China responds to challenges

A quiet start to the week as traders digest the impact of news today and over the weekend largely China-related.

Following on from reports on Friday that a signing of the “phase one” trade deal was imminent Chinese state media reported that Chinese Vice Premier Liu He and USTR Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin held a “constructive” phone call over the weekend to address each sides concerns.

Offsetting the good news on trade, another weekend of clashes between police and protesters in Hong Kong that resulted in hundreds of protestors being trapped overnight inside Hong Kong’s Polytechnic University.

The emergence of Chinese troops on the streets of Hong Kong for only the second time since the handover in 1997 further flaming tensions after China President Xi’s warning last week that the worsening violence was a threat to a key principle agreed on before the handover of “one country, two systems”

Faced with the challenging backdrop outlined above and following a surprise cut to the 1-year Medium Lending Facility (MLF) two weeks ago, the Chinese central bank, the PBOC today cut the interest rate on its 7-day reverse repurchase (repo) agreements by 5 basis points.

The 7-day repo is used to manage short term liquidity and while the cut is modest it is significant due to it being the first reduction in the repo rate since 2015. It shows an intent to support the economy in the face of the social, economic and geopolitical challenges mentioned above.

Furthermore, it suggests the main lending rate (the Loan Prime Rate) is likely to be cut this coming Wednesday a prospect that has prompted a modest bounce for copper in today’s session. Unfortunately for long-suffering copper bulls, the technical set-up implies any recovery is likely to be modest at best.

As can be viewed on the chart below, the rally from the September 2.4820 low has unfolded in three waves, usually a sign a reliable sign of a correction. Therefore, unless copper rallies above the November 2.7300 high, the risks remain for a retest of the 2.5000 support zone.

Source Tradingview. The figures stated areas of the 18th of November 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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