New Highs Await as China Eases, Europe Sneezes – Reuters

Market Preview: U.S. and Global Insights

Wall Street is poised for another record achievement as global markets react positively to significant monetary easing efforts in China. The People’s Bank of China implemented rate cuts aimed at stabilizing a faltering economy, a move that has ramifications not only within China but also across international markets, particularly in Europe.

Chinese stock indices saw a remarkable increase of over 4% on Tuesday, while the yuan strengthened against the dollar, reaching its highest point in 16 months. This positive movement follows the announcement from PBOC Governor Pan Gongsheng, detailing a 50 basis point cut in banks’ reserve requirement ratios, which is expected to release around 1 trillion yuan (approximately $142 billion) for new lending.

These measures aim to address the ongoing property market downturn and to mitigate concerns about broader deflationary pressures. Alongside the reserve requirement cut, the PBOC also reduced the one-week reverse repo rate by 20 basis points to 1.5%, along with several significant reductions to lending and mortgage rates. Furthermore, the central bank’s decisions included lowering down payment requirements for new homes and facilitating capital market transactions to encourage investment in stocks.

However, it remains uncertain whether these initiatives will have the desired impact, particularly given the ongoing geopolitical tensions. Recently, the U.S. Commerce Department proposed restrictions on certain Chinese software and hardware used in connected vehicles over national security issues.

China’s economic slowdown has forced many banks and investment funds to downgrade their growth forecasts below the Chinese government’s target of 5%, creating a ripple effect throughout the industrialized world. This was particularly evident in recent business surveys revealing a steep contraction in European businesses during September. German business sentiment, as noted in the latest Ifo survey, showed a drop in morale for the fourth consecutive month, falling short of expectations.

Despite these challenges, China’s new stimulus measures provided a significant boost to European stocks, with gains of nearly 1% driven by the basic resources and luxury goods sectors. The euro also regained much of its earlier losses.

While speculation about a potential European Central Bank rate cut in October has increased, the likelihood remains below 50%. Stateside, recent surveys indicated ongoing difficulties within the manufacturing sector, contrasted by robust growth in services, affirming a more favorable outlook for the private sector as Wall Street reached a new peak.

Currently, markets are reflecting approximately 75 basis points of expected additional easing from the Federal Reserve this year. Two-year Treasury yields were around 3.60%, with an auction of $69 billion scheduled for later in the day and a steepening yield curve reaching an 18 basis point difference between two and ten-year notes.

Comments from Chicago Fed President Austan Goolsbee suggest anticipation of "many more rate cuts over the next year." The upcoming day will also feature the release of U.S. consumer confidence data for September.

In the Asia-Pacific region, Japanese markets rebounded following a holiday, with notable gains and a weakening yen. Bank of Japan Governor Kazuo Ueda indicated the central bank may consider raising interest rates if inflation trends align with projections but emphasized a cautious approach in evaluating current economic conditions.

Meanwhile, the Reserve Bank of Australia opted to maintain its policy rate but indicated that further tightening is not currently under consideration. The Australian dollar reached a nine-month peak before settling back slightly.

Key developments expected to influence U.S. markets later include consumer confidence readings, regional business surveys, and corporate earnings reports from notable companies.