Greece, China Weekend Events to Drive Markets

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

Written by Marc Chandler

NEW YORK ( BBH FX Strategy) -- There are two sets of important developments over the weekend that will influence the global capital markets.

China cut reserve requirements, and Foxconn, the Taiwan-based outsource company with extensive assembly work in China, announced an immediate 16%-25% wage increase.

In Europe, Greece's cabinet took the necessary steps to pave the way for the eurogroup of European finance ministers to press ahead with a second aid package.

China

Speculation about an easing of Chinese monetary conditions has ebbed and flowed since required reserves were cut at the end of last November, the first easing in three years.

Nevertheless, the 50-basis-point cut in reserve requirements to 20.5% announced Saturday will catch the market by surprise.

> > Bull or Bear? Vote in Our Poll

This is especially true in the aftermath of the recent report that showed China's consumer prices rose a stronger-than-expected 4.5% in the year through January (vs. 4.1% in December).

The cut in required reserves will boost bank lending capacity by 350 billion to 450 billion yuan ($55.5 billion to $63.5 billion). Changing reserve requirements is part of the macro-prudential policies that the People's Bank of China has developed as a liquidity management tool, rather than direct stimulus. However, there is a signaling function as well.

The official action and rhetoric will reinforce the belief in the market that the cycle has turned and officials are more concerned about engineering a soft landing to the economy. This would seem supportive of Chinese shares. The Shanghai Composite has underperformed in recent years and is still more than 22% off of last year's peak even with this year's advance (of about 7.1%).

Additional cuts in required reserves are likely at the pace of about one a quarter over the next six months. However, officials are in a bit of a policy scissors. The financial and economic need to ease policy is increasing faster than price pressures, giving policymakers scope to cut interest rates.

The last easing cycle began when inflation was 2.5%. As we noted, in January it stood at 4.5%. Yet there is cause for action. A report in the Chinese Securities Journal has led many to conclude that Chinese consumption of electricity fell in January for the first time since at least 2002, suggesting a weakening economy. Money supply (M1) fell sharply in January as the downtrend seen for two years now accelerates.