China-linked assets pull back after Tuesday's euphoria

• China-linked stock indices, commodities, and currencies soared on Tuesday
   
• Yesterday, Chinese government unveiled broad-based economic support measures
   
• Today's prices seeing pullback despite PBoC's triggering record rate cut
   
• Market euphoria may have gone too far too soon
   
• Recent support measures should put near-term floor below China-linked assets

 

Yesterday, the Chinese government unveiled a slew of economic support measures.

That broad stimulus package saw many China-linked assets spiking higher on Tuesday (Sept 24th):

• CN50 stock index surged 5.7%, soaring by almost 1,000 index points intraday
   
• CHINAH stock index grew by 5.1%, or as much as 633 index points intraday
   
• HK50 stock index rose 4.14%, or as much as 1,448 index points intraday

 

Even commodities soared on Tuesday, given China’s status as a major commodities importer/consumer:

• Silver: +4.6%
   
• Copper: +3.3%
   
• Sugar: +2.3%
   
• Cocoa, Brent and US Crude (WTI) oil: +1.7% respectively

 

Over in the FX universe, the Aussie dollar has been among the best-performing G10 currencies against the US dollar so far this week:

NOTE: China is Australia’s largest trading partner, hence their economic fortunes are very much intertwined.

 

However, many of these assets are now pulling back at the time of writing.

The pullback is despite the People’s Bank of China (PBoC – China’s central bank) announcing earlier today (Wednesday, September 25th) yet another stimulus measure.

The PBoC cut its medium-term lending facility – the interest rate charged on its 1-year policy loans – by 30 basis points down to 2%.

That was the PBoC's biggest cut to the medium-term lending facility rate on record.

 

 

Why are Chinese-linked assets falling on Wednesday?

Overall, the market euphoria surrounding this recent broad-based stimulus package may have gone too far too soon.

Ultimately, it remains to be seen whether these support measures can truly arrest the dismal conditions surrounding Chinese demand.

Economists believe that the government still needs to roll out even more support measures, beyond what’s already been announced so far this week, in order to truly help China’s still-sluggish economy.

China has been on the cusp of a deflationary spiral, with consumer prices barely growing for much of this ear while incomes are stagnating.

Hence, further gains for these China-linked assets, from stock indices such as the CHINAH, CN50, and HK50, to industrial commodities and even currencies, may still find it tough to come by, until investors and traders are shown concrete data that China’s consumption is on a steady path towards recovery.

Still, the existing support measures that were just announced may well put a near-term floor below the prices of these China-linked instruments.

 

 

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