ANALYSIS: WHAT TO EXPECT ON MAINLAND CHINA’S RETURN

*OVERVIEW: Mainland Chinese stock markets are poised to open on February 3rd following its annual Lunar New Year holiday - which was extended on account of the coronavirus outbreak, and in an attempt to slow down the spread of the pathogen.

*THE LATEST: China announced that the confirmed number of coronavirus cases increased to 9692 (Prev. 7711) and total deaths at 213 (Prev. 170). Moreover, the Centers for Disease Control (CDC) verified the first human to human transmission of coronavirus in the US, to bring total number of cases in US to 6 (Prev. 5), in which the new patient is the spouse of the Chicago woman who brought the infection back from Wuhan

*WHO’S VERDICT: World Health Organization declared the coronavirus a Public Health Emergency of International Concern in which the decision was near unanimous although it did not recommend limiting trade and movement due to the China outbreak and noted the greatest concern is for the virus to spread to countries with weaker health systems. Furthermore, WHO said there has been progress made in developing a vaccine and believes measures taken by China "will reverse the tide". Participants digested this a as a “soft announcement” which provided markets with some short-term relief at least.

*CATCH-UP PLAY: Using Hong Kong and Taiwan as proxies, Shanghai and Shenzhen markets look set to open with significantly steep losses. The Hang Seng fell over 5% in the two days after its extended break, while the Taiex saw its worst open since late-2018, and the FTSE China A50 futures trimmed ~6% since the last trading day in the Mainland.

Mainland China abandoned circuit breaks in onshore equities following major declines in 2015. Stocks trading on the main boards are permitted to fluctuate 10% intraday on either side of break-even. Desks note that investors find it hard to hedge positions in onshore markets amid the lack of index futures, volatility products and single stock options.

-          Pre-market prices for Shanghai are released at 09:25am Beijing time (01:25GMT) with Cash open at 09:30am (01:30GMT)

In terms of sector focus:

-          Commodity stocks will bear the brunt of the W/W declines across the oil and base metal complexes

-          Airline names are likely to see effects amid numerous flight cancellations and isolations in the region

-          Luxury and gambling names will have to face the prospect of lower demand as tourist numbers fall

-          Financials will be opening to a lower-yield environment vs. Jan 23rd

-          Healthcare names may see support amid heightening demand for drugs and due to the sector’s defensive nature

Metals: Shanghai Iron ore, steel and coking coal futures are seen declining upon Mainland’s return as the contracts are likely to align themselves with price action in the Singapore Exchange (SGX) and London Metal Exchange (LME) over the past week.

Bonds: Yields on Chinese bonds are likely to fall in synchrony to Western core bond markets. 

*CHINA INTERVENTION:

Unsurprisingly, participants expect Beijing to take steps to stem losses. The PBoC has said that the Central Bank will offer abundant liquidity after the Lunar New Year Holiday through Open Market Operations. Additionally, Chinese government stated that it is to study and implement tax and financial support policies to mitigate effects of the coronavirus outbreak. In terms of other interventions to lookout for:

PBOC CNY FIXING: Since Mainland’s New Year departure from the market, the Yuan briefly surpassed the 7.00 mark vs. the Dollar for the first time since late-December amid the implications of the outbreak on the Chinese economy. The PBoC’s last USD/CNY fix stood at 6.8876; some desks note that the Chinese Central Bank may set a firmer-than-expected fix for the CNY to provide markets with some reprieve.

-          The Yuan fixing occurs at 09:15am Beijing Time (01:15GMT) with onshore (CNY) trading commencing at 09:30am (01:30GMT)

OPEN MARKET OPERATIONS (OMO): China will experience the largest single day maturity in almost four years upon its return, with some CNY 1tln of Central Bank funding due. Traders expect the Central Bank to roll over some of the funds. As mentioned above, the PBoC stated that it will ensure ample liquidity using tools, including open market operations.

-          Details of OMO are seen at 09:15am Beijing Time (01:15GMT)

OTHER FORMS: Aside from the above, Chinese state funds are widely expected to buy stocks to stem the downside in cash markets via the government’s influence.

31 Jan 2020 - 08:19- Fixed IncomeImportant- Source: Newsquawk