Photographer: Dario Pignatelli/Bloomberg

Charting the Markets: Muted Moves as China Takes it Easy

China optimism fades from European stocks, the Aussie dollar outperforms and the U.S. dollar drops.

Easy does it.... Late on Friday China's central bank announced it would cut benchmark interest rates — that's the sixth interest-rate cut since November. It also lowered the amount of deposits banks must hold as reserves. Just the day before, European Central Bank President Mario Draghi gave a clear signal to the markets that the ECB was ready to step up stimulus. The move sent global stocks soaring and the euro plummeting. And with the Bank of Japan to hold its one-day policy meeting this Friday, investors are betting it will be under pressure to match the ECB's dovish rhetoric.

But while investors applauded Draghi, the market reaction to the PBOC's measures has been more muted.

Chinese leaders gather in Beijing this week to formulate a five-year plan to deal with an era of sub-7 percent economic growth. But questions remain around the effectiveness of the latest round of monetary easing. Barclays, Blackfriars Asset Management and BlackRock remain skeptical, seeing government intervention as a hint of fundamental weakness in the world's second-largest economy. The Shanghai Composite Index rose 0.5 percent to a two-month high, while the Hang Seng Index finished 0.2 percent lower and European stocks fell from a two-month high, snapping their biggest two-day rally since July.

China is a key trading partner for Australia. In fact, Australia is heavily reliant on the biggest consumer of its chief exports of iron ore, coal and other commodities. You can see that reflected in the latest growth data — Australia's economy expanded at half the expected pace in the second quarter, as China's slowdown weighed on exports. The PBOC's latest measures are aimed at fighting deflationary pressures, easing the financial burden on indebted local governments and companies and adding liquidity to a market that's been drained by capital outflows. While other markets may not be celebrating, the Aussie dollar has rallied against most of its major peers. It's also registered the biggest gain against the U.S. dollar among G10 currencies on Monday.

Which brings us to the world's reserve currency. The U.S. dollar slipped against major peers on Monday after capping its longest winning streak since January. Before today, the Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, had risen for seven days to the highest level this month. The dollar is benefiting from policy divergence as central banks outside the U.S. add to stimulus. So what of the U.S. Federal Reserve, which meets this week? The likelihood that the Fed raises rates by the end of the year rose to 36 percent Friday, from 32 percent a week earlier. If China's policy shift reduces volatility in markets, could that remove one of the obstacles that kept the Fed from liftoff in September? Traders are only predicting a 6 percent probability of a move on Wednesday, and better than even odds of a rate rise are priced in for March 2016. And a sustained dollar drop would not be in line with expectations of tighter policy.

Nejra Cehic is a presenter on Bloomberg TV. Follow her on Twitter @NejraCehic

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