PBoC stimulus reduces pressure on stock markets

Across Asia, shares are dragged mainly by Chinese markets which have plunged nearly 9% on their 1st day of trading since Jan 24


THE Chinese central bank’s decision to pump in 1.2 trillion yuan (RM703.25 billion) into financial markets while introducing lower interest rates on reverse purchase agreements (revenue repo) has managed to alleviate some pressure on global stock markets amid fears that the coronavirus would hit China’s economy.

Across Asia, shares were dragged mainly by Chinese markets which plunged nearly 9% on their first day of trading since Jan 23.

The Shanghai Composite Index ended 7.72% lower at 2,746.61, while the Shenzhen Component Index was down 8.45% to close at 9,779.67.

Japan’s Nikkei Index fell by 1.01%, while South Korea’s Composite Stock Price Index and Singapore’s Straits Times Index dropped 0.01% and 1.19% respectively yesterday.

In Malaysia, the FTSE Bursa Malaysia KLCI (FBM KLCI) extended its losses with a decline of 0.6% or 9.11 points to 1,521.95 — its lowest in nine years.

The tumble would have been worse had it not been for China’s “calming” liquidity injections, said AxiTrader Ltd chief Asia market strategist Stephen Innes.

“A residual People’s Bank of China’s (PBoC) sugar rush is supporting equity markets as the Chinese central bank has done its bit to steady domestic markets, pumping in 1.2 trillion yuan of liquidity and unexpectedly cutting its seven-day and 14-day reverse repo rates by 10 basis points (bps) to 2.4% from 2.5% and to 2.55% from 2.65% respectively.

“All of which have seemingly alleviated some of the market’s immediate settlement and meltdown concerns.

“But on a gloomier note, the economic impact will take a few weeks to come through, with the February Purchasing Managers’ Index and South Korea’s 20-day export data on Feb 21 the key figures to watch,” Innes said in a note.

Despite the weak China outlook, he said some investors are buying the dip, which can be a fruitful strategy with a PBoC backstop.

“And while reversion is one of my favourite approaches, if the coronavirus headcount doesn’t start to improve and the Chinese economy deteriorates more than expected, it means there will be more legs in the sell-off run,” Innes cautioned.

Sectorial losers from the coronavirus outbreak are aviation, gaming, consumer and plantation, while gloves are the only winner. FBM KLCI has fallen by nearly 3% post Chinese New Year.

Taking cue from the SARS experience, Hong Leong Investment Bank Bhd (HLIB) is hopeful that the current weakness will not be a prolonged episode and advise to bottom nibble. HLIB maintained the FBM KLCI target at 1,640.

Looking back at the 2003 SARS experience, HLIB pointed out that the FBM KLCI fell by as much as 6.9% from the start of February to March 11 and stayed rangebound till end-May 2003.

However, since then, the FBM KLCI had staged a recovery and even surpassed the pre-SARS level to close 2003 with gains of 22.8%.

“Given the swift reaction by China to contain the novel coronavirus outbreak, we are hopeful for this pandemic to be resolved quicker than SARS.

“Still, negative sentiment on the coronavirus will persist in the near term, especially when China reopens its stock market,” it said.