As China Rate Cuts Signal Panic, Bitcoin, Stocks Plunge, Treasury Yield Curve Steepens
China’s consecutive interest rate decreases indicate the need to boost development after the country’s faltering economy received little assistance from the most recent Communist party plenum.
Thursday saw a decline in risk assets as worries about instability in the second-largest economy in the world were raised by China’s second interest rate drop in as many days.
The largest cryptocurrency by market value, Bitcoin (BTC), has plummeted about 2% to about $64,000 since midnight UTC, while ether (ETH) has dropped more than 5%, pulling down the whole altcoin market.
According to data source Investing.com, futures linked to the tech-heavy Nasdaq 100 were marginally lower following the index’s 3% decline on Wednesday.
In the equities markets, Germany’s DAX, France’s CAC, and the eurozone’s Euro Stoxx 50 sank over 1.5%.
The People’s Bank of China (PBoC) surprised the market by reducing the rate on its one-year medium-term lending facility off-schedule, from 2.5% to 2.3%, early on Thursday.
This move brought 200 billion yuan ($27.5 billion) in liquidity to the market. This is the largest decrease since 2020.
The action demonstrates the desperation of policymakers to support growth after their recent third plenum showed little prospect of an improvement, along with comparable decreases in other borrowing rates earlier this week.
China’s economy rose by 4.7% on an annualized basis in the second quarter, according to data released early this month.
This was slower than the 5.3% expansion in the first quarter and far poorer than the 5.1% projection.
“After yesterday’s violent session that rocked opinions across all asset classes, equity futures are stable,” senior global strategist at Marex Solutions Ilan Solot wrote in a note shared with CoinDesk.
“The decision by the PBoC to cut rates in a surprise move only added to the sense of panic.” A branch of the international financial platform Marex, Marex Solutions, is focused on developing and offering tailored derivatives products as well as issuing structured products with a crypto component.
Echoing CoinDesk’s earlier reports this month, Solot pointed out that risk assets, including cryptocurrencies, are at risk due to the continuous “steepening of the U.S. Treasury yield curve”.
When the difference between the yields on longer-duration and shorter-duration bonds rises, the yield curve steepens.
Because 10-year Treasury yields are stickier than two-year yields, the spread between the two-year and 10-year Treasury yields has increased by 20 basis points this month to -0.12 basis points (bps).
In the past, risk aversion has been associated with the so-called de-inversion or re-steepening from inversion (or negative spread).
“The U.S. yield curve’s continued steepening shape is the main source of concern for me. Not only is the 2- and 10-year curve -12bps inverted, but it was only -50bps last month.
Rising back-end [10-year] yields and declining short-end yields have driven the recent movements, according to Solot.
Markets are anticipating a rate decrease from the Fed, but Stickier inflation and an expansionary fiscal policy are perceived as significant concerns, according to Solot.
