The Fed’s “Acronym Cavalry” Arrives After The Bell in Asia
Asian markets were ravaged after the US Senate failed to pass a virus rescue package in a stark reminder of just how intertwined the global economy has become. S&P 500 futures were limit down in Asian trading overnight, leading to the continued selling of risk assets and a stronger US dollar. India was absolutely destroyed by more than -10% while Thailand was off -9%, Singapore -7% and Korea -5%. However, Japan was an outlier with a small gain after its Friday market holiday missed the big swing day as it played catch up. The only positive news was the continued buying of Hong Kong stocks by Mainland investors.
The Fed released an acronym-laden liquidity program to fix the financial plumbing here in the US. As previously noted, the illiquidity in the bond market is driven by the massive unwinding of leveraged trades across asset classes. That money is going into US dollars. Because banks’ capacity to act as a market maker has been limited by regulation, fixed income markets went “no bid”. The Fed will now act as a market maker by buying bonds. Additionally, they will provide credit to companies who are unable to raise capital since there are no buyers. As a fixed income trader and friend noted: “this isn’t a bazooka, it’s a nuclear bomb”. Let’s watch if mortgage rates begin to drop, which we assume they will.
Thankfully, Stanford scientist Michael Levitt, who has been tracking the spread of coronavirus with a high degree of accuracy, is predicting a shallower spread in the US. Take a look for yourself
High-frequency economic data from our partners at CICC continues to show China returning to normal. The economy is running just over 80% of its pre-Lunar New Year level. Meanwhile, coal consumption is around 75% of its pre-Lunar New Year level and freight logistics capacity utilization is nearly 100%.
The Hang Seng cratered -4.86%/-1,108 to close at 21,696 as volume fell nearly 20% from Friday though breadth was terrible with 0 advancers and all 50 constituents falling. Index heavyweights were hit hard with HSBC -5.96%/-130 index points, AIA -5.31%/-113 index points, and Tencent -3.23%/-65 index points. Techtronic Industries was the day’s worst performer -13%/-24 index pints while Wharf Real Estate was the “best” performer -1.32%/-1 index point. China-domiciled companies listed in Hong Kong were off -4.02% while Hong Kong-domiciled companies were off -5.99% using the HS China Enterprise and HS HK 35 indices as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index were off -3.8% led lower by real estate -7.18%, discretionary -5.97%, tech -5.39%, health care -5.19%, energy -4.56%, industrials -4.37%, staples -3.63%, financials -3.63%, materials -3.32%, communication -3.27%, and utilities -2.12%. Southbound Connect was about the only positive sign as Mainland investors continued to buy Hong Kong-listed stocks. Buying activity was 2X selling activity with volume leader Tencent seeing 5 to 1 buying, China Construction Bank 20 to 1 buying and HSBC 200 to 1. Mainland investors bought $1.226 billion worth of Hong Kong stocks as Southbound Connect turnover accounted for just over 10% of Hong Kong turnover.
Shanghai & Shenzhen ended lower by -3.11% and -4.26%, respectively, on light volume, which was 4% lower than on Friday, though breadth was awful with only 409 advancers and 3,348 decliners. Large caps were off 2% as small and mid-caps were off closer to 4%. The Mainland listed stocks within the MSCI China All Shares Index were off -3.78% as utilities -0.68%, healthcare -1.76%, staples -2.8%, communication -2.86%, financials -3.25%, industrials -3.62%, energy -3.79%, materials -3.85%, real estate -4.66%, discretionary -6.11%, and tech -6.7%. While the Shenzhen Connect had higher volume, The Shanghai Connect had strong selling with MSCI inclusion stock sold nearly 5 to 1. Foreign investors sold $1.128B of mainland stocks as Northbound Connect trading accounted for just over 5% of Mainland turnover.
Last Night’s Prices & Yields
- CNY/USD 7.09 versus 7.08 Friday
- CNY/EUR 7.62 versus 7.59 Friday
- Yield on 1-Day Government Bond 1.44% versus 1.47% Friday
- Yield on 10-Year Government Bond 2.80% versus 2.84% Friday
- Yield on 10-Year China Development Bank Bond 3.24% versus 3.26% Friday
- Commodities were down hard on the Shanghai & Dalian Exchanges with Dr. Copper were off -4.56%