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Central banks flex their muscles

Published Monday, October 26th, 2015

Investors were given a timely reminder that central banks still have the ability to jolt markets in what was a light week of economic reports after the ECB and People’s Bank of China reaffirmed their commitment to supportive monetary policy. Mario Draghi got proceedings under way on a typically dovish tone by virtually guaranteeing an early Christmas present come December in the form of an expansion of its asset-buying programme and a potential cut in its deposit rate.

The prospect of additional easing came in spite of as a survey revealing that lending conditions to private sector eurozone companies were improving. Moreover, there was an encouraging release of flash PMI surveys from the bloc pointing to stronger-than-expected business growth. Nevertheless, the fallout was swift with equities surging, the euro tumbling 3% against the dollar and the zone’s sovereign-debt yields following suit to multi-month lows.

The lift given to global risk assets received a further helping hand by the surprise decision of China’s central bank to announce its sixth interest rate cut in less than a year and a reduction in banks’ reserve requirements as it stepped up its effort to bolster growth. The unexpected move comes ahead of a meeting of Beijing officials who will pen the next five-year economic plan as well as news that China’s rate of growth slowed in 3Q to its lowest in six years. Stock indices already basking in the hope of extra liquidity from the ECB bounced higher to register solid weekly gains with the FTSE Eurofirst 300 +3.8%, Germany’s Dax jumping 6.8%, London’s FTSE 100 up 1% and Japan’s Nikkei gaining close to 3%.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.