Markets Feb 21

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

Southbound inflows in focus as Hong Kong benchmark gains 12.5% ytd; Rising bond yields could raise borrowing costs, dull risky assets allure; US economy accelerating

Markets this week: PBOC decision, southbound flows, Treasury yields
 A Stock Exchange of Hong Kong (HKEX) sign is seen at the 2020 China International Fair for Trade in Services (CIFTIS) in Beijing, China September 4, 2020. REUTERS/Tingshu Wang


Investor focus will remain on bond markets after yield on the benchmark 10-year Treasury note, jumped to a one year high of 1.36% last week amid worries this could dull the lure of riskier assets.

“The acceleration in US 10-year Treasury yields to pre-pandemic levels is generating concerns about the risks to equities,” said Mathieu Savary, Vice President at BCA Research.

“This is especially relevant given that real yields appear to be bottoming. While the Fed remains consistent in communicating its intention not to kill the recovery, its own actions are not the only ones that matter. The perception and actions of market participants are also relevant and could prompt a reaction from the Fed.”

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Hong Kong markets will watch southbound flows from mainland China which have been strong in recent months stoking concerns there could be regulatory intervention to moderate the flows.

HSBC expects the full year southbound capital inflows to be in the region of 1-1.4 trillion yuan after January’s aggregate flow of 260 billion. This compares with 2020’s full year total of 600 billion.

“The recent rally in the Hong Kong stock market has reinforced investors’ confidence about southbound flows,” said HSBC analysts Bob Liu and Steven Sun in a note.

“However, if the strong growth momentum of southbound inflow continues after CNY, we would expect the regulatory authorities to take action, as they did in 2015.”

Earnings will continue to be in focus next week along with data tracking the economic recovery and developments with President Joe Biden’s proposed $1.9 trillion coronavirus relief package.

This comes at a time when analysts are growing bullish on the world’s largest economy with JPMorgan economists predicting the accelerating US recovery puts it on course to outperform China’s V-shaped rebound.

JPMorgan also said China’s economic slowdown is less rapid than feared and this could be a crucial factor in the PBOC’s rate decision on Monday.

Rate setting meetings are also scheduled in South Korea and New Zealand. All three central banks are expected to hold.

“The People’s Bank of China hasn’t touched the 1-year and 5-year Base Lending Rates since April last year. There is no reason for it to disturb policy now given that the recovery is coming along nicely,” said ING Economist Prakash Sakpal.

“The renewed threat to the economy from the pandemic may instil some interest in the other two central bank meetings; the Bank of Korea and the Reserve Bank of New Zealand.”

Crypto currencies will be watchful after Elon Musk tweeted the price of Bitcoin and Ethereum “seemed high”. He also said in a tweet:  “Bitcoin is almost as bs as fiat money. The key word is 'almost' ”, while saying investors have to look elsewhere when fiat currency has negative real interest.

Last week Ethereum, the second largest cryptocurrency in terms of market capitalisation and volume, hit a record high of $1,938 and gained more than 126% on a its price a year ago. Some analysts have projected a price of $2,500 over the next three months.


In the week to February 17, investors poured $27.8 billion into various equity funds with Emerging Markets, SRI/ESG and Global Equity Funds all receiving net investments for the sixth, 28th and 35th straight week, according to fund flow tracker EPFR.

“Emerging Markets Equity Funds recorded their 20th inflow in the past 21 weeks during mid-February, with energy and commodity prices remaining supportive and expectations of more stimulus-fuelled developed markets demand for developing markets exports running high,” said Cameron Brandt, Director, Research at EPFR.

According to Jefferies analysts, global equity funds have had the best winning streak since late 2017.

“US, Japanese, Chinese equities, IT, Financials and SRI/ESG funds were the standouts again,” they said in a note.

Bond Funds attracted a net $12.6 billion in inflows but as the reflation trade powered on flows also reflected concerns about high levels of inflation, as convertible bond funds received their second inflow record in as many weeks, Bank Loan Bond Funds extended their longest run of inflows since 3Q18 and Inflation Protected Bond Funds absorbed fresh money for the 50th time in the past 55 weeks.

Conversely, government bond funds recorded a small outflow last week on the back of rising sovereign yields and money market funds extended their streak of outflows to a 6th consecutive week as investors continued to deploy the cash pile accumulated in 2020.

Technology Sector Funds posted their second largest inflow on record as those with diversified global, cybersecurity and semiconductor mandates attracted most of the fresh money.

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Last week's rating changes

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PBOC Treasury yields HSBC JPMorgan ING Ethereum