Stocks in China slide despite PBOC easing, Bolsonaro wins first round of presidential elections

Summary:

• PBOC cuts reserve requirement ratio for the fourth time this year

• Bolsonaro crushes other candidates in the first round of Brazilian presidential elections

• Di Maio says that EU budget rules will change after the elections

Chinese equities edged lower on Monday after a week-long holiday. This can be viewed as a catch-up after a tremulous previous week but what one may find interesting is fact that this happens even despite a stimulus tool offered by the People’s Bank of China. Namely, PBOC decided to cut reserve requirement ratio for some of the domestic lenders by 1 percentage point effective from October 15. Such a move would free up as much as 1.2 trillion yuan. Note that this is the fourth time this year PBOC resorts to this kind of monetary policy easing. More relaxed reserve requirements will help China tackle with the growing impact of the trade conflict with the US. Apart from that, it will help boost credit growth amid slowing economy. Yuan depreciated against US dollar but the move was not to steep and the PBOC announced that reserve requirement ratio cut will not exert additional downward pressure on the Chinese currency. Markets expect more easing measures to be taken by the central bank as the growth in  the World’s second biggest economy is projected to slow to 6.6% YoY.

Hang Seng (CHNComp) opened higher on Monday but rushed lower almost immediately afterwards. The index revisited the lower bound of the current consolidation ranging 10350-11200 pts. Source: xStation5

Brazilians went to polls stations this Sunday to elect new president. Jair Bolsonaro, the far-right politician and former Army captain, unexpectedly crushed his opponents in the first round of voting. Bolsonaro won support of 46.2%, just a notch short of the majority needed to avoid the second round. Note that it would be the first such situation in Brazil in past 20 years. However, as it did not happen Brazilians will vote once again on October 28. Bolsonaro will face the Worker’s Party candidate, Fernando Haddad. Haddad secured 29.1% backing in the first round. While Bolsonaro was viewed to be victorious in the first round of voting it was projected that he will get just a slight lead against Haddad a no one of them will get more 30% of votes. Opinion polls do not view either of them as a clear winner in the second round. Despite his populist tones Bolsonaro is favoured by markets. While he is quite ignorant when it comes to economics he already said that all the economic policy-making will be delegated to Paulo Guedes. Guedes is a strong backer of privatization, lowering tax burden and central bank independence. On the other hand, Haddad vowed to revert market friendly reforms of the current Brazilian President Temer as well as revoke constitutional limits on the government spending.

The main currency pair launched this week’s trading slightly below Friday’s close, in the vicinity of the lower bound of the consolidation range. After steep declines seen in the past dozen or so days EURUSD looked to climb back into the range of the multi-month consolidation but today’s weakening of the common currency makes this vision more distant. Source: xStation5

Last but not least, Luigi Di Maio, Italian Deputy Prime Minister and leader of the Five Star Movement, played down European Commission’s attacks over the proposed Italian budget. He backed his budget deficit target and said that EU rules will change. Di Maio claimed that European nations grown tired of the austerity of the lawmakers and that the upcoming European elections will be an earthquake to the bloc. He said that the budget rules will relax “the day after the elections”. Additionally, Di Maio reiterated that his Five Star will not form an alliance with the League, another governing party in Italy, for the European elections. Euro is one of the worst performing G10 currencies on Monday morning gaining only against the Canadian dollar.