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Yuan falls on rate cut as China data disappoints: markets wrap

Yuan falls on rate cut as China data disappoints: markets wrap
A member of the Malon de la Paz kneels between protesters and police to try and stop clashes between them, during a protest to demand justice for the death in a police operation of Facundo Molares Schoenfeld, at the Obelisco in Buenos Aires, Argentina, 11 August 2023. (Photo: EPA-EFE/Luciano Gonzalez)

The yuan slid to the weakest level since November and China’s sovereign bonds rallied after the central bank unexpectedly cut a key interest rate in an effort to boost its ailing economy.

The Chinese currency slipped as much as 0.5% after policymakers lowered the rate on one-year loans — known as the medium-term lending facility — by 15 basis points to 2.5%. Only one of 15 economists surveyed by Bloomberg had predicted the move. The People’s Bank of China also trimmed its seven-day reverse repurchase rate by 10 basis points. Ten-year bond yields fell to the lowest since 2020 while the yuan has since pared some of its losses.

China’s benchmark share index slipped for a third day, while equity gauges for Japan and Australia both gained. Treasuries were little changed in Asia after 10-year yields had climbed to the highest since November in US trading. The Australian dollar weakened after wage data missed estimates.

China’s MLF rate cut “is positive but I suspect the support to the market from this will be subdued and short-lived”, said Redmond Wong, a market strategist at Saxo Capital Markets HK Ltd. “Investors now are worried about credit events, not just from the ailing property sector, and once again also on the shadow banking system and rightly expect that the authorities will not bail them out.”

A raft of July economic data published after the rate decision added to signs China’s recovery is faltering. Industrial production and retail sales both expanded less than economists forecasts, while the urban jobless rate rose to 5.3% from 5.2% in June. 

Property woes

Tension has been building in China’s financial markets as red flags pop up throughout the economy, but particularly in the troubled property sector. Sentiment has been soured by debt concerns at Country Garden Holdings Co., once the nation’s largest developer by sales, missed payments by one of the nation’s largest private wealth managers, and heavy losses at China-focused hedge funds.

In US trading on Monday, tech stocks had their best day in two weeks amid the prospect of a soft landing for the economy. The Nasdaq 100 rose 1.2% with gains led by AI-favourite Nvidia Corp. and other technology giants. Still, smaller stocks were under pressure, with the Russell 2000 touching the lowest in a month.

The focus later this week will be on minutes of the Fed’s July policy meeting as traders seek clues on the central bank’s next move. Investors who’d bet on a pivot to easier policy this year are having to adjust their bets as officials signal they will keep interest rates higher for longer. 

In emerging markets, Argentina’s already-distressed debt slumped on Monday after a populist who vowed to burn down the central bank won surprisingly strong support in a primary vote. Its under siege government submitted to a 18% currency devaluation. 

Elsewhere, oil rose and gold held near its lowest close since March as traders pared expectations for Fed rate cuts next year and beyond. DM

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