Barclays: Fed rate cut imminent, bullish on emerging markets, optimistic about high-rated Chinese corporate bonds

According to the Wisdom Financial APP, the Barclays research team published a quarterly report on emerging markets, indicating that emerging market assets have been constrained by the Federal Reserve policy this year. However, with the Fed's rate cut imminent, the situation is rapidly changing. The Fed's shift to a more moderate easing stance is sufficient to support the repricing of recent emerging market rates, implemented in countries such as Mexico, the Czech Republic, Israel, and India. In this process, there may be a divergence between emerging market rates and emerging market currencies, with rates potentially outperforming currencies. In other words, as most central banks ease policy, arbitrage trading returns decrease, and the risk of volatility may push up the US dollar against emerging market currencies, especially given the current situation where emerging market forex markets reflect a low premium for economic recession risks.

Even with the Fed's rate cut in September, Asian emerging market central banks may not follow suit

Some market participants believe that the Federal Reserve is the main focus of Asian central banks at the moment, as these central banks are hoping to ease monetary policy. Barclays remains skeptical, as overall economic activity has not yet reached levels that would alert policymakers. Even at the crucial moment when the Fed is expected to cut rates in September, Asian emerging market central banks are likely to remain relatively cautious and conservative in easing monetary policy.

Concerns about financial stability in South Korea, Taiwan, Thailand, Singapore, and Malaysia, especially considering high housing prices and heavy household debt, may inhibit local central banks' willingness to cut rates.

Positive outlook on high-rated Chinese corporate bonds, USD to RMB still has room to rise

Barclays is optimistic about individual high-quality Chinese corporate bonds, especially in the technology, media, and telecommunications sectors, as well as companies and asset management firms with unique advantages. It is expected that the high-rated Chinese corporate bond sector will continue to demonstrate its defensive attributes, with profits and fundamentals expected to improve. However, potential negative factors are also noted, such as the direction of US-China relations as the US election approaches, which may affect market sentiment.

It is expected that after the recent adjustment in positions leading to a decline in the USD to RMB exchange rate, there may be a certain degree of rebound, but the extent is limited and unlikely to exceed 7.10. Considering that China's willingness to boost demand is not very strong at the moment, along with relatively loose monetary policy and significant interest rate differentials between China and the US, there is still room for the USD to RMB to rise.

Chinese government bond yield curve to steepen, unlikely to push for aggressive stimulus measures

With the People's Bank of China strengthening control over short-term and long-term rates, and the market gradually digesting the impact of the central bank's sale of borrowed bonds, the Chinese government bond yield curve will steepen. It is expected that by the fourth quarter of this year, the 3-year and 10-year Chinese government bond yields will stabilize at around 1.5% and 2.1% respectively, and by the third quarter of 2025, they will remain around 1.50% and 2.20% respectively. Continued positive outlook on the steepening strategy for 10-year and 30-year Chinese government bonds.

The basic assumption is that China's monetary and fiscal policies will provide gradual support rather than large-scale aggressive stimulus measures. Following the announcement in July of a 10 basis point cut in the 7-day reverse repurchase operation rate (the main policy rate), it is expected that the People's Bank of China will cut this rate by 10 basis points again in the fourth quarter of this year, and in the first and second quarters of next year However, given that the net interest margin of banks is at a historical low, the pace of interest rate cuts will be cautious. In addition, it is expected that the People's Bank of China will reduce the bank reserve requirement ratio by 50 basis points in the coming weeks (possibly in September) and will reduce it by another 50 basis points in the first half of 2025.

It is expected that the Ministry of Finance will continue to accelerate the issuance of special bonds by local governments, and will complete the annual issuance plan by the end of October or early November, providing support for infrastructure investment. The basic forecast is that following the 8% growth in infrastructure investment in the first half of 2024 and 2023, the growth in the second half of China's infrastructure investment will remain strong, reaching 8%.

Expect the USD to HKD exchange rate to decline by the end of the year, with short-term interest rates in Hong Kong rising slightly

It is expected that the USD to HKD exchange rate will remain within the range of 7.75-7.85, and will decline towards the end of the year due to the Fed's interest rate cuts and the impact of seasonal factors in the fourth quarter. In the short term, even if the Fed gradually starts to cut interest rates as scheduled, the market may still increase long positions in USD to HKD. Furthermore, it is expected that the Fed's interest rate cut cycle will cause the USD to HKD to fluctuate in the range of 7.75-7.80 in 2025.

It is expected that Hong Kong interest rates will show a "bearish trend" in the short term, and then turn to a "bullish trend" after the Fed starts its interest rate cut cycle. Although short-term interest rates in the United States may remain stable, Hong Kong short-term interest rates are expected to rise slightly, reflecting the uneven distribution of local liquidity