My Diary 316 ---HSI, Phantom Fed Cut, WTI and PBOC Guess

My Diary 316 --- HSI, Phantom Fed Cut, WTI and PBOC Guess

 

 

 

HSI: Up and Down

Today is another good day for Hong Kong stock investors as the HSI adds another 133 ppt after yesterday’s +5% rally. However, if we carefully looked at the intra-day trading pattern, Hengseng Index was once moved up + 1000 points and then drifting down. This is largely reflecting the similar pattern of Dow Jones on last Friday. So does this mean every rebound is a sell opportunity? 

 

At least, I think some investors are taking this rebound to further trim down their risk positions as the market uncertainty remains high. In fact, today, I met two UBS managing directors in the fixed income side, and they all felt bearish on the market outlook, in particular now the prime mortgage segment. They feel surprised on how the equity market responding to the “Phantom” policy moves of Fed.

 

Fed: How Much Cut?

In the Rates market, money markets remain under stress today. In the US, 2-year Treasury yields ended at 4.01, 70 bps lower than July 25 yields. This implies that the market has assumed the Fed will aggressively cut at 50bp in the next FOMC meeting. To me, either Fed or the bond market is making a big bet and the simple conclusion is more uncertainty and volatility. Because if Fed cut less, then Bond market have to adjust, of if Fed do cut 50bps, then equity market will be impacted as that means Fed was underestimated the real consequence of Sub-prime led financial market disorder.

 

Let me try to summarize the recent discussions I had with some street economists and our internal view:

 

The Fed has followed liquidity injections to the financial system with a reduction in the discount rate, a clear signal that it will not relax in the face of evaporating liquidity in the financial system.  This may provide a base of support to risk assets in the near term, but ppl question whether the move addresses the broader economic issues that will continue to exist, including deteriorating mortgage asset quality, slowing economic growth, and declining corporate earnings clarity. At lest I believe the last shoe may well be the US consumer, who appears unwilling to purchase automobiles, homes, or apparel at the same rate as last year.  The last two weeks has undoubtedly resulted in weaker consumer confidence going into the Fall (wrong time).  We still have an upcoming wave of ARM resets as unemployment and continuing jobless claims seemed to have bounced.  The market seemingly has not priced in the possibility of meaningfully accelerating default rates or a potential accounting scandal akin to problems five years ago. 

 

However, good news is the continued decline in energy prices. Hurricane Dean is now expected to miss most Gulf Coast energy facilities and Nearby WTI is trading just above $70/bbl.

 

 

PBOC: Have a Guess!

Another news which I cannot classify clearly as good or bad is -- China raised interest rates for the fourth time since March to cool the world's fastest-growing major economy after inflation surged to a 10-year high. The effective day is tomorrow, instead of over a weekend. (Strange to me!) First of all, we all know the meat price is demand inelastic so this inflation-control argument to me is weak. Second, to the FX market, today’s rate hike seems to be able to offset yesterday’s individual QDII policy, which has pressure on CNY/USD. Moreover, as Fed is very close to cut interest rate, the opposite movement is able to help CNY appreciate faster relative to USD and help ease the heightened trade tension. But net-net, CNY turns to be more attractive than HKD, less outflows near term is definitely.

 

Bottom line: Do not try to guess How the PBOC thinks? Partially, the central bank looks mysterious.