Market commentary: Markets rally following boost from China

Two major news items are making the headlines this morning. News from China has emerged that PBoC Governor Zhou Xiaochuan broke a very long silence and spoke to Caixin financial magazine to suggest that capital controls are not needed and that neither is further exchange rate depreciation. The other major news is that the board of HSBC has unanimously voted for their headquarters to remain in the London, the world’s largest financial hub.

Markets have rallied strongly as a result of the statements by the PBoC governor. The Euro Stoxx 50 is up 2.8% as of this writing, as all European markets are significantly higher. A strong momentum in the stock prices of Italian banks has led to the FTSE MIB being the leader, up around 3.5% while the FTSE 100 is lagging, up around 2% despite the positive news about HSBC’s headquarters remaining in London. The news affected the sector very positively, with financials leading the index, up almost 3%.

Today the market is looking to Draghi for a statement of confidence as the ECB governor gives testimony to the European parliament. Although the market does not expect any major policy announcements, investors and the general market will be looking for confidence in the direction the ECB is taking with regards to reviving the stagnant region.

Concern among the investing community is that the ECB may be running out of policy tools to prop up the European economies, and thus leave European economies in a perpetual state of stagnation similar to the situation in Japan. This sentiment has added to the recent rout in both equity and high yield bond markets.

The yuan had its biggest one-day advance since a peg to the dollar was scrapped more than a decade ago, as the currency caught up with a decline in the greenback during the holiday. The currency appreciated around 1.25% before dropping off slightly as of this writing. The PBoC governor said in the interview he held that China’s balance of payments position is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies.

On to fixed income, Investment grade bonds are up across the board with the itraxx Europe index tighter by 4.8 points to 113.42 with the Materials sector leading. Peripheral government bonds are up, with Italy, Spain and Portugal’s spreads tighter while French and German yield are currently flat. In high yield, the iTraxx Crossover is also significantly tighter by 22 bp to 440.46 indicating a positive day for high yield bonds in a positive session for multi asset classes.

Looking at commodities, oil has continued its decline following news of further supply from Iran which led to the WTI crude drop below USD 30 a barrel and is hovering around USD 29 following a 12% surge on Friday. US oil explorers idled more rigs last week amid crude’s fluctuations and descent below USD 30 a barrel.

It is Presidents day in the US today, therefore both equity and bond markets will be closed.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.