China's PBoC overnight hikes Reserve Ratio Requirements by 50 basis points. This hits the basic materials sector the hardest as it has done in last night's Asian and European markets. This is the 4th raise in the RRR in 2 months as compared to 6 for the entirety of 2010. The Chinese are increasingly worried as you can see, about inflation after the November Consumer Price Index rose by 5.1% y.o.y.; this was the biggest inflationary move in China in two years. This is essentially the opposite of what is happening in the U.S., the U.S. is flooding the market with cash while the Chinese are requiring their major banks to keep more money in reserve at their central bank, essentially withdrawing liquidity from the market an curbing speculative activity. This is one of the reasons I'm not bullish on emerging markets. The US action is sending hot money flows into these markets and they are taking action to protect their economies from the unwanted excess of hot money flows which create inflation in their economies. This is also the reason that the Fed's QE program is unpopular with emerging market countries.
Do not underestimate their willingness to defend their economies against rising inflation which the US QE program is essentially exporting, food riots have already been seen this week on the African continent and parts of Asia. Food costs in China are up an astounding 11.7% y.oy. The Chinese RRR action puts the Reserve Requirement at an all time high of 19%. Again, this is why, as a theme for 2011, I favor a short side bias on emerging markets with leveraged ETFs like EDZ which have already shown a bullish long-term chart.
This trade has been added to the January Trade List.
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