yesterday’s Spanish bond auction went swimmingly. Buyers’ appetite exceeded the €2bn target and after the auction ten-year yields were down to 6.12%, 20 basis points lower than on Wednesday. Investors saw the success of the auction as vaguely positive for the euro. The one concern is that, by demonstrating its continued ability to fund itself, Spain might just be told by Brussels to get on with it if persists in quibbling about the technicalities of the mooted bank bailout.

UK government bonds came under a different sort of scrutiny at midday on Thursday. There had been a growing suspicion that the Bank of England might announce an increase in its asset purchase programme. The previous month’s decision to stand pat had, after all, been “finely balanced”. But no, the total will remain at £325bn for at least another month. Investors showed their relief by sending the pound half a cent higher against the euro and the US dollar.

The announcement coincided with news that China was lowering its benchmark interest rate by 25 basis points to 6.31%. The cut was immediately beneficial to the commodity-related currencies but it did not take long for the gloss to wear off. Rather than seeing the move as a potential boost to Chinese economic growth, investors began to ask themselves if it was no more than a last-ditch effort to prevent further slippage. Compared with Thursday’s opening levels the pound starts today half a cent better against the Canadian dollar, a cent and a half higher against the Aussie and two cents firmer against the Kiwi.

The yen, which also weakened as a result of fears for the Chinese economy, recovered strongly overnight in reaction to an upward revision to first quarter economic growth in Japan. The initial estimate of 1.1% was upgraded to 1.2%.

Today’s opening shots from Euroland showed a widening of Germany’s trade surplus. It was not particularly helpful to the euro though. Imports fell by -4.8% in April and exports were down too, by -1.7%. This morning Britain reveals the producer price index for May. Manufacturers’ costs are forecast to have risen by 1.3% and factory gate prices by 3.2%. After lunch Canada reports on employment, housing starts and the balance of trade. The American trade figures come out at the same time.

With no top-division data on the agenda other than the Canadian employment numbers, investors could well decide to take a breather after a long hard week. Have a good weekend and don’t forget to turn up for work on Monday.