Wednesday, 30 November 2011

China opened the flood doors by cutting reserve requirements

When the world screams for liquidity (shown by the increasing inter-banking swap rates), China comes to the rescue by lowering the reserve requirements and therefore unleashing a new wave of cheap money into the system. The markets responded very quick to this Chinese monetary stimulus, with equity and commodities spiking up, in a risk-on trade. Furthermore, in a following move, most of the leading Central Banks are now receiving USD swaps by 50 basis points less. Result: cheaper money.

Chinese stimulus 

The People's Bank of China has issued a statement today according to which they will cut the reserve requirement ratio for banks by 0.5% starting from Dec. 5, in a move meant to inject further liquidity in the financial system. This is meant to animate the Chinese growth rate, which recently showed signs of deceleration.


Gold is thriving in a negative real interest rate environment, in which the nominal interest rates do not cover the expected rate of inflation, and the news of further monetary easing was like a boost. It spiked to what is now $1743, after trading at the beginning of the trading session $1717, amounting to a positive 1.5%. Still holding my position and I`m quite happy it held the $1690 support level. I`m expecting a year-end rally in gold.

Equities: S&P500

As reported in yesterday's article, there was a high chance of this year closing with a happy-end, but until now, it lacked the catalyst. FED's and PBOC's combined efforts to open the monetary food gates and further stimulate asset prices are going to bring the punch-bowl back to the party (at least till January when all eyes will be on the FED'S FOMC statement. Till then, enjoy the party!

All major equity indexes spiked today, with the S&P500 up 3.6% to $1233 and with the DOW near the $ 11855 level. The sentiment is bullish for the short-term, as the 7 day sell-off didn't manage to break through the $1080 support level.

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