Stocks Applaud New China Rate Framework With Modest Gains

APAC Stocks Talking Points:

  • Asian stocks were broadly higher as Tuesday’s afternoon session got going
  • Chinese lending policy was in the spotlight after adjustments announced at the weekend
  • The Dollar inched back but still finds some yield support

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Asia Pacific stock markets managed broad if modest gains on Tuesday, reacting in part to a strong Wall Street lead but also to some news closer to home as China launched new Loan Prime Rates (LPRs) under a mechanism announced last weekend,

US stocks got a boost on trade hopes with tech and finance stocks climbing on reports that a new round of talks with China is being prepared for. As for the People’s Bank of China, its new LPRs replace the previous fixed benchmark lending rates and have been seem by some market watchers as a mechanism for guided monetary stimulus.

The PBOC said on Saturday that its new scheme will improve the mechanism used to establish rates, allowing it to ‘use market-based reform to lower real lending rates.’

The one-year LPR was set at 4.25%, below the previous comparable rate of 4.31%. Markets will watch future developments here very closely, especially if more fiscal stimulus is launched too, but so far seem prepared to applaud signs of policy loosening.

The Nikkei 225 was up 0.5%, with the Shanghai Composite and the Hang Seng both just in the green as their afternoon session got under way. Still, they had been deeper in the red earlier in the day. The ASX 200 was doing better, adding nearly 1% thanks to strong performances from job-listing company SEEK and software name Altium. Both companies’ results pleased the crowds. Gold miners did predictably poorly as haven demand for their product fizzled.

Like many pro-cyclical assets just now, the Japanese stock benchmark has bounced from its significant August lows (which in this case came in close to complete retracement of the rise up from December 2018 to the highs of this year).

Nikkei 225, Daily Chart

The index appears to have settled into a broad trading band, probably as investors await central bank commentary from Jackson Hole where the Kansas City Fed hosts this week its annual symposium.

The US Dollar saw a small pullback against the Japanese Yen as the session wore on but remains close to three-week highs against its major traded rivals as yields on US Treasuries regains a little composure and markets look hopefully to more stimulus from major central banks. There wasn’t a lot of economic news released through Asia’s day. The minutes of the last Reserve Bank of Australia monetary policy meeting found rate setters open to more stimulus should the domestic or international situation worsen. The closely-watched labor market has so far resolutely refused to roll over. If it holds up, monetary policy may be more dependent on offshore events, notably the trade situation between China and the US.

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— Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

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