FXStreet (Guatemala) – Cristian Maggio , Head of Emerging Markets Strategy at TD Securities explained that it took approximately one day to dissipate most of the enthusiasm generated by the PBoC’s decision to cut rates and the RRRs yesterday.
Key Quotes:
“Asia equity futures spiked after the announcement, but the move didn’t produce a great deal of follow through, and when the US session neared its close yesterday, pessimism started to reappear. Today looked like an extension of this story until Fed’s Dudley said that a September lift-off is less compelling. While this is raising the odds that the lift-off may occur at a later date—which we would normally consider risk positive—it didn’t seem to improve sentiment in EMs.”
“I mentioned yesterday that if the outlook for China and global growth improves as a direct consequence of China cutting rates and injecting more onshore liquidity, this may lead to the conclusion that the ball is still in the Fed’s court for a September hike. This remains very much alive an option that could eventually reset the game of expectations.”
“After the Dudley speech, we’re back at square one. It’s either China growth disappointing already weak projections or Fed tightening causing the turmoil. Clearly, we may see China’s economic activity doing better than feared and Fed hikes coming in later than September. This is the best case scenario for sentiment.”
“But China growth will continue to hit the brakes for some time and the Fed will resume tightening sooner or later. So your expectations should incorporate these two assumptions, and markets should get used to them as well.”
(Market News Provided by FXstreet)