What a difference a rate cut makes.
The Chinese government (via the central bank) took a big step to try and calm investor jitters Tuesday (Aug. 25), and in the Western world, the effort, through interest rate cuts, worked like a charm.
The broader U.S. markets rocketed higher, with a roughly 1.8 percent gain in the S&P and a better than 2.5 percent gain in the tech-laden NASDAQ.
The move and then dip in the “Nazz” (everyone on Wall Street likes to have a snappy nickname for market barometers and indices, laden as they are with numbers) should perhaps not be taken as a sanguine sign of things to come, at least for equities. One day (hour? Two hours?) does not a rally make, and of course, it all came crashing down, crushing a push that just couldn’t get any follow-through.
Here’s why: China’s central bank cut its interest rates by one quarter of a percentage point, with a nod toward reassuring investors that it will take steps to support (and hopefully boost) the homefront economy. Cutting interest rates is a powerful tool in getting people, and businesses, to spend more. Money is cheaper, and thus building, say, a workforce, a new production facility or even spending on luxury goods becomes more palatable. And, of course, when investors look for returns on the money they tie up, equities start to look relatively attractive compared to bonds and other interest-yielding financial instruments.
The move by the Chinese bank may smack of determination to keep the economy afloat, but the question remains: If that arrow does not hit the mark, what is left in the quiver? There are not that many more levers that can be pulled, with devaluation having come (and given the markets’ reaction) and seemingly gone. The government has already stepped in to boost stock equities, too, with programs geared toward 1) freezing stocks when things get bad and 2) setting up vehicles to actually step in and buy when there is panic selling.
So again, as we asked yesterday, what’s all this mean for payments companies? For now, the sigh of relief that greeted the news is only a faint echo. Stepping back from the stock market euphoria/depression and the fact that payments companies were down more than the markets, we can see that the Chinese consumer may be setting up to keep buying, at least in the short term, with the lower rates.
That may mean the engine that drives the consumer world — and thus, commerce, electronic and otherwise — may be OK for a while. So by extension, Apple should do well. So should Visa, MasterCard and companies that are catering to cross-border goods that can be brought back into China.
In the financial realm, though, startups may have a wicked time of it, as venture capitalists and others may keep powder dry to ensure that the “next big idea” has a platform to sell into, both here in the U.S. and abroad. Could that kill innovation, at least insofar as dreamers and doers getting the funding they need to push business plans into the realm of business reality? Time will tell.