The Slope of Hope Arrives: Bounce Edition

Ifeng has a special section dedicated to central bank surrender.

iFeng: 5年来首次!又有全球大国降息了:26国"大放水" 中国跟不跟?
Trump just shouted that the Fed accelerated the pace of interest rate cuts, and another national central bank announced its participation in the "reduction of interest rate legions."

The Bank of Mexico recently decided to cut the benchmark interest rate by 25 basis points to 8% on the grounds that global economic activity is slowing and international economic and trade tensions are tight, and this is the first time the central bank has cut interest rates in five years.

Since the beginning of this year, the central banks of 26 countries have announced interest rate cuts, and the interest rate cut camp has continued to expand. The agitation of the global interest rate cuts has undoubtedly strengthened the market's expectation that domestic central banks will open monetary policy space and follow up interest rate cuts.

However, will “saving” the global economy through the release of money bring about the expected increase? Under the tide of interest rate cuts, risk assets will re-emerge? A series of questions are still waiting to be resolved.

Mexico cuts interest rates by 25 basis points to 8%

The global interest rate cut has not stopped.

The Mexican central bank decided on Thursday to cut the benchmark interest rate by 25 basis points to 8%, citing the slowdown in global economic activity and the tight international economic and trade situation. This is the first time the central bank has cut interest rates in five years. Before the Mexican central bank announced a rate cut, the market is expected to remain unchanged at 8.25%.

The Bank of Mexico said in a statement that “the risks facing the global economy have increased” and mentioned the commercial disputes, the “disordered” Brexit process and the deterioration of “some political and geopolitical risks”. The agency added that there is still uncertainty in the US-Mexico relationship.

After the announcement of the interest rate cut, the peso fell back 0.4% against the US dollar and quickly fell back. Mexico's 10-year bond yield fell 19 basis points.

In fact, before this announcement of interest rate cuts, institutions have expected that the Mexican central bank may be in a difficult position to eventually choose to cut interest rates.

On August 14th, BBVA expects the Mexican central bank to cut interest rates by 25 basis points in September and cut interest rates by 100 basis points in 2020. Last month, Goldman Sachs released a report stating that Mexico’s economy remained “moderate” in the second quarter of 2019; the weakness of the Mexican economy increased the probability that the Mexican central bank would cut interest rates in August.

It is reported that earlier this week, Moody's analyst Alfredo Coutino predicted that Mexico's GDP growth rate this year is only 0.5%, which is "moderately positive", but the above analysts also said, "If investors remain silent, The economy of 2019 may not grow, and there may even be a moderate contraction."

According to a report by the Global Forex Network on July 30, Mexican President Andres Manuel Lopez Obrador said in an interview with Bloomberg that Mexican interest rates are too high for a slowing economy, but he added that he Respect the freedom of the central bank to independently set interest rates.

“The Central Bank of Mexico is paying attention to inflation, which is not bad,” Ovrado said. “But it’s important to lower interest rates to start economic development.” This is also the case after the presidents of advanced economies such as the United States and Turkey offered to recommend central bank interest rate cuts. Another president of the country publicly expressed his views on interest rate cuts.

Global central banks set off a wave of interest rates

From the beginning of this year, after India started the "first shot of interest rate cuts", central banks in various countries began to rush to cut interest rates in order to cope with the slowdown in global economic growth. According to statistics, at present, half of the G20 countries have lowered their policy rates, and four of the BRICS countries have cut interest rates.

Starting from August this year, the Fed’s rare interest rate cuts have intensified this round of global interest rate cuts. After the Fed’s interest rate cuts, several countries once again intensively announced interest rate cuts within half a month.

After the interest-rate meeting that ended on August 1, the Fed decided to cut the federal funds rate target range by 25 basis points to 2%-2.25%. This is the first time the Federal Reserve has taken interest rate cuts since December 16, 2008.

The policy statement shows that US economic activity is growing at a moderate rate, the job market remains strong, and household spending growth has accelerated, but corporate fixed investment continues to be weak. Federal Reserve Chairman Powell said that the interest rate cut is to cope with the downside risks of global economic slowdown, the uncertainty of the trade situation and the 2% inflation target as soon as possible.

On the day when the US announced a rate cut, the central banks of the United Arab Emirates, Saudi Arabia and Bahrain followed the Fed’s pace and lowered the benchmark interest rate by 25 basis points. The analysis said that the reason for the rate cut was that the currencies of the three countries were pegged to the US dollar. On the same day, the Brazilian central bank announced a 50 basis point rate cut and cut the benchmark interest rate by 50 basis points from 6.50% to 6.00%, exceeding market expectations (the market expects to cut interest rates by 25 basis points).

On August 7, New Zealand, India and Thailand, three central banks announced interest rate cuts on the same day. Among them, the New Zealand central bank cut interest rates by 50 basis points, the second rate cut in the year. It is worth mentioning that New Zealand's interest rate cuts exceeded market expectations. The New Zealand Federal Reserve announced interest rate resolutions, the committee agreed to cut interest rates by 50 basis points, reducing the official cash rate (OCR) to 1%, after the market forecast will cut interest rates by 25 basis points. The Bank of India announced that it will cut its benchmark interest rate by 35 basis points from 5.75% to 5.40%, setting a new low since 2010. The Bank of Thailand’s Monetary Policy Committee decided to cut the benchmark interest rate by 25 basis points to 1.5%. This is Thailand's first interest rate cut since 2015 to stimulate economic growth and curb the strength of the Thai baht.

On August 8, the Central Bank of the Philippines announced that it would cut the benchmark interest rate by 25 basis points to 4.25%. This is the second time the country has cut interest rates since May this year. On August 9, the Peruvian central bank announced that the reference interest rate (base rate) was set at 2.50%, compared to 2.75%. In just three days, five consecutive countries have successively implemented interest rate cuts, and the rate cuts are very dense.

In just half a month, 10 central banks announced interest rate cuts, and the global interest rate cuts swept through. From the perspective of the interest rate cut cycle, most of the central bank's interest rate cuts are the first monetary policy water release measures taken many years later.

The domestic central bank is still "not moving"

The global entry into the interest rate cut cycle and the surge in interest rate cuts have undoubtedly strengthened the market's expectation of domestic central bank interest rate cuts. However, in the analysis of industry insiders, China's monetary policy space will be opened, but the scope may be limited.

Judging from the current action of the central bank, although the global central bank has followed the action of cutting interest rates, the domestic central bank has always adopted the strategy of “doing no action”.

On August 15, the People's Bank of China carried out a medium-term loan facility (MLF) operation of 400 billion yuan, 17 billion yuan more than the amount due on the day, and the operating rate was 3.3%, which was the same as the previous period. At the same time, the 7-day reverse repurchase operation was 30 billion yuan, and the operating rate was 2.55%.

This also means that the central bank still adopts other monetary instruments such as MLF to adjust the monetary policy, and the market interest rate cut is expected to fall again.

Earlier, the central bank said in the second quarter monetary policy implementation report that "in view of the possibility of maintaining the medium- and low-speed growth of the global economy in the medium and long term, we must adhere to the principle of taking the initiative, taking into account international factors and grasping the overall balance in multiple objectives. Keep your strength and plan for a long run."

At the same time, in July, in addition to insisting on the attitude of housing and not speculation and long-term mechanism, the Politburo meeting also added a new phrase “not to use real estate as a means of stimulating the economy in the short term”, and real estate regulation has become more stringent. Industry analysts pointed out that since the mortgage interest rate is greatly affected by monetary policy, if the currency is further widened, it will be contrary to the policy intention of not stimulating the real estate bubble. From the perspective of preventing the real estate market bubble, the monetary loosening plus code will also be constrained.

Economist Deng Haiqing said that China's monetary policy is highly independent of the United States. The Chinese central bank is not just like the small country central bank, it can only passively follow the Fed. When judging the monetary policy of the People's Bank of China, giving overseas factors too high a weight may be more emotional rather than rational.

Deng Haiqing said that the central bank's monetary policy will maintain its strength, with structural credit and dredge monetary policy transmission mechanism as the focus to stabilize growth, rather than engage in "big flood irrigation." The crux of the real economy financing also appears in "wide credit" rather than "wide currency."

This also means that looking at the adjustment of monetary policy and simply cutting interest rates is not necessarily a "universal medicine" that stimulates the rapid recovery of economic recovery. It may also bring other effects. It needs to say goodbye to the traditional "big flood irrigation" traditional thinking, but The goal of importing “live water” into the real economy is achieved through diversified policy adjustments and fine-tuning of monetary policy space.

Asset style switched to safe haven assets

It is worth noting that under the surge of global interest rate cuts, the general concern about the economic slowdown has not been much reduced, the short-term elasticity of risk assets has risen hard, and asset styles are shifting from risky assets to safe-haven assets.

On Friday (August 16th), the Asian market reported that the spot gold short-term surge suddenly rose to a maximum of 1528.1 US dollars / ounce. The analysis believes that the recent concerns about the trade situation and the speculation that the Fed will cut interest rates again will support the gold price. Market risk aversion has warmed up again.

According to industry analysis, the price of gold is rising strongly and is currently above the $1520.00/oz mark, thus consolidating the expectation that the price of gold will continue to rise in the future.

At the same time, the gold ETF holdings increased significantly. On August 15, the gold holdings of SPDR Gold Trust, the world's largest gold exchange-traded fund, increased by 844.29 tons compared with the previous trading day, indicating that investors are more optimistic about gold investment.

The risk aversion has warmed up, and it has also brought the market's enthusiasm for investment in safe-haven assets. Some hedge fund managers said that as the valuation of traditional safe-haven assets continued to rise, many investment institutions turned their attention to emerging market high-credit rating bonds with relatively high yields as new safe-haven investment targets, including China, Thailand, etc. Emerging market countries, national debt, etc.

Analysts at Zhongtai Securities said that global safe-haven asset prices have risen sharply. Since October last year, the risk-free yields of major economies such as the United States, Europe, and Japan have fallen sharply, and international gold prices have risen by 26%. Although short-term safe-haven assets have risen rapidly or have some pressure to adjust, the global economic downturn is difficult to reverse, and safe-haven assets are still attractive.

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