The Overnight Report: China Cuts Interest Rates, Again

This story features BENDIGO & ADELAIDE BANK LIMITED. For more info SHARE ANALYSIS: BEN

By Rudi Filapek-Vandyck

Spare a few seconds of thought for Dennis Gartman. He found himself stuck in New York yesterday with a Dell laptop that did the perfect imitation of a sudden death, just as he was preparing the next edition of The Gartman Letter.

We can sympathise with him for we have had similar experiences throughout the years. Being a publisher of an on-line news medium while being on the move can have its back flips.

Gartman did still manage to leave some comments for his subscribers, and here are two key paragraphs from his shortened newsletter, published this morning:

“Stocks are weak, and we are concerned that we might have erred in “skewing” our positions bullishly, for if volume is to follow the trend, it is not. Volume has waned as the markets have rallied, and we wish therefore to return to a market neutral position, hedging our net long positions in banks and “infrastructure” stocks by either going long of the reverse ETFs for those who cannot use futures, or by selling futures upon receipt of this commentary by those who can.

“Regarding the commodity markets, if we were forced to trade gold we would tend to trade it bearishly, for the news has been manifestly bullish and yet gold, in US dollar terms, cannot make new highs. Further, regarding the grains, although we might tend on balance to trade bullishly, we should note that much of that is predicated upon wheat’s recent strength, and that is predicated upon winter kill in the central US where the hard and soft red winter wheat crops are making their way through frigid temperatures. However, we must always remember that “wheat is a weed,” and to think that the wheat crop can be killed off so easily is to forget the lessons of history. Wheat is a fantastically hardy crop, and it is more so with modern seeds and genetic engineering.”

And so it is that with each passing day investor hopes for at least a mini-Christmas rally evaporates a little bit more.

US shares retreated some more overnight. The Dow Jones Industrial Average slipped 59.42 points, or 0.7%, to 8,519.69. The Standard & Poor’s 500 Index retreated 1.8% to 871.62.  The Russell 2000 Index of small companies lost 2.3%.

About four stocks fell for each that rose on the New York Stock Exchange, as investors once again realised the next few quarters will be tough and company earnings continue to slide. Overall expectations that retail sales are poised to disappoint during this all-important Christmas period added to the gloomy atmosphere.

Also, news wires report today’s losses followed the S&P 500’s first back-to-back weekly gains since September. Completing the picture, European equities also lost ground overnight, dragged down by auto and mining stocks. The DJ Euro Stoxx 50 closed 1.9% lower to 2398 and the FTSE100 closed down 0.9% to 4249.

In China, the central bank announced another interest rate cut – showing just how much the Chinese economy is in deep trouble – and judging by the emails in our in-box, economists across the globe have jumped on the occasion to predict more of those cuts will be forthcoming in the months ahead.

The Australian SPI 200 March futures contract fell 32 points or 0.9% to 3521.

It was a choppy night of trade in the currencies markets. The EUR/USD reached as high as 1.4125 before stabilising around 1.3950 late in the session. GBP/USD also lost ground, falling as low as 1.4688 before recovering above 1.4830.  Yesterday’s weakening in the JPY following reports of a record plunge in Japanese exports was reinforced, with the USD/JPY pushing back above 90.00 late in the session and EUR/JPY remaining largely steady between 125.40-90.

AUD/USD was unable to break above 0.6880 due to the stronger USD tone. AUD/JPY ground higher to above 61.50 but was unable to rally above 62.0.  AUD/EUR reached 0.4934 but was unable to hold onto gains and has since dipped back around 0.4910.

News of another rate cut in China supported commodities with gold posting a small gain, despite USD strength, and with most base metals posting small gains, but the Chinese news failed to prevent another slide in the price of crude oil.

Oil futures rolled over into the February contract and as these contracts were trading nearly US$10 above the January contracts, oil in essence started again from above US$40 per barrel compared with a low-US$30s price on the expiration of the January contract on Friday. The release of weak demand figures from Asia overshadowed everything else and crude oil for February delivery fell 5.9% to US$39.86 a barrel.

The People’s Bank of China (PBoC) cut its benchmark 1-year lending rate 27bps to 5.31% and its benchmark one-year deposit rate to 2.25% from 2.52%. The PBoC also cut banks’ reserve requirement ratio by 50bps (to 15.5% for the 5 largest banks and to 13.5% for other lenders). This is the fifth interest rate cut from China since September. (There’s a message in here, need I be any clearer?)

US Treasury bond prices fell overnight as the US government auctioned a record US$38bn of two-year notes for a higher than expected yield. The yield on the 2-year note rose 6bp to 0.785 and the 2s10s curve flattened with the 10-year yield rising 2bp to 2.139%. The 30-year yield was 5bp higher at 2.598%.

Australian bond futures were little changed overnight, outperforming the sell-off in US treasuries. The 3-year Dec-08 bond futures contract fell 1bp to 96.57% and the 10-year Dec-08 bond futures contract rose 1bp to 95.87%.

Time to spare a few moments of thought about what some key policy makers had to say last night:

Bank of Japan Governor Masaaki Shirakawa:  “The Japanese economy is deteriorating and for the time being its conditions are likely to become more severe.”

Bank of England Deputy Governor Sir John Gieve:  “We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy,,, and individual supervision and regulation of individual banks. We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand.”

That’s it for today. Tomorrow will be our last Overnight Report for the year. See you all back in January!

Last Minute Addition: News just came in that Bendigo and Adelaide Bank ((BEN)) is conducting a share placement at $10 per share.

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