Global equities bounced on Friday as China announced new economic stimulus measures ahead of trade talks between Washington and Beijing that investors hope will brighten sentiment following a bruising first week of the year.
Equities have endured a testing start to 2019, with a warning late on Wednesday from Apple over its China sales fanning concerns that a weaker global economy will hit corporate profits just as central banks provide less support to markets.
Chinese premier Li Keqiang on Friday urged banks to step up their lending to the private sector, while the People’s Bank of China cut a key reserve ratio in a move designed to encourage more lending from commercial banks. The moves came after China said that government officials will on Monday hold their first formal trade talks since the world’s two largest economies struck a truce.
The CSI 300, a benchmark index for Chinese equities, closed 2.4 per cent higher, up off a three-year low. European stock markets were also up more than 1 per cent apiece, while S&P 500 futures suggest the benchmark index will open 1.3 per cent higher on Wall Street after another day of heavy declines on Thursday.
The People’s Bank of China’s cut in the reserve ratio will inject a net Rmb800bn ($117bn) into the economy. The size of the cut was at the high end of analyst expectations. It was the biggest net cash injection in five such measures undertaken by the central bank since last January as part of government moves to counter slowing growh.
Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management, called the People’s Bank of China’s 1 per cent cut to its reserve requirement rate “swift”, and said the action “supports our view that there won’t be a sharp deceleration in the Chinese economy this year and that fears of a major global slowdown are overdone.”
Investors will pay close attention to the latest snapshot of the US labour market, which will be released at 1.30pm London time. Economists expect the report to show that 184,000 jobs were created last month, with the annual pace of average earnings growth at 3 per cent.
The figures will draw particularly close scrutiny after a survey of the US manufacturing sector for last month proved much weaker than expected yesterday, feeding some investors’ concern that the US economy risks slowing significantly this year.
“From a stock market perspective, with a lot of negative news already priced in, we could realistically hope that the absence of further negatives may at least lead to some stabilisation in equity prices,” said Colin Morton, a portfolio manager at Franklin Templeton Investments.
This week’s turbulence in equities — the S&P 500 closed down 2.5 per cent and the Nasdaq tumbled 3 per cent yesterday — has added fresh momentum to a rally in government bonds that began in late November and made December the best month for global sovereign bonds in more than a month. However, after falling for much of the week, the yield on the 10-year Treasury was up 4 basis points at 2.6 per cent in early trading on Friday as the mood shifted.
Sentiment was also helped on Friday after a gauge of China’s services sector showed continued expansion in December, snapping a run of worrisome data.
Elsewhere in equities, the Hang Seng in Hong Kong rose 2.1 per cent. Europe’s Stoxx 600 added 1 per cent. Koon Chow, strategist at UBP, said that investors had appeared this week to be “over-anxious about what could be a typical ebb and flow in the global growth cycle”, adding: “I’m more sanguine as recessions tend to be caused by a financial market or specific shock or an asset bubble collapsing. I’m not sure this is the case right now.”
