Market Outlook: China cuts reserve requirements

The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects

The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects

"In the face of rising trade frictions, moderate yuan depreciation aids exporters and is what the market expects to see", Tang Xiangbin, currency analyst at China Minsheng Banking Corp said, predicting additional USA rate hikes would help strengthen the dollar further. There is room for further reductions and I expect another 1 percentage point cut by the year-end,"Mr. Xu added".

Banks in China are now allowed to reduce the amount of cash held as reserves following a cut in Reserve Requirement Ratio (RRR) by 1% announced by the People's Bank of China (PBoC) yesterday.

Reserve requirement ratios (RRRs) - now 15.5 percent for large commercial lenders and 13.5 percent for smaller banks - will be cut by 100 basis points effective October 15, the PBOC said, matching a similar-sized move in April.

The yuan was also down Monday as expectations of more easing measures plus surging United States bond yields exerted downward pressure on the Chinese currency.

The yield on Italian government 10-year bonds rose more than 20 basis points to 3.626 percent, the highest since February 2014, while Italy's FTSE MIB stock index fell 2.4 percent to its weakest since April 2017.

On Wall Street, the tech-heavy Nasdaq fell for the third straight day though the broad S&P 500 pared losses to end almost flat as defensive stocks offset a decline in growth shares.

Chinese stocks plunged Monday, with the China A50 index losing more than 4.8% in trading.

"That is exacerbated by the fact that you would have had quite a few long positions going into that time-off and people just quit them and were hitting the bid today", he said. At its two-day meeting ending later on Wednesday, the Fed is expected to increase USA interest rates for the third time this year. "We find it quite hard to reconcile the political machinations that are going on over there being friendly to markets". "Also, capital outflows should be increasing due to mounting risks on China-U.S. trade war risks".

On Friday, Chinese technology stocks listed in Hong Kong slumped on a Bloomberg report that the systems of multiple USA companies had been compromised by malicious computer chips inserted by Chinese spies.

Hong Kong's Hang Seng index was down 0.9 percent.

"We are seeing some strength in the dollar index and some weakness in the equity market and it doesn't appear that investors are going for safety in the gold markets at all", said Phil Streible, senior commodities strategist at RJO Futures in Chicago.

The offshore yuan was also weaker at 6.9050 per dollar.

"The PBOC will continue to take necessary measures to stabilize market expectations and keep the foreign exchange market running smoothly", it said.

Still, some analysts said the "national team", a term used by Chinese investors to refer to state-supported funds created during the 2015 market crash, may be behind the stock's rise, buying it up to prevent the benchmark gauge from sinking further.

China's foreign exchange reserves dropped to a 14-month low at the end of September amid prolonged trade tensions with the USA and a weakening yuan.

The injection of cash into the economy will also boost hopes that the negative impact of higher U.S. tariffs on Chinese exports can be eased. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.8697 0.01% * Offshore 6.9523 -1.37% non-deliverable forwards **Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. It was off 0.9 percent on Monday morning.

Oil prices fell more than 1 percent after the USA said it may grant waivers to sanctions against Iran's oil exports next month, and as Saudi Arabia was said to be replacing any potential shortfall from Iran. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that the worst that could happen is the US imposing levies on all Chinese imports, but that would only hit 0.7 percentage points of China's growth.

The losses in NY seeped into Asia, where Shanghai sank 2.4 percent and Hong Kong lost 0.8 percent with property firms hit by expectations the city's banks will lift mortgage rates again as they track a likely Fed hike.

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