Market Close Feb 22

Liquidity fears grip China markets

PBOC moves hint at hawkish shift; Pound surges on vaccine rollout; Treasury yields spike ahead of Powell testimony

Liquidity fears grip China markets
China will allow more outbound investment by raising the quota on its QDII scheme in 2021, an official at the foreign exchange regulator said in remarks published on Friday. It will push forward with the opening up of its financial derivative market in 2021, Ye Haisheng, head of capital account management department at the State Administration of Foreign Exchange (SAFE), wrote in China Forex magazine. And it will conduct feasibility studies on allowing individuals to invest in overseas securities and insurance products within an annual quota of $50,000 per person, Ye said. File photo by Reuters.

(ATF) Hong Kong: Chinese markets underperformed the region as investors grew jittery about policy normalization following warnings about the formation of asset bubbles, while rising commodity prices kept global markets on edge.

Copper prices hovered around nine-year highs with oil extending gains as Brent crude futures added 0.7% at $63.33 a barrel and US crude rose 0.7% to $59.65. 

Although commercial banks left their loan prime rate unchanged on Saturday, the People’s Bank of China’s recent action suggests liquidity will remain tight in a hawkish shift as policymakers focus more on financial risks.

Japan’s Nikkei 225 index jumped up 0.46% on optimism the BOJ will reaffirm its commitment to ETF purchases. Australia’s S&P ASX 200 dipped 0.19%, Hong Kong’s Hang Seng index eased 1.06% and China’s CSI300 tumbled 3.14%, underperforming on worries that policy normalisation could hurt risk appetite. Regionally, the MSCI Asia Pacific index advanced 0.29%.

Sheana Yue and Mark Williams of Capital Economics said in a note there were signs of a hawkish shift referring to the authorities’ draining liquidity ahead of the Lunar New Holiday, a time when liquidity demand tends to rise.

“Interest rates are not the only tool for steering policy – there are quantitative controls and 'window guidance' too. Their impact is evident in credit growth, which is already slowing, and in surveys of borrowers that suggest banks have become less willing to lend,” they said.

“We expect the PBOC to formalise the shift with policy rate increases in the next few months. Overall, we expect PBOC policy rates to rise by 30bps in 2021.”

Rise in US Treasury yields

Yields on 10-year US Treasury notes rose to one-year highs of 1.38%, bringing the rise for the year so far to a steep 43 basis points. 

This week Federal Reserve chairman Powell will give his semi-annual testimony to Congress, and analysts will watch his words for insights into future policy direction given the recent surge in yields.

“Rising inflation expectations and stronger growth prospects have lifted 10Y Treasury yields from 0.90% to 1.39% in 2021, increasing the risk of near-term volatility in equities, credit, commodities and emerging markets,” Mansoor Mohi-uddin, the Bank of Singapore's Chief Economist, said.

“But the Fed’s very dovish stance is likely to prevent a major sell-off in US government bonds, thus keeping intact the economy’s recovery from the pandemic and the broad rally in risk assets.”

Gold jumped 0.4% to $1,797 per pounce and the dollar was flat at 90.4 against a basket of currencies.

The British pound hit a new three-year high of $1.405 as the UK’s vaccination rollout stoked hopes about an economic recovery.

“There are clear signs of pick-up in flows into UK Plc. Cross-border M&A, where UK is target has picked up since December, consistent with the broader lift in global M&A,” Kamal Sharma and Myria Kyriacou, strategists at BofA Securities, said.

“Cyclical support for GBP should continue in the near-term and we like higher GBP versus the funding currencies.”

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Markets this week: PBOC decision, southbound flows, Treasury yields

Foreign Exchange: Yuan looking to overtake the pound and yen in forex trade

Asia Stocks

· Japan’s Nikkei 225 index jumped up 0.46%

· Australia’s S&P ASX 200 dipped 0.19% 

· Hong Kong’s Hang Seng index eased 1.06%

· China’s CSI300 tumbled 3.14%

· The MSCI Asia Pacific index advanced 0.29%.

Stock of the day

Jiangxi Copper shares surged 20.4% after the price of the metal struck 9-year peaks. The Nanchang-based firm is one of the biggest copper smelters in China, the world’s top metals consumer. 

Asia markets China tightening? PBOC Pound surges Vaccine rollout Treasuries up Powell to testify