Tuesday, October 19, 2010

Chinese Rate Hike Shocker Slams Equities

Now this was an interesting surprise:

"BEIJING (MNI) - The People's Bank of China said Tuesday that benchmark deposit and lending rates will be increased, marking the first such adjustment since December 2007 and the global financial crisis.

The central bank said that the one-year deposit rate and one-year lending rate will each be increased by 25 basis points, effective October 20.

The one-year deposit rate will stand at 2.5% and the one-year lending rate at 5.56% following the adjustments.

No explanation for the move was provided in the short statement on the bank's website.

The National Bureau of Statistics is scheduled to release the latest inflation data on Thursday morning."

My Take:

This is what took the markets down this morning.  The Yuan is pegged to the US dollar and visa versa so essentially, this was a stealth way for the US to raise rates without effecting it's banks or balance sheet. 

This is all pretty frickin sneaky but I have to admit it's a brilliant move by the Fed.  This was abviously a coordinated event between China and the US.

The US Dollar of course soared on the news:

Commodities like gold crashed on the news which should be expected after a rate hike:

What concerned me most about today's price action was the drop in longer dated treasuries.  Take a look at the 30 year bond:

Quick Take:

The ten year was also down.  One must ask themselves where in the heck is money going if it's flying out of stocks, bonds, and commodities?

The Bottom Line

The rate hike by the Chinese was definitely an olive branch extended to the US as the currency wars escalate. 

The Fed certainly needed a break given the foreclosure mess.  Adding to today's selling pressure is the reaction to the IBM and Apple earnings.

I had warned that these stocks were priced for perfection and this is being reflected in this morning's trading.   The NASDAQ has been hardest hit of all the major indices today.

Until later!


Anonymous said...

great analysis on the china rate hike.. any chance it was hostile, not freindly?

Jeff said...



Great question.

G-20 is coming up. Brazil has already bailed on it. Should be interesting to watch.