Last week we were surprised to see a 25 basis point rate cut by Australia – whose inflation and unemployment levels are in a healthy range – so to now see that even China has cut interest rates, well, that’s telling you something significant about the weakness and risks facing global growth.
First Rate Cut Since Lehman
Yes, China is cutting interest rates for the first time since the Lehman Brothers fiasco in September 2008. So much for the global engine of growth, right?
The rate cut of 25 basis points initially pushed U.S. markets higher, but one head of a Chinese consulting firm believes it is going to take one more rate cut to spur continued Chinese growth amid current global headwinds. And Chinese sentiment clearly matters – the head of China’s largest sovereign wealth fund, the China Investment Corp., sees the likelihood of a breakup of the Euro zone. As a result, China has lowered its European exposure, and this is hurting Spanish banks.
China has also recently cut back on exposure to the USD by implementing direct trade between the yuan and yen – a historic move.
In light of this unexpected interest rate cut, however, all Asian markets reacted quickly by sinking past the prior day’s lows. Meanwhile, the yuan made slight gains against the USD.
Who Cares About the Rate Cut?
What does this mean for you and your portfolio? Well, if China is the commodities engine of the world, and commodities fuel global trade, it means less growth globally all the way on up to housing starts and building in central Africa. It means it is an especially good time to buy gold. It means it is time to learn Mandarin (to the extent that the Chinese rate cut is having serious ripple effects).