Global Markets Hit Hard as China’s Rate Cuts Signal Panic

The People’s Bank of China (PBoC) has implemented two surprise interest rate cuts within a week, signalling urgency to support its flagging economy. These actions have heightened market fears and led to widespread risk aversion.

Cryptocurrency Market Impact

Although often touted as a hedge against traditional financial market volatility, Bitcoin (BTC) once again showed significant correlation with risk assets during periods of heightened uncertainty and fell nearly 2% to around $64,000 – but has since recovered to around $68,000, and is up nearly 2% for the week.

Ether (ETH), the second-largest cryptocurrency, has not proved as resilient, however, dropping more than 7% and pulling the broader altcoin market cap down with it.  The sharp decline in cryptocurrency prices underscores the sensitivity of digital assets to macroeconomic developments and risk sentiment. 

Equity Markets Reaction

In equity markets, major European indices such as Germany’s DAX, France’s CAC, and the eurozone’s Euro Stoxx 50 each declined over 1.5%.  Futures tied to the tech-heavy Nasdaq 100 in the U.S. were slightly lower, following the index’s 3% slide on Wednesday, according to data from Investing.com.

The sell-off in equities reflects growing investor concerns about global economic stability and the potential for a slowdown in growth. Tech stocks, which had seen significant gains earlier in the year, are now facing increased pressure as market sentiment turns cautious.

Details of China’s Rate Cuts

Early Thursday, the PBoC announced a cut in its one-year medium-term lending facility rate to 2.3% from 2.5%, injecting 200 billion yuan ($27.5 billion) of liquidity into the market. This was the most significant reduction since 2020. 

The move follows similar reductions in other borrowing rates earlier in the week and underscores the urgency among Chinese policymakers to bolster economic growth.

Recent data showed that China’s economy expanded by 4.7% in the second quarter at an annualised pace, much weaker than the estimated 5.1% and slower than the first quarter’s 5.3%. The disappointing economic figures have prompted the PBoC to take aggressive measures to stimulate growth and reassure investors. “Equity futures are stable after yesterday’s bloody session that shook views across all asset classes,” noted Ilan Solot, senior global strategist at Marex Solutions. “The decision by the PBoC to cut rates in a surprise move only added to the sense of panic.”

While 4.7% growth still sounds impressive, the reality on the ground in China is not as clear cut, as shopping malls and street-front stores have not seen a return of customers since China’s Covid restrictions were lifted in early December 2022. China’s online retailers were quick to respond to the early Covid lockdowns and are now the first choice for the majority of retail buyers in the country, even though standard retail has been fully operational for over 18 months. 

U.S. Treasury Yield Curve Concerns

Also of concern is the ongoing steepening of the U.S. Treasury yield curve as a significant risk to market stability, including cryptocurrencies. The yield curve steepens when the difference between longer-duration and shorter-duration bond yields increases. This month, the spread between 10-year and two-year Treasury yields has risen by 20 basis points to -0.12 basis points (bps), primarily due to stickier 10-year yields.

Historically, the de-inversion or re-steepening from inversion (a negative spread) has been associated with risk aversion in the markets. This indicates that markets expect the Federal Reserve to cut rates but see persistent inflation and expansionary fiscal policy as growing risks. The shape of the yield curve is often viewed as a predictor of economic performance, with a steepening curve suggesting expectations of future economic challenges and potential shifts in monetary policy.

Market Outlook

As global markets digest these developments, investors remain on edge, anticipating further policy actions and economic data that could influence future market movements. The interplay between China’s aggressive monetary easing and the evolving U.S. economic landscape will be closely monitored in the coming weeks.

The current market environment underscores the interconnectedness of global economies and the far-reaching impact of policy decisions. With uncertainty high and risk sentiment fragile, market participants will be looking for signs of stability and clearer guidance from policymakers. Until then, volatility is likely to remain elevated across asset classes.