People’s Bank of China cuts interest rates due to global uncertainty and ‘trade tensions’
Joshua Mahony, analyst at Scope Markets, has looked at the moves in financial markets.
European markets have kicked off the day in rather uncertain fashion… This comes as traders weigh up the potential for progress between the US and China, with talks due to get underway in Switzerland [at the weekend]. The response to that news has been surprisingly muted, with the Shanghai composite (up 0.8%) providing the one bright spot as domestic Chinese optimism builds. Nonetheless, coming off the back of a one-month period that has seen sharp gains for the DAX (+17%), IBEX (14%), Eurostoxx (13%), FTSE 100 (11%), and CAC (10%), it comes as no surprise that much of the upside of a resumption in US-China trade talks have been baked in.
The DAX remains within touching distance of the all-time high of 23,479. In spite of those US-centric concerns, the German economy remains in a more positive position as the new chancellor Friedrich Merz looks to bring forth a new phase of increased spending and a potential resurgence for German business activity.
Looking ahead, today’s FOMC [federal open market committee] meeting undoubtedly provides the main event of note, with traders watching out for commentary from [Fed chair Jerome] Powell over the direction of travel for rates in the face of economic uncertainty. The sheer number of unknowns mean that we are highly unlikely to see the Fed cut rates this time around. However, the events of the past week have also seen markets lose confidence over the potential for a June cut, with a pause going from a 33% outside chance to the 70% base case.
Nonetheless, traders still expect to see the bank cut rates another 3-4 times this year, and thus the outlook provided by Powell today will likely help inform markets over the direction of travel for rates. The recent better-than-expected jobs and ISM PMI data does ease the pressure on the Fed to act swiftly, and thus there is a hope that Donald Trump can mend the relationship with China before the economy rolls over.
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