Bank Stress in Europe, Inflation in China Pressure Stocks: Morning Market Update Oct 23

October 23rd, 2013 by


Expected profit-taking after yesterday’s four-week high has gold slightly lower in New York this morning, after a gentle decline overnight. The dollar is attempting to recover from recent lows that it hasn’t seen since the first of the year, but is being hampered by a Chinese renminbi still near 20-year highs, and a surge overnight in the yen.

The short-term bank borrowing rate (repo rate) in China spiked 47 basis points last night, in what is interpreted as a move by the central bank to curb risky loans in the red-hot real estate market. Real estate speculation continues to be a large driver of inflation pressures in China.  The fears of tightening money supply in China drove safe haven flight to the yen. A higher yen hurts Japanese exporters, which has caused a dip today in the Nikkei index.

The prospect of a tighter money supply in China, coupled with fears that the U.S. recovery has been severely wounded by budget battles in Washington, has driven global markets lower. This has been exacerbated in Europe by the ECB’s insistence that all European banks undergo “stress tests” and detailed scrutiny before the financial union of EU banking systems. It is feared that many banks in Italy, Spain, Greece, and Portugal will fail, exposing the need for more taxpayer money from Germany and the Scandinavian countries to rescue them.

The SPDR gold ETF, the world’s largest, reported 6 tons of inflows yesterday. This is the largest one-day rise in two months. Eyes will be on gold today, to see if it holds the $1,330 level. If so, it may signal a turnaround in market sentiment, now that QE tapering in the U.S. is seen to have been pushed back until next spring. There may still be some hesitation by some, over next week’s FOMC meeting, but the “not-taper” seems to be being priced-in by most.