Global Markets Overview – September 17, 2014

Stimulus bets become a rumoured reality

We have never had a clearer example of the adage the 'market is always right' than what happened with China overnight.

It is yet to be confirmed, however Sina.com has reported that the PBoC has provided an additional CNY500 billion (approximately US$81.4 billion) of liquidity to the five largest banks in China. Each will receive CNY100 billion through standing lending facilities, with a three-month expiry according to the one reported analyst in the know.

If this is confirmed, it essentially means the PBoC is undertaking QE; it is printing money and giving capital to the banks in the hope they will lend it on. It isn't as aggressive as the Q2 programme which saw the PBOC relaxing the reverse ratio and increase disbursements to rural and co-op banks with a hope that it would stimulate infrastructure spending and reduce local government debt concerns. However, it is still a stimulus measure and one that has a broader reach in that this is the first time the largest banks in China have seen a handout in 2014.

This is a rather large change in tact considering the talk from Premier Li Keqiang in the last four to five weeks. Premier Li had been talking up reforms rather than stimulus. He had resisted calls for further monetary inputs and instead had been concentrating on longer-term stability in the Chinese fiscal markets.

If the above is confirmed, it would suggest Premier Li has had to react to the data seen over the last two weeks and the inferred threat to GDP. Industrial production at 6.9% year-on-year is 210 basis points away from where it needs to be to reach the central government's targeted growth figure of 7.5%. What is more pressing is industrial production month-on-month contracted 2.3% in August, only the second time it has done so since the GFC, and will be a solid boost to reverse this trend.

The market's reaction to the rumoured stimulus package was also telling - the AUD shot up 1% in European and US trading, base metals added between 1.2% and 2% respectively. Interestingly spot iron ore eased to US$84 a tonne; after having seen the Dalian futures move up yesterday I would have expected to see a print higher. This is one to watch on the open at 11.15am AEST.

If the programme is confirmed, it is likely to snap Asian equities out of their Fed-induced slumber, particularly those cyclical materials plays that are leveraged to the China story. The futures are suggesting the miners and base metal producers across the Asian region are in for a north print day; however I again reiterate that the Fed is still the main driving force in the market currently, and this may only be a day or two move, and could reverse come tomorrow morning.

Ahead of the Australian open

We're currently calling the ASX 200 up 24 points 5469. There is some technical testing happening currently in the ASX. The two-and-half-year up trend line is being pressured, the RSIs and stochastics are in oversold territories, so it will be interesting to see if this holds over the coming days.

We remain cautious heading into Thursday and reiterate that being long the VIX is a good tactic as it is only going to increase as the prospect of the Fed funds rate moving higher ratchets up. It will be an interesting few days and weeks on the market as we head into the last trading months of the year.

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