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The Krips Report: China’s Central Bank Boosting Investments

By October 26, 2015 November 30th, 2015 No Comments

The FTSE ended the week on a high note after China’s central bank cut key rates and as better-than-expected manufacturing reports in the Eurozone and the US boosted investor confidence.  The People’s Bank of China said it will cut its one-year deposit rate and one-year lending rate by 25 basis points each to 1.5% and 4.35%, respectively.

These moves come after clear signs of weakness in the economy in recent months. Amid continued capital outflow and falling CPI inflation,  these cuts may be necessary to prevent a tightening of financial conditions, according to Goldman Sachs.

Manufacturing data, ECB stimulus

The Eurozone manufacturing purchasing managers’ index held at 52 in October compared to a month ago, beating expectations for a reading of 51.7, Markit revealed. A reading above 50 signals expansion in sector activity.

Separately, Markit’s US manufacturing PMI rose from 53.1 in September to 54 in October, comfortably above the 52.9 reading analysts had expected.

Meanwhile, the market continued to digest Thursday’s European Central Bank press conference where president Mario Draghi hinted at further stimulus to address prolonged low inflation amid concerns about risks from China and falling commodity prices.

Draghi said policymakers would re-examine the ECB’s €60bn a month asset purchase programme in December and consider extending it past September 2016 if needed. He also revealed that the central bank had also discussed further lowering the deposit rate, although there was “no specific preference to one instrument or the other, they were all considered”.

Strong ECB easing in December also limits the chances the Fed will hike at the same time, pushing a lift-off further into 2016.

The euro fell sharply during Mario Draghi’s press conference, this  was because the market knows that weakening the euro is one of the ECB’s unofficial policy tools to boost Euro-area growth.

Weakening the euro improves the competiveness of European exports and it also reduces the competitiveness of China’s exports into Europe.