Key Economic Insights
Japan:
On the 27th, Bank of Japan Governor Kazuo Ueda delivered a speech, stating that price levels will remain steady and wages are expected to rise further.
Europe:
Macroeconomic data has shown strong performance, with unemployment rates hitting new lows and a rebound in CPI. Despite this, the expectation for a rate cut in June remains firm.
United States:
The Federal Reserve’s Beige Book indicated overall economic stability, but with weakened long-term expectations.
Market Movements and Liquidity Analysis
This week, the US Dollar Index experienced volatility, dropping from 105 to 104 before climbing back to 105. Concurrently, the VIX Index surged, the Dow Jones saw significant declines, oil prices rose sharply during the dollar’s decline but later retreated, and gold prices also fell. The two-year US Treasury yield rose again to around 5.0%. Overall, global liquidity has tightened, with the Dow’s weakness indicating underlying pressure in the US economy.
The coming week will enter the Federal Reserve’s blackout period, leading up to the FOMC meeting. Market participants are currently debating whether the Fed will adopt a dovish or hawkish stance. Given the current financial environment, it is anticipated that the Fed will seek to calm the financial markets, based on two main points:
- This week, the US Treasury auctioned nearly $100 billion in government bonds. A decline in overseas buyers and tight domestic liquidity have led to a rapid rise in two-year Treasury yields.
- The Fed’s meeting minutes expressed concerns about financial stability, noting that significant stock market volatility is detrimental to maintaining a stable financial environment.
By Friday, the Dow had shown signs of stabilizing, with buyers testing market bottoms. Similar volatility was observed in the cryptocurrency market, with significant intraday adjustments and major cryptocurrencies experiencing sharp pullbacks. In a tightening liquidity phase, reducing risk exposure may be a prudent choice.
Domestic Market Overview
In China, A-share trading volumes continued to decline this week, returning to the 700 billion yuan level. Sector-wise, power stocks saw smooth gains, while consumer sectors remained weak, with leading liquor brands like Maotai experiencing panic-induced declines. The bond market also saw significant adjustments, with yields on government bonds from one to ten years generally trending downwards. The People’s Bank of China (PBOC) has verbally intervened in the market, indicating that much of the market liquidity has flowed into bonds, potentially creating an overbought risk.
The secondary market prices for ultra-long-term government bonds sparked heated discussions, with significant intraday adjustments highlighting the bond market as a focal point for capital contention. Reports indicate that the turnover rate for convertible bonds reached 2000%, suggesting a trend towards stock market characteristics in the bond market. Against this backdrop, the Chinese stock market lacks sufficient upward momentum.
This week also marked the first real estate disclosure period post-517 policy update, with overall sales data remaining unsatisfactory. The PMI data released on Friday showed a comprehensive decline. Although the A-share market seems insensitive to these data points, they could dampen long-term market optimism. The PBOC injected 200 billion yuan of liquidity through open market operations, stabilizing the stock market and suppressing bond prices. However, if this short-term seven-day liquidity injection is not rolled over, it could lead to a “cliff effect” upon maturity. Market participants should closely monitor whether the liquidity injection is extended beyond the seven-day period to mitigate risk exposure.