The CNY weakened and 10Y CGB yields retreated on the first trading day after the week-long holiday. The CSI 300 Index closed 5.9% higher after surging 11% at the market open. The volatility was partly due to the absence of concrete measures announced during the NDRC press conference.
In our view, CNY rates will likely rebound after a temporary retreat. On the policy front, regulators reinforced vows to take forceful action across several critical areas including fiscal spending. Forthcoming details on fiscal policy from the State Council or Ministry of Finance will support another leg of the asset market rally and CGB yields. There are also some initial signs of improvement in terms of data. Reportedly, primary property market transactions registered 26% YoY growth during the National Day holiday. Domestic tourist travel and revenue also exceeded 2019 levels by around 10%. To be sure, the impact of support measures will take time to unveil. A sustained property and consumption recovery, especially in tier 2-3 cities, requires further stimulus and a lasting positive wealth effect from the equity market.
Strategy-wise, we maintain our bear steepening view. The uptick in short-end yields from equity market money demand will be offset by rate cuts over the medium term. Meanwhile, long-end yields will be supported by special sovereign bond issuance. The return of investor confidence in China will also push the 10Y yields higher.
Likewise, the HIBOR uptrend is expected to stabilize before another rally leg. HKD demand from the asset market may ease temporarily, with HSI falling by 9.4% yesterday. Note that capital inflows into the Hong Kong stock market thus far is mainly attributed to passive foreign funds. Over the medium term, further stimulus and fundamentals catch-up will attract active funds. Such stronger HKD demand will fuel HIBORs again.
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