Market Close Oct 26

China bonds rally as foreigners pile in

China government bonds rally amid foreign buying spree; Plenum expected to chart 5-year economic plan; Safe haven bid boost US Treasuries, US dollar

China bonds rally as foreigners pile in
People dine at a restaurant in Beijing on Sunday October 25, 2020. Bars are also filling up, reporters say. Photo: Tingshu Wang/Reuters.

(ATF) Hong Kong: Financial markets were in retreat amid a surge in coronavirus cases in the United States, France and Spain while investors were also watchful of a top-level meeting in China which will determine the direction of the world’s second largest economy over the next five years.

“Rising Covid cases and tighter measures to stem the spread of the virus are raising fears that the fragile economic recovery will quickly be derailed. Fears of a double-dip recession are overshadowing upbeat vaccine,” City Index analyst Fiona Cincotta said.

“Risk off is dominating as investors fret over the impact that tighter restrictive measures will have on economic growth. Riskier assets such as stocks are out of favour, whilst flows into safer havens such as the US Dollar are on the rise,” she said.  

The US and France recorded a record number of coronavirus cases, and Spain imposed a national curfew with Italy on a partial lockdown.

Japan’s Nikkei 225 index inched down 0.09%, Australia’s S&P ASX 200 edged down 0.18% and China’s CSI300 fell 0.58%. Regionally, the MSCI Asia Pacific index eased 0.28%.

China’s domestic market saw a rally in the government bonds as Beijing inaugurated a meeting of its top leaders to discuss the country’s 14th five-year plan including issues like technological innovation, economic self-reliance and a cleaner environment.

The meeting, which runs from Oct 26-29, comes at a time when analysts are upgrading their forecasts for the yuan on the strength of a resurgent economy and amid reluctance of the central bank to cut interest rates. 

The 10-year yield fell 7 basis points to 3.2% after a recent spike to one-year highs struck earlier this month, as foreigners piled into Chinese government bonds after the recent inclusion by FTSE Russell into its WGBI last month.

Morgan Stanley analysts estimate the inclusion could help funnel $60-$90 billion of investment money into the country in the next few years with monthly inflows of $3-4.5 billion. 

Foreigners raised their holdings of Chinese sovereign bonds by $66 billion in the third quarter, Bloomberg calculations showed. 

Tight monetary conditions and lack of aggressive central bank rate cuts had propelled the 10-year yield to a one year peak of 3.31% earlier this month from all-time lows of 2.48% struck in April. 

“China’s bond market really did sniff out the domestic recovery but also the rebound in global growth back in June. Not only has the Chinese yield curve shifted upwards (10-year minus 1-year) over the past two quarters but it has also steepened sharply (10-year minus 3-month SHIBOR),” Jefferies strategist Sean Darby said in a note. “We remain Modestly Bullish on the CSI 300 within our global asset allocation.” 

The US dollar, meanwhile, firmed against a basket of currencies rising 0.3% to 93 and US Treasuries rallied with the 10-year yield dropping 4 basis points to 0.80%.

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Asia Stocks

· Japan’s Nikkei 225 index inched down 0.09%

· Australia’s S&P ASX 200 edged down 0.18% 

· China’s CSI300 fell 0.58%

· The MSCI Asia Pacific index eased 0.28%.

Stock of the day

Alibaba Pictures share prices fell by as much as 16% after it issued a profit warning. The company expects revenue of the Group for the six months ended September 30, 2020 will decrease by around 35% to 40% while the net loss attributable to owners of the company will fall by approximately 55% to 60%.

Asian markets China bonds China Plenum US Covid crisis EU Covid crisis