Risk-on sentiment continues to triumph, lifting stocks and bond yields, while punishing metals and the yen. Today's announcement from China cutting banks reserve requirement ratio for the 7th time since 2018 and Thursday's revelations from China that top-level U.S.-China trade meetings will resume in October are helping to fuel risk appetite ahead of U.S. and Canada jobs and Fed Chair Jerome Powell's speech. There are three Premium trades currently in progress.
The People's Bank of China announced today it would cut the reserve requirement ratio (RRR) by 50 bps, with an additional 100 bps cut for qualified city commercial banks. The magnitude of the rate cut was larger than most analysts had expected and the 900 bn yuan released is the largest stimulus in the current easing cycle.
The S&P 500 broke out of its box to the best levels in a month at 2985 (DOW30 to 26830) after the U.S. and China agreed to face-to-face talks in early October.
A few things stood out from this rally. One was that Treasury yields climbed alongside stocks. Many times last month it was stocks moving higher alone. Cyclical stocks are also accelerating their gains, even European automakers--the biggest victim of the trade war. Yen crosses made similar breaks with AUD/JPY and USD/JPY both rising to a one-month high. Commodity markets reversed recent moves as gold sank more than $30 to $1518 and oil touched a one-month high.
On the fundamental side there were some notable differences as well. A Chinese MOFCOM spokesman highlighted that both sides would strive for 'substantial progress' at the talks, which is not a term that has been used before. State mouthpiece Hu Xijin also noted a higher possibility of a break-though.
The lengthy timeline is also a notable development. It leaves a catalyst for bulls in place but also gives central banks a reason to be less aggressive until there is a resolution.
In terms of economic data, the U.S. showed some improvement as ADP employment rose to a four-month high of +195K compared to 148K expected while the ISM non-manufacturing index was at 56.4 compared to 54.0 consensus.
Fundamentals will remain in focus on Friday with U.S. and Canadian jobs reports both due. Non-farm payrolls are forecast at +160K. Note however that the report has missed the consensus 77% of the time in September over the past 22 years. While APD was strong, the employment component of the ISM services survey was weak. Powell's speech is at 12:30 Eastern, 17:30 London.