The Fed started to shrink its balance sheet on June 1, reducing its holdings of US Treasuries and MBS (mortgage-backed securities) by a total of US$47.5 billion per month, and will raise the limit of the reduction of the balance sheet to US$95 billion per month three months later.

"Quantitative tightening" affected the financial market, and US stocks closed down overnight, ending the "three consecutive gains".

  In the past month, the world has experienced a frantic "sell in May" - the US Nasdaq fell by nearly 30%, emerging market stocks and bonds were sold off by international funds, and the Shanghai Composite Index rebounded in May, but still relatively It fell nearly 12% at the end of last year.

The market value of global stock markets has evaporated by $20 trillion from a peak of $120 trillion at the end of last year to a low in May, and two-thirds of the increase in market value since the outbreak of the epidemic has evaporated.

But at present, global inflation is high, and international oil prices are once again approaching the $120 per barrel mark. The tightening road of global central banks has just begun, and traders have fastened their seat belts.

  Unlike the Fed raising interest rates and shrinking its balance sheet, China's monetary policy remains stable and loose.

Benefiting from the continuous efforts of the policy, institutional people interviewed by reporters generally believed that the Chinese economy is likely to bottom in May and rise in June.

After the downward revision of earnings in the second quarter is basically completed, China's capital market may also usher in a turnaround.

  The Fed's tightening process has just begun

  Generally speaking, in the context of economic activity, the impact of interest rate hikes on the market is limited, especially the Fed's current interest rate level of 0.75%~1% is still far from the neutral rate of 2%.

Shrinking the table may be the real test for the market.

  It is expected that the Fed will raise interest rates by 50BP (basis points) in June and July respectively, and raise interest rates by 150~200BP from June to the end of this year.

Last week, the reason why US stocks experienced a bear market rebound of more than 6% was the market's fine-tuning of the Fed's expectations.

On May 23, local time, Atlanta Fed President Bostic said: "I think it may make sense to suspend (interest rate hikes) in September." But he warned that if prices unexpectedly rose, more aggressive action may be needed .

  The agency believes that this statement means that after raising interest rates to a neutral rate close to 2% in July, the Fed will re-examine the extent of future interest rate hikes in September.

After all, U.S. GDP unexpectedly contracted by 1.4% in the first quarter, and last week's GDP growth rate was further revised down to -1.5%, adding to concerns about stagflation.

But just in the past 24 hours, hopes have been dashed, sending U.S. stocks down again on Tuesday.

  "Fed official Waller said that the option of raising interest rates by 50bp will not be ruled out until it sees inflation falling back closer to the 2% target. Meanwhile, as the US summer driving season kicks off and China fully reopens, the EU agrees to ban Russia imported oil by sea, and the price of crude oil rose above the $119/barrel line, the highest level in nearly three months. It is difficult for the Fed to turn around with high inflation.” Tony Sycamore, senior analyst at Gain Capital Group told reporters.

  In addition to aggressive interest rate hikes, the shrinking of the balance sheet may once again exacerbate market volatility, after all, the rate of this shrinking of the balance sheet is more than twice that of 2018.

The Fed's balance sheet could shrink by nearly $1.5 trillion to around $7.5 trillion by the end of 2023, according to calculations by Wells Fargo Investors.

This could be equivalent to an interest rate hike of 75~100BP, when the federal funds rate is expected to be around 3.25%~3.5%.

  In 2018, the Fed shrank its balance sheet too quickly, which once led to a market sell-off.

There is also a view that in July 2021, the FOMC (Federal Reserve Board) announced a new monetary policy implementation tool, the Standing Repurchase Liquidity Facility (SRF), which may play a role when the market lacks liquidity. Function, buffer the shock of shrinking table.

The current SRF's collateral is US Treasuries, agency debt and MBS.

The Federal Reserve continues to lend dollars to the market by offering SRFs, offering daily overnight repos, providing additional dollar liquidity.

  High oil prices remain one of the biggest risks

  If inflation does not peak in a day, it will be difficult for global central banks such as the Federal Reserve to stop tightening, and the market will continue to fluctuate.

Oil prices are a key variable in determining inflation.

  "Recent oil prices hit a record high of $119 per barrel, and inflationary pressures continue to rise, which will suppress global stock markets and risk sentiment." Wu Zhaoyin, director of macro strategy at AVIC Trust, told reporters.

  On the evening of May 30, local time, European Council President Michel said on social media that the EU has reached a consensus on imposing an oil embargo on Russia, which "will immediately cover two-thirds of the EU's oil imports from Russia."

  The EU is highly dependent on Russia for energy supplies.

In 2021, Russia's natural gas supply will account for more than 40% of the EU's total demand, crude oil and its products will account for 27%, and coal will account for 46%.

Since the outbreak of the Russia-Ukraine conflict, the EU has tightened sanctions against Russia, leading to an increased risk of disruption to its energy supply.

The EU plans to reduce Russian gas imports by 70 billion cubic meters by this winter.

  "Increasing imports from other regions and reducing terminal demand are the fastest ways for the EU to reduce its dependence on Russian energy. However, the EU has limited ways to reduce its dependence on Russian natural gas in the short term. Therefore, the EU launched the REPowerEU program on May 18, It involves an additional investment scale of 210 billion euros to end dependence on Russia's energy supply in 2027 and accelerate the pace of the EU's energy transition." Fu Xiao, head of commodity market strategy at BOC International, told reporters.

  However, it is not easy to get rid of energy dependence, especially because the supply of crude oil itself is in a state of tight supply. At present, there are voices in the market that oil prices will climb to US$150 or even US$200 per barrel.

  “From June 1st, Shanghai has resumed work and production in an all-round way, and the market’s confidence in the recovery of China’s oil demand has increased. On the supply side, the EU is working hard to achieve sanctions against Russia’s oil ban. At the same time, OPEC+ may stick to the established production increase plan unchanged. OPEC+ is due to meet later this week, but there is currently no sign that it will increase production in July to a higher rate than the 432,000 bpd originally planned, Sikamore said. level, which led to further tightening of supply.

With the summer travel peak approaching, oil prices still have upward momentum.

  Stimulus policy effectiveness is the key to the Chinese market

  As the U.S. and China monetary policies further diverge, the inversion of the U.S.-China interest rate differential may deepen.

At present, the yield of China's 10-year treasury bond is around 2.8%, while the yield of 10-year U.S. Treasury bond has reached 2.86%.

  In the context of the Fed raising interest rates and shrinking its balance sheet, international capital may continue to flow out of emerging markets.

Since February this year, foreign investors have continued to reduce their holdings of RMB bonds.

By the end of April, the cumulative reduction of nearly 300 billion yuan.

The reason for foreign investors to sell may be "de-risking" behavior.

This is mainly driven by a number of factors, including: foreign exchange losses (RMB depreciation), continued weakening expectations for duration and carry, etc.

  However, Zhang Meng, a China macro and foreign exchange strategist at Barclays, told reporters: "This outflow rate is not expected to continue in the second half of the year, as most of the stock reflects the holdings of reserve managers, sovereign wealth funds and passive indices (long-term). Investors). Inflows related to the inclusion of the FTSE Russell WGBI index will continue to provide a buffer, with approximately $10 billion expected to flow into Chinese government bonds each quarter through the fourth quarter of 2024.”

  It is worth mentioning that the rate of foreign capital outflows from A-shares has slowed down significantly since late May, and northbound funds have turned from a cumulative net outflow of about 30 billion yuan this year to a net inflow of 86 million yuan.

On May 31, the net inflow of northbound funds was 13.865 billion yuan. On June 1, the net inflow was 1.247 billion yuan again. The cumulative net inflow in the second quarter was 24.415 billion yuan.

  Meng Lei, a China strategist at UBS Securities, told reporters that since mid-May, macro policy support has continued to increase, and stock market sentiment has recovered.

All major institutions believe that the actual effect of the next policy is the focus of the market.

  On May 31, the State Council announced a package of policy measures to stabilize the economy, proposing 33 specific policies and measures in six areas and the division of labor, and reiterated that "the epidemic must be prevented, the economy must be stabilized, and development must be safe."

Since then, various ministries, commissions and local governments have introduced specific measures in their respective areas of responsibility.

"This has released a positive policy signal, and stable growth has been placed in a more prominent position." Meng Lei said.

  Wu Zhaoyin believes that from the perspective of the stock market in June, there are still some challenges - although the epidemic situation is controllable, the progress of resumption of work and production still takes time; the macro policy has a stimulating effect on the economy, but the effect of the policy remains to be seen.

Commodity prices remain high and global inflation remains cloudy.

In addition, the financing needs of A-shares are very large. About 100 billion to 150 billion yuan of funds per month flow from the stock market to the industry through IPO, additional issuance, allotment, issuance of convertible bonds and exchangeable bonds, etc. At the same time, there is a lack of new funds. 4 , In May, the partial stock fund only issued 11.4 billion and 3.4 billion yuan.

  As far as the exchange rate is concerned, the outside world generally believes that there is no need to worry too much about short-term exchange rate fluctuations. Foreign banks’ forecasts of the RMB-to-US dollar exchange rate at the end of the year are generally between 6.6 and 6.9. Offshore central bank bills, reduction of foreign exchange deposit reserve ratio, etc.

  Liu Linan, managing director of Deutsche Bank and head of macro strategy in Greater China, said that compared with the previous period in 2018, the fluctuation range of the RMB exchange rate was between 6.2 and 7.2. This time, due to the rise of the US dollar index and changes in the fundamentals of the domestic economy, the RMB The correction and fluctuation range of the exchange rate is only at the midpoint of the fluctuation range in the past four years, which is in line with market expectations.

In addition to economic fundamentals and cross-border capital flows under the capital account, the current account balance of payments situation also affects exchange rates.

So far in 2022, China's current account surplus remains and is expected to continue throughout this year and into 2023.

From January to April, my country's foreign direct investment (FDI) increased by 20.5% year-on-year.

These are the factors that drive the RMB exchange rate to remain stable.

  In addition, on May 14, the International Monetary Fund (IMF) raised the weight of the RMB in the Special Drawing Rights (SDR) currency basket from 10.92% to 12.28%.

Liu Linan believes that this significant increase is good for the RMB. It is expected that overseas investors, especially medium and long-term investors, will still buy RMB assets on a net basis.

  Author: Zhou Ailin ▪ Xu Yanyan