The Year-End Market and the China Interest Rate Raise

by: Zhong Jin

For those who are interested in the year-end thin markets, the following table presents the returns of S&P 500 index in the week between the Christmas and the New Year in the past 20 years. The number of the positive returns is 12 and the number of the negative return is 8 for the last two decades, which give us little hint of direction in the final week this year.

But while most of Western countries were in vacation, PBOC raised interest rates by 0.25% in China due to rising inflation. I looked at the most recent eight rate raises in China and the market reactions following the raises. The following table illustrates the date of each recent rate raise, the 5-days return of related stock markets following the rate raise, the 5-days return of Dow Jones-UBS commodity index, and inflation rates at the time.

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The Shanghai stock market had reacted positively toward rate raise announcements in the past. The average rate of 5-days return following the rate raise is 4.93%. Hang Seng index in Hong Kong had shown only an average 5-days return of 0.75%. The Hong Kong market reacted negatively three times toward the rate raise decisions from PBOC in the last seven rate raises.

Impacts of China’s rate hiking announcements on commodities are also positive in the short term. The average rate of 5-days return of Dow Jones-UBS commodity index following the rate raise is 0.56%, with only one negative return in seven rate raises.

It is clear that markets had expected those rate raise decisions before PBOC made announcements in the past few years. The latest raise is also not a surprise, since everyone was talking about it since the November CPI in China jumped to 5.1%. When the uncertainty of rate raise is removed from the China stock market for now, it is likely that the history will repeat itself.

Disclosure: No positions