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DJIA : China Responds to Liquidity Crunch

(Tue, 18 Aug 2020). The Dow followed Chinese equities higher Monday after the People`s Bank of China announced a fresh liquidity boost to shore up the financial system. The gains quickly evaporated as Boeing, American Express and Goldman Sachs tumbled. China`s liquidity boost helps shore up domestic banks, but will it be enough? Chinese banks need $500 billion in liquidity this month alone.

The Dow Jones Industrial Average opened higher on Monday before erasing gains. Wall Street’s shaky open follows broad gains in China and Europe. The People’s Bank o China could be paving the way for lower interest rates as the nation grapples with economic headwinds and strained political relations with the United States. The Dow and broader U.S. stock market opened higher on Monday, following a rally that began in Asia after the People’s Bank of China (PBOC) paved the way for lower interest rates.

 

Dow Gives Back Gains; S&P 500, Nasdaq Approach Record Highs

The Dow’s gains quickly evaporated after the open, as the blue-chip index fell more than 100 points. At the time of writing, the Dow was off 109 points or 0.4%. Most of the Dow’s 30 companies traded lower. Boeing (NYSE:BA) fell 3.4%, American Express (NYSE:AXP) lost 2% and Goldman Sachs (NYSE:GS) traded 1.9% lower. The broad S&P 500 Index of large-cap stocks rose by as much as 0.4%. The technology-focused Nasdaq Composite Index rallied 0.8%. Both indexes were trading within a few points of all-time highs. Seven of 11 S&P 500 sectors reported gains Monday, with information technology, healthcare, and consumer discretionary companies leading the charge. Cyclical industries tied to energy and finance declined.

 

Asian Markets Respond to China Stimulus

Chinese equity markets finished higher on Monday after the People’s Bank of China injected another 700 billion yuan into the financial system. The liquidity boost was facilitated through the medium-term lending facility (MLF)–a move that not only eases liquidity stress but puts interest rates on a path lower. Central bankers use the MLF to manage China’s longer-term liquidity requirements, including setting the country’s benchmark loan prime rate (LPR). The size of the cash injection confirmed PBOC’s easing bias at a time of heightened stress for the nation’s economy. Although China says its economy rebounded 3.2% in the second quarter, the recovery has been wrought with mounting internal and external risks. In the meantime, Chinese banks need $500 billion in liquidity to roll over debt and buy government bonds.

 

U.S.-China Tensions on the Rise

Tensions between the United States and China show little signs of letting up heading into the 2020 presidential elections. Donald Trump is doubling down on his tough-on-China stances amid the Covid-19 pandemic–the so-called “plague” he attributes to Chinese negligence. On Friday, the Trump administration approved the sale of F-16 military jets to Taiwan. Earlier this month, the president issued executive orders to ban “untrusted” TikTok and WeChat in 45 days. Trump has since ordered ByteDance Ltd., the owner of TikTok, to sell its U.S. assets. The Trump administration has taken tough stances on China regarding free trade, intellectual property, and Hong Kong. A presidential working group is also exploring whether to adopt new rules that could delist Chinese companies from U.S. exchanges.

 

 

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