Friday, October 07, 2022

Q2 2022 Global Markets Emerging Topics: Rising US Treasury Yields and Weakening JPY (Part 2)

TeaHis articles are written by CMC APAC Market Analysts; Calvin Wong, Tina Teng and Leon Liu

Sectors View on US Equities

According to the above statements, central banks’ policies are more focused on lowering consumer prices, rather than stimulating growth, in turn leading the US economy into a “stagflation” era, directing investment funds to withdraw. can continue. Walk away from growth stocks and into defensive sectors, such as utilities, healthcare, and consumer stables. Also, we expect Energy sector will continue to lead in Q2 performance Due to war-intensive supply shortages and rising inflation.

Growth stocks, typically in consumer discretionary, communications services and technology, are expected to outperform the S&P 500 amid declines in growth and valuation, in which we see variables from the performance of individual stocks dependent on cashflow position and sentiment dynamics. can. ,

simultaneously, Bank stocks may suffer from potential credit crunch Due to increasing sanctions on Russia, as well as rising borrowing costs.

Performance of S&P 500 Sectors

Q2 2022 Global Markets Emerging Topics: Rising US Treasury Yields and Weakening JPY (Part 2)Source: TradingView (click to enlarge chart)

China’s yuan trend from 2020 to 2022

Reviewing the trend of the Yuan over the past two years, USD/CNH has entered a substantial depreciating trend since May 2020.

Q2 2022 Global Markets Emerging Topics: Rising US Treasury Yields and Weakening JPY (Part 2)Source: CMC Markets (Click here to enlarge chart)

The yuan’s 2-year outperformance against the US dollar is evident across the board as well. The CFETS RMB index which measures the value of the yuan against a basket of 24 major currencies, has gained over 16% since June 2020, up only 12% against the US dollar.

Q2 2022 Global Markets Emerging Topics: Rising US Treasury Yields and Weakening JPY (Part 2)

Source: CFETS (Click here to enlarge chart)

Since November last year, the US Federal Reserve has begun a stringent cycle of debt reduction, interest rate hikes and balance sheet reductions. Conversely, China’s monetary policy has shifted to a targeted expansionary mode where China’s central bank, the PBOC, has cut commercial banks’ reserve requirement ratios and benchmark lending rates. However, the Fed has failed to halt the appreciation of the yuan against the US dollar despite more stringent monetary policy guidance engineered by the mandate of a dovish PBOC.

The reasoning behind Yuan’s strength: PBOC tightens its monetary policy regime after May 2020 while the Fed maintains its quantitative easing program. The long-term strength of a currency depends on the fundamentals of a country. China is the first country to recover from the COVID-19 pandemic crisis and its 2021 GDP growth rate in general surpassed that of the rest of the world, which in turn attracted large amounts of international capital inflows that led to the yuan’s growth. Consistent trend appreciated.

However, the current yuan’s strength is likely to be limited in the second quarter of 2022., primarily because the Fed will implement a more rapid interest rate hike cycle and a higher amount of quantitative hardening regime to reduce its $9 trillion worth of bonds on its balance sheet. Furthermore, China’s manufacturing sector suffered a severe contraction in March, so such weak economic data could prompt the PBOC to move forward and accelerate the pace of monetary policy easing.

In the context of China’s economic slowdown, the conclusion of the Q4 2021 PBOC meeting stated that the first goal of its monetary policy was to maintain economic stability. Given this statement, the main objective of subsequent monetary policy decisions will shift towards achieving stable growth and therefore, going forward, the monetary policy environment may become more accommodative, which will likely trigger some downward pressure on the yuan.

Chinese policy makers have always exercised balanced controls on the yuan. In particular, they do not want it to rise or fall significantly and China’s manufacturing industry has experienced a significant slowdown in growth due to the sharp appreciation of the yuan, the recent outbreak of the Covid-19 infection in major commerce centers such as Shenzhen. Outbreaks and increased raw material costs. Thus, achieving a stable exchange rate is essential for China as the manufacturing sector is a significant contributor to its overall economic development.

Does this mean that a major decline is on the cards to reverse the recent yuan’s strength? Since the last global liquidity easing cycle in 2020, a strong yuan has become the favorite for foreign capital and after the Fed begins its current interest rate hike cycle, the move to convert its yuan-based financials to foreign capital The pressure may increase. Asset holdings in US dollars. In conjunction, if the PBOC allows the yuan to depreciate rapidly, it could encourage foreign capital to increase China’s core assets which could be detrimental from a national security perspective. As a result, China will not allow its currency to depreciate significantly as it aims to achieve a steady GDP growth of 5.5 percent in 2022, so the downside is expected to be limited.

How will the real estate industry be affected?

Since last year, China has begun implementing policies to decouple the real estate market by introducing the concept of “housing is used for living and not for speculation”, which has led to the deterrence of many property developers. A significant credit crunch has arisen for the U.S., which increases the risk of bankruptcy and default on its debt obligations. To ease the debt crisis situation, the PBOC has started easing its monetary policy since late last year and has injected liquidity into the property market.

Q2 2022 Global Markets Emerging Topics: Rising US Treasury Yields and Weakening JPY (Part 2)

Source: Tradingview (click to enlarge chart)

Since mid-March 2022, China’s real estate sector has seen a rapid upward rebound, largely due to less stringent deleveraging policies. Policy makers have taken several supportive measures for the real estate sector such as support schemes for mergers and acquisitions, credit easing, seeking appropriate financing to boost market confidence.

More than 60 cities have eased restrictions on home purchases, lowered down-payment ratios, provided home purchase subsidies, lowered mortgage interest rates and provided financial assistance to real estate companies. A tax on several properties has also been delayed. In such a situation, the shares of many real estate companies have jumped more than 50 percent. However, it should be noted that this recent rally does not mean a revival of strength in the long-term fundamentals of the real estate sector. At present, most of the adjustment policies of real estate are carried out in the second and third tier cities of China and there is no clear change in the policies that govern the real estate market of the first tier cities.

China’s main goal on the asset sector is to achieve a “soft landing” and does not want to return to the volatile high growth environment driven by excessive leverage. However, since real estate contributes a substantial portion of China’s GDP, the achievement of China’s 5.5% GDP target for 2022 depends largely on the real estate sector, so it needs to be supported by a lax monetary environment. is needed. To sum it up, the current momentum of a sharp rebound in the stock prices of the real estate company is likely to continue and some retracement is expected in the short term. However, in the context of monetary policy easing, share prices will remain overall stable in the medium term.

How will China’s tech stocks perform after oversold conditions?

Chinese tech companies such as Tencent, Alibaba and Meituan have seen their respective share prices fall significantly this year, mainly due to the Russia-Ukraine war, foreign regulatory repression and the recent COVID-19 outbreak in China.

In the current environment, the Chinese government has started using policies to support these tech companies such as allowing them to list overseas. On March 16, the Financial Commission of the State Council held a special meeting, emphasizing that it will actively introduce market-friendly policies and introduce contractionary policies prudently, which means that the technology’s The stringent regulatory clampdown of the last one year on business practices platform companies may end soon.

In addition, many listed companies have implemented large-scale share buyback programs such as Alibaba.

China and US regulators have recently held several rounds of talks aimed at resolving some pending issues in cross-border regulations, which in turn reduce the odds of China’s ADRs being delisted from US stock exchanges. Overall, these latest developments have managed to dampen negative sentiment that will likely help slow the momentum of a major decline in China’s tech stocks.

Click here to read Part 1 of Q2 2022 Global Markets Emerging Themes

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