*Stocks rally because investors believe that PBOC is going to introduce more liquidity
*Fed chairman Jerome still not on the same page as President Trump
European markets and US futures are trading higher as investors are hopeful that The People Bank Of China will take all necessary steps to fight the sluggishness in the Chinese economic data. This fragility in the economic numbers is mainly due to the ongoing trade war between the two countries: China and the US.
Since the financial crisis, every time we have seen softness in the economic numbers, central banks have jumped into the Arena and saved the day. This strategy of the central banks has worked in the past, but now, there are some question marks on this.
The monetary policy alone cannot stimulate the economic growth. We have seen the evidence of this in the Eurozone and also in the US. The reason I am referring to the US is that the inverted yield curve (which we have seen in the past few weeks) is only because of the fact that investors lost their faith in central banks.
Nonetheless, traders are ready to chalk some gains today just because the PBOC said on Friday it is going to cut the amount of cash that banks hold as reserve. Clearly, a tactic to promote liquidity in the system, but at the same time, the risk is much bigger because these higher reserve ratios were introduced as a result of the financial crisis. The idea behind these ratio was that higher ratios would make the banks safer. And now, reducing these reserve ratios to their lowest levels since 2007 doesn’t seem to be the smartest policy.
The increase in the optimism among investors is also based on the fact that the Federal Reserve Chairman, Jerome Powell also said on Friday that another interest rate cut is highly probable- something which markets wanted to hear. Although, a rate cut is already priced in by the markets to a large extent, but the fact that the Fed is willing to listen to the needs of the market conditions has strengthen the bullish sentiment among traders.
The jury is still out if the Fed is on the same page as the President of the United States of America, Donald Trump. Remember, he has repeatedly referred to negative deposit rates, and has asked the Fed to cut the interest rates by at least another 100 basis points.