In short, due to the spread of the epidemic, some major gold smelters were closed down, and the US banned flights from the EU, which made the transportation of physical gold more difficult. But at the same time, the demand for gold as a safe haven asset is also increasing. As a result, the premium of gold period and spot has soared to the highest level since 1980. Sun Hongzhi believes that the liquidity operation of the Federal Reserve does temporarily ease the pressure of dollar shortage and bond default, but it will take time for global markets to truly stabilize. In contrast, the trading and liquidity situation in the Chinese market is still relatively stable, with limited overseas influence.
As of 19:20 on March 25, Beijing time, the international gold price was near $1640 / ounce, slightly lower than $1700 / ounce on March 25, but still near the historical high.
Gold supply cut reflects market turbulence
The market is in a mess. A number of traders told the first financial reporter. From the U.S. stocks, hedge funds, the global dollar shortage, the U.S. dollar debt base plummeted, the pressure on redemption rose, and then the gold supply was cut off, the market volatility continued.
Specifically, the delivery date of Comex futures in this month is March 27, Friday. The delivery of Comex gold futures needs to take EFP (spot market seller and futures market buyer carry out spot physical and futures contract swap) swap to LBMA (London gold and silver trade association, whose commodity delivery list is regarded as gold bar and silver bar quality standard) to sign the spot delivery agreement. Among them, EPFs quotation is divided into market making quotation and speculative quotation, and market makers are mainly LBMAs major gold merchants. The spread of the epidemic led to the shutdown of several gold smelters in Switzerland, three of which are suppliers of LBMA standard gold bars. At the same time, Fengcheng causes market makers to be out of stock and unable to quote on EPF. In the context of the Feds infinite QE and the difficulty of physical delivery of gold, other speculative markets were reluctant to sell, which led to the lack of quotation and delivery of the whole EPF, and also led to short futures only closing positions and soaring futures prices.
Xauusd is the spot price of London gold, which is priced by Comex active gold futures and EFP. Because Comex gold futures contract is the most liquid product, the futures price minus EFP is equal to the international spot gold price.
Sun Hongzhi told reporters that the price of gold fluctuated greatly, and the emotional factors should not be ignored. Traders reported that the financial market was in chaos, everyone was extremely sensitive, and any news could be amplified. Combined with the unlimited QE of the Federal Reserve and the closure of the production lines of gold bars, gold coins and ingots by the worlds three largest gold smelters due to the epidemic, the United States suspended flights to the European Union, resulting in a certain amount of physical gold unable to enter the U.S. market, making investors also expect that physical gold may be in extreme supply shortage, so they also rushed into the EFP market to buy gold. On the other hand, Shanghai gold on the Shanghai Gold Exchange (SGE) has a deep discount on London gold (US $10-20 / ounce), and usually a premium.
Liquidity is also the key. Sun Hongzhi analyzed that Comex gold futures contract is the most liquid product. Under the background of QE expansion and epidemic situation, people tend to buy futures, which will push up the gold price. Therefore, more and more people will start to buy Comex futures instead of spot, resulting in the worse liquidity of xauusd spot. The price difference of EFP is almost close to that of spot contract.
The problem of physical non delivery will continue to pose a challenge, leading to short positions being forced to close. The active Comex gold contract expires in April 2020, and people hold physical gold to force short. This is a common trading method, aiming to eliminate short positions in extreme situations of commodity market. But CME (Chicago Mercantile Exchange) is meeting to discuss whether London Bullion can be used as a Comex commodity for gold delivery, so it depends on whether the subsequent exchanges can flexibly solve the delivery problem.
In his view, it is difficult for short-term gold to weaken, because the global economy will remain weak and fragile in the next 2-3 years, and the current supply and demand of gold is extremely unbalanced.
Fund redemption pressure remains
In addition to gold, the redemption pressure of the whole market has not been completely eliminated, which means that the buying funds are limited, so the market is in the process of bottom seeking.
In the last two weeks, the net value of some hedge funds fluctuated sharply, and the pressure to make up the margin increased sharply. Since last week, the dollar bond market has been rocked, and an investment grade bond fund in New York fell nearly 20% overnight. At the same time, with the historic large redemption, Chinese dollar bonds have also been affected, and the dollar real estate corporate bonds with the maturity rate soaring to 30-40% are everywhere, or even 200%.
At present, the pressure of redemption of hedge funds is still not small. According to sun Hongzhi, the Volcker rule introduced after the 2008 crisis prohibits self trading in the banking industry, the ownership and launching of hedge funds by banking entities, etc. This has shifted the banks proprietary and hedge fund positions to the outside. In the past years, many hedge funds outside the banking system have been established, and their strategies and positions are similar. When the market is under pressure and the strategy fails, it may aggravate the pressure of deleveraging, margin increase and selling. In the early years, when banks were still engaged in proprietary trading and hedge fund business, if the market fell sharply, banks might set up long positions against the trend, but now these hedge funds will face the pressure of customers Redemption, which makes them unable to increase their positions and makes the market difficult to stabilize.
As far as the corporate bond market is concerned, the Feds unlimited QE and corporate bond purchase plan have indeed eased market sentiment, but the alarm has not been lifted. Earlier, the low interest rate environment led to a sharp increase in investors demand for earnings. BBB bonds (investment grade) with higher earnings were sought after by investors, accounting for nearly half of the total corporate bonds in the United States. However, these BBB bonds are only a step away from junk bonds. Once the rating is lowered when the companys business situation deteriorates, the fund manager will have to close his position in accordance with the funds articles of association. Now the new coronavirus epidemic is raging in the United States, and the companys operating environment has deteriorated significantly. As a result, investment grade bond funds have also been cut short and faced with significant redemption by customers.
However, a series of operations by the Federal Reserve have calmed down the market. We see that credit spreads and swap contract prices have also begun to converge. The LIBOR OIS spread, which measures the offshore dollar LIBOR and OIS, has also begun to narrow. Sun Hongzhi said, however, it will take time for the market to stabilize completely because of the pressure on redemption.
Limited external influence on Chinas domestic market
In contrast, transactions in Chinas domestic market are limited by external influence, and liquidity is still stable.
However, due to the rising pressure on overseas redemptions, some traders said that some hedge funds and large asset management institutions had made profits by selling Chinese bonds.
Foreign investors have been more active in the 30-year bond market. In this round of US dollar tension, the 30-year active treasury bond 190010 has become a vane for foreign investors. On March 19, foreign investors sold 2.286 billion yuan of 190010, accounting for 15% of the total volume (normally 5%) Ji Tianhe, head of Chinas exchange rate and local market strategy, said. Another observation dimension is that many old bonds are also sold by overseas institutions. For example, on March 19, the proportion of transactions of overseas institutions on 180027 was 14% (net sales of 940 million), while 180010 also sold 1 billion.
In addition, among the varieties of credit bonds, including 19 South Power mtn005 and 15 Longyuan Power mtn001, the only transaction in the whole day is the sale of overseas institutions; even 15 Longyuan and 17 Colombia have only nine months to maturity, and they are all sold.
However, a number of institutional people also told reporters that this is mostly the behavior of foreign investors under the pressure of redemption, but in the medium and long term, many foreign investors think that Chinas relatively high-yield debt is attractive. The interest rate gap between China and the United States soared to a record high of 200bp earlier, and is now at a high of 170bp. In addition, the peoples Bank of China is still restrained from following the trend. Therefore, Chinas interest rate bonds have a greater value of medium and long-term allocation of foreign capital, and their liquidity is also improving. Sun Hongzhi said. In the future, RMB lprirs (interest rate swap of loan quotation rate) will also accelerate its development. Sun Hongzhi said that people from all walks of life think that Chinas interest rate will go down in the long term, so LPR interest rate will continue to go down, so they are more willing to convert their RMB fixed interest debt into LPR floating rate loan through lprirs, so as to achieve the purpose of cost reduction. Source: First Financial Editor: Guo Chenqi, nbj9931
However, a number of institutional people also told reporters that this is mostly the behavior of foreign investors under the pressure of redemption, but in the medium and long term, many foreign investors think that Chinas relatively high-yield debt is attractive. The interest rate gap between China and the United States soared to a record high of 200bp earlier, and is now at a high of 170bp. In addition, the peoples Bank of China is still restrained from following the trend. Therefore, Chinas interest rate bonds have a greater value of medium and long-term allocation of foreign capital, and their liquidity is also improving. Sun Hongzhi said.
In the future, RMB lprirs (interest rate swap of loan quotation rate) will also accelerate its development. Sun Hongzhi said that people from all walks of life think that Chinas interest rate will go down in the long term, so LPR interest rate will continue to go down, so they are more willing to convert their RMB fixed interest debt into LPR floating rate loan through lprirs, so as to achieve the purpose of cost reduction.