Market Close Aug 20

Investors jittery on Fed view, PBoC rate outlook weighs

China holds interest rates; Banks weaken as no cuts expected in China for rest of 2020; Corporate bond issuance frenzy continues

Investors jittery on Fed view, PBoC rate outlook weighs
Financial markets were defensive today after the Fed's gloomy assessment for the latter part of this year. AFP photo.

(ATF) Hong Kong: Financial markets were on the defensive after the US Federal Reserve painted a gloomy picture for the second half of the year although some of the pessimism was offset by expectations the US Senate will revive stalled negotiations on the next round of pandemic aid.

China kept its benchmark lending rate unchanged and analysts said this was consistent with the central bank stance that monetary policy will be more flexible and more specific to give liquidity to corporates in need.

Although the move was expected, the growing sense the central bank would not ease policy across the board caused a sell-off in shares of banks and financial institutions on sentiment grounds.

“We expect monetary policy on interest rates, including the 7D reverse repo, 1Y Medium Lending Facility, and the 1Y and 5Y Loan Prime Rate, to remain the same for the rest of 2020 as China’s Covid-19 infection cases have been stabilised,” ING Bank's chief economist for Greater China Iris Pang said. “We also expect there will be no broad-based RRR cut, but there could be targeted RRR cut or targeted re-lending for SMEs and the agricultural sector.”

Pang said if liquidity tightens, the central bank will fine-tune it via daily open market operations.

LPR steady

China kept its loan prime rate steady – the one-year rate at 3.85% and the five-year rate at 4.65%.

“It seems that policymakers see little need to engineer a further decline in bank lending rates given the relatively rapid economic recovery and the continued prop from loose fiscal policy, which is set to drive a further improvement in activity in the coming months,” Julian Evans-Pritchard, senior China economist at Capital Economics, said.

“We think the next move in the LPR will be an increase, though probably not until next year once the economy has fully recovered and returned to its pre-virus growth path.” 

Overnight, the US Federal Reserve minutes for the July 28-29 meeting said the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near-term, and poses considerable risks to the economic outlook over the medium-term.

The negotiations on CARES2.0 may have stalled but analysts expect a deal to be agreed eventually, with Morgan Stanley public policy analyst Michael Zezas estimating the package to be of $1.5-2 trillion versus the early expectation of $1 trillion.

“While we expect an agreement eventually in late August or early September, prolonged delays would weigh on household incomes and state and local spending in the short-term,” Morgan Stanley analysts said in a note. “If this additional stimulus package is not passed, it would threaten to interrupt the V-shaped recovery that we have had so far.”

Gold edged up to $1,955 during Asian hours but has since come off and is trading at $1,926. US Treasuries have inched up with the 10-year yield marginally lower at 0.66%. The US dollar has also recovered, rising against a basket of currencies to above 93.

The Nikkei 225 ended down 1%, the Australian S&P ASX 200 slipped 0.77% and the mainland China benchmark CSI 300 was off 1.3%. The regional underperformer was the Hong Kong benchmark HSI, which fell 1.54%, weighed down by financials after China held interest rates.

Credit markets issuance activity remains frenetic and is expected to remain busy as yield gaps are significant.

“US investment-grade corporate bond yields are around 100-140 basis points, while Asian investment-grade corporate bonds are around 200-250 basis points,” said Angus Hui, head of Asian & Emerging Market Credit at Schroders. “The gap is even higher for high-yield bonds with a difference of up to 150 basis points. This means we could expect to see more capital flows into the Asian credit market.”

Nan Fung Intl’s 10-year bondEmperor International’s bond exchange offerNanjing Jiangbei’s short-dated bondsHong Kong Electric’s 10-year bond, and China Jianyin’s two-tranche issue are in the market.

But secondary markets are in line with the broad risk-off mood with the Asia IG index wider by a basis point at 64/65 bps.

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Asia Stocks

# Japan’s Nikkei 225 index slipped 1%

# Australia’s S&P ASX 200 retreated 0.77% 

# Hong Kong’s Hang Seng Index tumbled 1.54%

# China’s CSI300 fell 1.3%

# The MSCI Asia Pacific index dropped 1.43%.

Stock of the day

Scholar Education Group rose as much as 24% in a weak market after announcing a profit rise of 30% in the first half of the year and the company announcing an expansion of its coverage in the Great Bay Area and all of Guangdong Province. The company also announced a merger of its online and offline education products and services.