This website uses cookies to provide you with full functionality and the best possible user experience. By continuing to use this website you agree to our cookies policy. Find out more. Close

China rides in to save the (stock market’s) day

by City Index

The night is darkest just before the dawn, and the recent price action in global markets certainly qualifies as pitch black. On what’s been called “Black Monday” equities sold off across the board, with the widely-watched Dow Jones Industrial Average (DJIA) of 30 massive US companies falling by over 1,000 points early in the morning. While stocks did bounce slightly from there, the DJIA still closed the day down nearly 600 points, garnering top story treatment on the evening news across the US.

As the selloff spilled over into Asian session trade, the People’s Bank of China (PBOC) finally decided that it had seen enough, and stepped in to try to stem the decline. The central bank cut interest rates for the fifth time since November, lowering the 1-year lending and deposit rates by 25bps to just 4.6% and 1.75% respectively. In addition, the PBOC reduced the reserve requirement ratio (RRR), or the portion of deposits that Chinese banks must hold as a backstop against losses, by 0.5% to 18% for large banks. At the margin, this change is meant to stimulate the economy by encourage citizens to borrow and banks to lend more money, though the absolute impact on China’s economy, much less the world economy as a whole, may be limited and delayed.

It’s worth noting that all the previous interest rate cuts by the PBOC have taken place over the weekend, when businesses and market participants would have time to digest the move before the start of a new week. Today’s midweek action signals that policymakers are concerned with the recent volatility, but still willing to step in and provide support for the market. Though the economic impact of this move may be limited, the psychological result is reassuring for jittery traders.

Market Impact

As of writing, the PBOC’s bold action appears to have stabilized sentiment in global markets. European and US equities are trading higher by around 4%, erasing the majority of the losses from “Black Monday.” That said, Monday’s big selloff did plenty of technical and psychological damage, so a return to the halcyon days of global bull market in stocks appears unlikely.

In terms of the DJIA, the key level to watch will be 17,000. That level represented previous support for the US index back in December 2014 and February 2015; now that it has been broken, it may present a key level of resistance, or possible ceiling, on prices. Only if US stocks can break back above that key level will a recovery back up toward the all-time highs above 18,000 become a legitimate possibility again.

In other words, only time will tell if today’s PBOC-induced recovery will mark a significant bottom in the market or whether it’s merely a “false dawn.”

From time to time, GAIN Capital UK Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

Don't have an account?

Open a trading account with us and start trading forex.

Create an account

Got some trading ideas?

Make the most of any trading opportunity

Log in and Trade

Contact us: