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Since mid-April, domestic equity assets have risen and commodity prices have rebounded; Recently, there have also been some positive signals between northbound funds and the RMB exchange rate. Behind the change in exchange rate, the change in fundamentals and the significance of the capital market? This article analyzes for reference.
Hot Thoughts: RMB Assets, Adding Positive "Signals"?
Since mid-April, equity assets in the domestic market have risen, commodity prices have rebounded, and the market performance has been relatively positive. 1) In the equity market, the Hang Seng Index has surged 20.3% since April 16, and the Shanghai Composite Index has also rebounded 4.9%. 2) In the commodity market, the South China Composite Index has rebounded sharply by 7.5% since April, of which non-ferrous metals, ferrous metals, precious metals, energy and chemicals, and agricultural products have risen by 14.2%, 12.5%, 10.6%, 3.3%, and 1.0% respectively.
There are also certain positive signals between northbound funds and the RMB exchange rate. Since April 24, northbound capital has picked up as a whole, with a total net inflow of 43.3 billion yuan; The RMB exchange rate also broke away from the 7.25 mark, which was weak and under pressure in the early stage, and the offshore RMB and onshore RMB appreciated by 0.5% and 0.3% to 7.23 and 7.22 respectively. At the trading level, the strengthening of the forward exchange rate, the decline of risk reversal factors, and the narrowing of the onshore spread also released signals that the RMB will continue to appreciate.
Q2: What are the external changes in the strengthening of the exchange rate? The strength of the US dollar may not be maintained, and the substantive impact of tariffs will be limited
The easing of the labor market and the reduction of the risk of "secondary inflation" may not support the strength of the dollar; The easing of supply and demand in U.S. bonds also weakened the risk of a rebound in the dollar. Fundamentals, core services inflation is expected to continue to cool as wage growth slows; Housing inflation may continue to decline, and it may be difficult to rebound before the end of the year. On the trading side, the supply pressure of U.S. bonds has eased, the demand side has not deteriorated, and the high risk is relatively limited. Looking back historically, one quarter before the official interest rate cut, the dollar may enter a weak range.
However, the scale of tariff imposition is not large, the pace is slow, and the actual impact may be relatively limited. Biden's recent increase in tariffs is mainly one of the campaign tactics, and the symbolism is even greater. On the one hand, in 2023, the United States will import US$427.2 billion from China, with US$18 billion accounting for only 4.2%, and the overall scale of goods subject to tariffs in this round is relatively small. On the other hand, judging from the previous four rounds of tariff collection, the "decoupling" of bilateral trade between China and the United States has actually only taken place.
Q3: What is the market significance of a stronger exchange rate? The appreciation of the exchange rate and the improvement of the internal vitality may increase the attractiveness of RMB assets
The economic data in April exceeded expectations, and the clarion call for domestic "recovery" may have sounded; The resonance of internal and external replenishment and the acceleration of the implementation of superimposed policies may continue to improve the fundamentals. On the one hand, the current domestic inventory is at an absolute low level, and the real interest rate is falling, and the signal of economic stabilization and upward movement has become more and more clear. With the support of the United States' replenishment, the mainland's strong exports will also continue. On the other hand, the acceleration of the pace of special bond issuance and the acceleration of the implementation of real estate and other policies may further show the support effect on the economy.
The strengthening of the RMB exchange rate is conducive to the improvement of the risk appetite of funds in the domestic market. Historically, the flow of northbound funds is often affected by the expectation of the appreciation and depreciation of the RMB exchange rate. Since August last year, under the pressure of depreciation, the cumulative outflow of northbound funds has reached 98.8 billion yuan, which has caused a significant drag on the A-share market. With the turn of the exchange rate, northbound funds are expected to stabilize and return; Among them, since August last year, the financial, real estate and other industries that have been relatively favored by northbound funds have been reduced by a large amount of money are worth paying attention to.
Risk Warning
escalation of geopolitical conflicts; The Fed turned "hawkish" again; accelerated contraction of financial conditions;
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The main body of the report
Hot Thoughts: RMB Assets, Adding Positive "Signals"?
Since mid-April, domestic equity assets have risen and commodity prices have rebounded; Recently, there have also been some positive signals between northbound funds and the RMB exchange rate. Behind the change in exchange rate, the change in fundamentals and the significance of the capital market? FYI.
Q1: RMB assets, adding a positive "signal"? Northbound funds stabilized and returned, and the RMB exchange rate showed signs of appreciation
Since mid-April, equity assets in the domestic market have risen, commodity prices have rebounded, and positive signals have gradually begun to be released. 1) In the equity market, the Hang Seng Index has surged 20.3% since April 16, and the Shanghai Composite Index has also rebounded 4.9%. 2) In the commodity market, the South China Composite Index has rebounded sharply by 7.5% since April, of which non-ferrous metals, ferrous metals, precious metals, energy and chemicals, and agricultural products have risen by 14.2%, 12.5%, 10.6%, 3.3%, and 1.0% respectively.
Although Biden's proposal to impose tariffs has been disturbed to a certain extent, there are still some positive signals between northbound funds and the RMB exchange rate. Since April 24, northbound capital has picked up as a whole, with a total net inflow of 43.3 billion yuan; The RMB exchange rate also broke away from the 7.25 mark, which was weak and under pressure in the early stage, and the offshore RMB and onshore RMB appreciated by 0.5% and 0.3% to 7.23 and 7.22 respectively. On May 14, Biden instructed his trade representative to raise tariffs on $18 billion of imports from China under Section 301 of the Trade Act of 1974. The tariff increase proposal once had a slight impact on market sentiment, and northbound funds outflowed 17.5 billion yuan for three consecutive trading days. However, with the "cooling" of the emotional shock and the "force" of domestic policies, the northbound funds stabilized again in the next two trading days, with a total inflow of 20 billion yuan; The renminbi also appreciated slightly by 0.1% throughout the week.
At the trading level, the strengthening of the forward exchange rate and the decline of the risk reversal factor have also released a signal that the RMB will continue to appreciate. First, in the forward market, since April 16, the dynamics of the 3-month forward exchange rate and spot of the RMB against the US dollar have declined, and the forward premium has risen sharply by 273bp. As of May 16, the implied volatility of the 3-month RMB/USD parity option has fallen to 3.7%, and the risk reversal factor of 25delta has also fallen rapidly from 0.68 on April 16 to -0.07. Third, the onshore spread between the RMB and the US dollar has also narrowed sharply, reaching 260bp on April 16 and only 118bp as of May 17, and has turned negative before.
In the near future, the easing of labor market tightness and the reduction of the risk of "secondary inflation" may not support a sharp strengthening of the dollar. 1) The number of new non-farm payrolls in the United States in April was 175,000, lower than the market expectation of 243,000, while the growth of non-farm private sector wages slowed in April, the unemployment rate rose to 3.9%, and the number of job openings fell to a three-year low. 2) The core CPI in the United States fell to 3.6% year-on-year in April, the lowest in three years, and the month-on-month growth rate fell for the first time in six months. Looking ahead, the "secondary inflationary" pressure in the United States comes from core services, but with the rebalancing of the labor market and the further slowdown in wage growth, core services inflation is expected to continue to cool under the "wage-inflation" chain. According to our estimates, housing inflation may continue to decline, and it may be difficult to rebound before the end of this year. With the risk of "secondary inflation" lowering, the dollar index may not be able to strengthen significantly.
In addition to fundamentals, if the US Treasury interest rate soars driven by supply and demand, it will also bring about a rebound in the US dollar index; However, at present, the supply pressure of U.S. bonds has eased, and the demand side has not deteriorated, and the high risk of re-rushing is relatively limited. 1) On the revenue side, the U.S. fiscal revenue may improve significantly in 2024. Total fiscal revenue is expected to rise to $4.9 trillion, with a growth rate of about 11%; 2) On the spending and deficit side, the U.S. deficit ratio is expected to fall from 6.3% to 5.9%; 3) On the demand side, since the second half of last year, the net purchase of U.S. bonds by U.S. money market funds and overseas departments has increased, and the total net inflow has not dropped significantly during the high period of U.S. bond yields. Looking back historically, in the first quarter before the official interest rate cut, U.S. bond yields mostly entered a downward trend range, and the U.S. dollar index was difficult to maintain its strength. Based on the September interest rate cut, the current dollar index may be at the end of its strong crossbow.
The tariff increase is more of one of Biden's campaign measures, the scale of implementation is not large, the pace is slow, and the actual impact is relatively limited. Recently, Biden has raised tariffs largely as part of a series of measures to prop up American businesses and attract workers in an election year, and it is more symbolic. On the one hand, in 2023, the United States will import US$427.2 billion from China, with US$18 billion accounting for only 4.2%, and the overall scale of goods subject to tariffs in this round is relatively small. On the other hand, judging from the previous four rounds of tariff collection, the "decoupling" of bilateral trade between China and the United States has actually only taken place. From the perspective of trade balance, after the trade conflict, the U.S. trade deficit with other regions and China's trade surplus with other regions widened in tandem. From the perspective of U.S. imports and Chinese exports, after the trade conflict, U.S. imports from other regions and China's exports to other regions have been in line with the same trend. Although the surge in tariffs has reduced U.S. imports from China, China has been able to fully compensate for the losses by exporting to other regions.
Q3: What is the market significance of a stronger exchange rate? The appreciation of the exchange rate and the improvement of the internal vitality may increase the attractiveness of RMB assets
The economic data in April exceeded expectations, and the clarion call for the "recovery" of domestic fundamentals may have sounded. 1) Driven by exports, manufacturing production strengthened sharply, and the added value in April increased by 2.4 percentage points year-on-year to 7.5%; 2) Since February, the investment in equipment and tools has maintained a high growth rate of more than 17%, significantly higher than the 6.6% at the end of last year, indicating that the demand for equipment renewal has been released. 3) The relevant support policies for real estate in the early stage have also been effective, and the cumulative real estate construction and construction area in April rose by 3.2 and 0.3 percentage points year-on-year from the previous month to -24.6% and -10.8% respectively. 4) The performance of consumption is not bad, in April, the social zero was 2.3% year-on-year, and the two-year compound increase was 10.1%, an increase of 3.3 percentage points from the previous month. In the past two years, the growth rate of commodity retail and catering revenue increased by 2.9 and 6.3 percentage points to 8.7% and 22.5% respectively.
In the future, the resonance of internal and external replenishment and the accelerated implementation of domestic policies may continue to improve economic fundamentals. On the one hand, the current domestic inventory is at an absolute low level, and the real interest rate is falling, and the signal of economic stabilization and upward movement has become more and more clear. The U.S. replenishment is one of the "source power" for the improvement of the global manufacturing industry, and the "strong" export of the mainland will continue to be supported by some industrial logic. On the other hand, domestic policies are also accelerating the implementation, and the effect of supporting the economy may be further revealed. The slow progress of special bond issuance in the early stage has dragged down infrastructure investment, and this constraint may improve with the acceleration of the pace of issuance in the future. On May 17, the real estate support policy was intensively introduced, and He Lifeng pointed out that "solidly promote the key work of guaranteeing the delivery of housing and digesting the stock of commercial housing", and the central bank and the Financial Regulatory Bureau lowered the down payment ratio of individual housing, etc., will also further support the improvement of fundamentals.
The improvement of economic fundamentals, coupled with the easing of external disturbances, may support the appreciation of the RMB; The "resonance" between the exchange rate and northbound funds is also good for assets such as domestic equity. In the fourth quarter of 2018, mid-2019, the third quarter of 2022, and since August 2023, there has been a relatively large outflow of northbound funds, of which since August 2023, the cumulative outflow of northbound funds has been 98.8 billion yuan, which has caused a significant drag on the A-share market. With the marginal stabilization of the RMB exchange rate, northbound funds are expected to stabilize and return; Among them, since August last year, the northbound funds have reduced their holdings by a large margin, and the relatively favored media, electronic new, financial real estate and other industries are worth paying attention to.
After research, we found that:
1. Since mid-April, equity assets in the domestic market have risen, commodity prices have rebounded, and the market performance has been relatively positive. There are also certain positive signals between northbound funds and the RMB exchange rate. Since April 24, northbound capital has picked up as a whole, with a total net inflow of 43.3 billion yuan; The RMB exchange rate also broke away from the 7.25 mark, which was weak and under pressure in the early stage, and the offshore RMB and onshore RMB appreciated by 0.5% and 0.3% to 7.23 and 7.22 respectively. At the trading level, the strengthening of the forward exchange rate, the decline of risk reversal factors, and the narrowing of the onshore spread also released signals that the RMB will continue to appreciate.
2. The easing of the labor market and the reduction of the risk of "secondary inflation" may be difficult to support the strengthening of the dollar; The easing of supply and demand in U.S. bonds also weakened the risk of a rebound in the dollar. However, the scale of tariff imposition is not large, the pace is slow, and the actual impact may be relatively limited. Biden's recent increase in tariffs is mainly one of the campaign tactics, and the symbolism is even greater.
The economic data in March and April exceeded expectations, and the clarion call for domestic "recovery" may have sounded; The resonance of internal and external replenishment and the acceleration of the implementation of superimposed policies may continue to improve the fundamentals. On the one hand, the current domestic inventory is at an absolute low level, and the real interest rate is falling, and the signal of economic stabilization and upward movement has become more and more clear. With the support of the United States' replenishment, the mainland's strong exports will also continue. On the other hand, the acceleration of the pace of special bond issuance and the acceleration of the implementation of real estate and other policies may further show the support effect on the economy.
4. The strengthening of the RMB exchange rate is conducive to the improvement of the risk appetite of funds in the domestic market. Historically, the flow of northbound funds is often affected by the expectation of the appreciation and depreciation of the RMB exchange rate. Since August last year, under the pressure of depreciation, the cumulative outflow of northbound funds has reached 98.8 billion yuan, which has caused a significant drag on the A-share market. With the turn of the exchange rate, northbound funds are expected to stabilize and return; Among them, since August last year, the financial, real estate and other industries that have been relatively favored by northbound funds have been reduced by a large amount of money are worth paying attention to.
Risk Warning
1. Escalation of geopolitical conflicts. The conflict between Russia and Ukraine has not yet ended, and the Palestinian-Israeli conflict has made waves again. Geopolitical conflicts could exacerbate crude oil price volatility and disrupt the global "disflation" process and "soft landing" expectations.
2. The Fed turned "hawkish" again. The current consensus expectation in the market is that the Fed's interest rate hike cycle is likely to be over. However, FOMC members remain divided on this, and there is uncertainty about whether the marginal weakening trend in the US labor market can continue.
3. Financial conditions are shrinking at an accelerated pace. Although the overseas interest rate hike cycle is gradually coming to an end, the balance sheet reduction is still continuing, the real interest rate will remain high, the bank credit is still in the contraction cycle, and the probability of credit risk events tends to rise.
This article is from a selection of brokerage research reports