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Rate Cuts Drive Next Leg of Equity Market Rally
China Macro Monitor November 2014 Rate Cuts Drive Next Leg of Equity Market Rally. This publication is a monthly report focusing on macro developments in China relevant to investors across asset classes and markets.
Summary
- Last week the People’s Bank of China (PBoC), the central bank, stepped up its fight against flagging growth and deflationary headwinds by cutting interest rates for the first time since 2012.
- The PBoC had been active this year in delivering very targeted policy easing and injecting liquidity into the banking system. However, last week’s move marks the first broad-based monetary easing action in over two years. We believe there will be more to come.
- We believe the PBoC will cut the reserve requirement ratio (RRR) as well as cut interest rates further as it aims to generate sustainable demand in the economy and ward off rising deflationary risks.
- The PBoC also increased the flexibility of banks to set deposit rates, highlighting its commitment to increasing financial market liberalisation.
- The Hong Kong-Shanghai Stock Connect opened for business earlier this month. The daily quota was hit on the first day of trading, illustrating the strength of pent up demand for domestic Chinese equities.
Download the complete report (.pdf)
PBOC CUTS POLICY RATES AND ADVANCES ON RATE LIBERALISATION
We have long argued that weak economic data and the threat of deflationary pressures will expedite policy stimulus from both the Chinese government and central bank. The PBoC has been very active in recent months in delivering targeted policy easing and injecting liquidity into the banking system. Last week’s moves however demonstrate that the central bank has stepped up its fight and marks the first time the PBoC has cut key policy rates since 2012. The PBoC cut the 1-year benchmark lending rate 40bps (to 5.6%) and cut the 1-year deposit rate by 25bps (to 2.75%).
At the same time the PBoC raised the deposit rate ceiling (the limit on deposit interest rates, expressed as a multiple of the benchmark deposit rate) to 1.2 from 1.1 times previously. Deposit caps have been a constraint on the formal banking system and have led to the growth the shadow-banking system which does not face the same draconian constraints. The moves to widen the ceiling illustrate that policy easing and liberalisation can go hand-in-hand. While the net effect on deposit rates for this first rate cut could become muted if all banks utilise the new ceiling1, the moves highlight policymakers’ commitment to supporting growth and liberalising financial markets.
We believe last week’s rate cuts will be the first in a series of cuts that will be necessary to stimulate the economy. A further 50bps could be cut in H1 2015.In addition we believe that China will cut the reserve requirement ratio (RRR) i.e. the amount of deposits and notes that banks must hold as reserves at the central bank. Cutting the RRR expands the capacity of banks to lend into the real economy. Although the PBoC cut the RRR for select banks earlier this year, we believe that a broad-based cut is now required
With shadow banks taking a back-seat, the onus is on the formal banking sector to provide financing into the economy. The banking sector therefore needs all the support it can get from the central bank.
The PBoC took further steps to liberalise interest rates by abolishing the benchmark guidance for 5-year savings rates and consolidated the benchmark guidance for loans of 1-5 years maturity. These moves allow regulated banks to attract more deposits that would have gone to shadow banks and therefore should aid their ability to lend
On 27th November, the PBoC refrained from selling repurchase agreements for the first time since July, loosening monetary policy further. It last suspended sales of repos, in the week of July 21 as initial public offerings boosted cash demand. This time the motivation seems more aligned with monetary stimuli. The sale of repos drain funds from the banking system. Indeed the PBoC could conduct reverse repos to increase liquidity in the banking system, a tool which we believe it will utilise in 2015.
The Renminbi depreciated modestly in November, helping to boost the competitiveness of Chinese exports. Exports were already been growing briskly during a period of Renminbi appreciation. The recent depreciation should act as a catalyst to extend that growth and is in line with the recent monetary easing efforts by the central bank.
HONG KONG-SHANGHAI STOCK CONNECT OPENS FOR BUSINESS
The Hong Kong-Shanghai Stock Connect programme, which allows foreigners access to the domestic equity market in China via Hong Kong, started on November 17th. This initiative marks the most substantial opening of the Chinese equity market in history. On the first day of trading, flows from Hong Kong to China hit the daily quota, in a sign of the strength of pent up demand for Chinese equity exposure. Coinciding with the opening of the Connect programme, capital gains tax on investments by foreigners has been waived for three years and the cap on HK dollar-yuan convertibility was lifted for Hong Kong residents in another significant sign of willingness to liberalise financial markets.
In June 2014, MSCI refrained from including China A-Shares into its MSCI Emerging markets Index due to concerns over difficulty in accessing the market. The Connect initiative should go a long way in alleviating these concerns. With approximately US$1.5tn benchmarked to MSCI China Emerging Markets Index, even a small allocation of 0.5% to the China A-Share market in the broader index could drive US$7.5bn into the market on the back of index replication by investors. With equity markets becoming more optimistic on index inclusion, China A-Shares have staged a rally.
As a point of reference, the MSCI United Arab Emirates Net TR USD index rose over 90% between the time MSCI announced UAE stocks would enter its Emerging Market Index and actual inclusion (see shaded area of chart). While the Chinese and UAE markets are vastly different in size and composition and therefore limits comparability, we believe the increasing probability of index inclusion will bode well for China A-Shares.
The Hong Kong-Shanghai Connect programme does not open the Shenzhen market up to foreigners and for that reason many investors prefer investment products benchmarked to broad indices with exposure to all A-Shares such as the MSCI China A-Share Index.
1 If banks fully utilize the new deposit ceiling, the new deposit rate will be 2.75%*1.2 = 3.3%, same as 3.00%*1.1 =3.3% under the old deposit rate and deposit ceiling.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
• Expanding Geopolitical Conflict Throws Crypto in Turmoil, Hong Kong ETFs Revive Hope
• Ethereum’s Most Anticipated Application of the Year is Live
Expanding Geopolitical Conflict Throws Crypto in Turmoil, Hong Kong ETFs Revive Hope
The latest Consumer Price Index (CPI) report released last Wednesday revealed a hotter-than-expected inflation rate of 3.5%, exceeding forecasts of 3.4%. This marks the fourth consecutive month where inflation has surpassed expectations, dimming hopes of rate cuts in the near future, resulting in a sustained high interest environment. This is further evidenced by interest rate futures currently pricing in just two rate cuts for the entirety of 2024, a significant shift from four months ago, when markets were predicting a more hawkish approach. Further, the conflict between Iran and Israel escalated more this weekend, as Iran launched a drone strike towards Israel, who are said to be potentially preparing for ‘retaliation’. This rise in geopolitical tensions coincided with a decline in the crypto market as Bitcoin (BTC) and Ethereum (ETH) prices fell by 8.22% and 11.29% respectively.
That said, it’s worth remembering that Bitcoin is viewed as a flight to safety during geopolitical conflicts. For instance, BTC grew by almost 17% during Russia’s invasion of Ukraine. This was driven by the fact that the average Russian citizen was able to withdraw their capital out of banks promptly before the imposed sanctions. Similarly, Ukrainians leveraged Bitcoin’s decentralized nature to navigate the overall shutdown of their financial system, while leveraging it to resume raising donations, showcasing its value as a decentralized and globally accessible asset immune to disruptions.
However, Bitcoin’s response to Iran’s recent escalation may have been adverse. This is given the gravity and the complexity of the geopolitical situation and its potential to entangle several other actors into the conflict, potentially affecting a broader swath of the world, including global trade and economic stability. Nevertheless, Bitcoin’s properties uniquely position it to serve a dual function as both a risk-on and risk-off asset. This duality could explain why its behavior diverged from that of gold in recent days, facing a drawdown last week versus benefiting from Russia’s conflict in 2022, as shown below in Figure 1.
Figure 1: BTC vs Gold Performance in 2022 vs 2024 – On a Weekly Timeframe
Source: TradingView
Finally, while the industry showed signs of a tentative recovery following last week’s economic challenges, evidenced by BTC soaring to nearly $67K on Monday, it’s crucial to maintain vigilance and closely monitor Israel’s response as it could have additional repercussions on the global market. Bitcoin faces a pivotal week with the highly anticipated Bitcoin Halving event scheduled in just four days, which will cut the issuance of new BTC in half, further tightening its already limited supply. This scarcity narrative is often seen as a bullish signal, which potentially bolsters Bitcoin’s position as a store of value and a hedge against inflation, as investors seek refuge in the current environment.
Adding to the positive sentiment, the Hong Kong Securities and Futures Commission (SFC) recently granted conditional approval for the launch of the first spot Bitcoin and Ethereum ETFs. The investment vehicle could unlock up to $25B in demand from Chinese investors via the Southbound Stock Connect program, according to Matrixport. The approval could also expand BTC’s market penetration into the wealth management sector in Hong Kong valued at $1.15T. The combined effect of the halving and the ETF approvals could provide a much-needed boost to the industry’s current momentum. A trend which is evident in Figure 2 below, indicating that flows into BTC have remained positive since the beginning of the year.
Figure 2 – *BTC Monthly Balance Change vs BTC Monthly Issuance vs ETF Cumulative Flows
Source: Glassnode
*Monthly Balance Change includes different cohort of investors that hold >1, >10, >100, >1K BTC
Ethereum’s Most Anticipated Application of the Year is Live
EigenLayer, a protocol that allows ETH users to “re-stake” their existing staked ETH to validate the security of external networks known as Actively Validated Services (AVS), has finally deployed on mainnet. EigenLayer has been long anticipated as it enables capital efficiency by allowing users to earn additional yield on top of their ETH staking yield. Further, it allows younger protocols to borrow the security assurances of Ethereum. This is crucial, as it circumvents the need for non-established protocols to develop their own security measures from scratch. This translates to a more cost-efficient approach while simultaneously bolstering their decentralization, as newer projects can anchor their security to Ethereum’s.
By opting to earn additional yield, users subject themselves to heightened smart contract risks, as they become exposed to the vulnerabilities of both Ethereum and the additional protocol relying on its security. Further, a large portion of ETH could end up being “re-staked” in EigenLayer instead of just validating the security of Ethereum, creating a problem of misalignment. In simpler terms, some validators might focus on maximizing their profits by pursuing strategies that prioritize short-term gains over the long-term security of the network. Moreover, the growing enthusiasm for the protocol suggests that a significant portion of the crypto economy might rely on Ethereum’s security assurances. Currently, 14% of all staked ETH is being allocated towards Eigen’s re-staking strategy. The continuation of this trend could lead to centralization, posing a risk as Ethereum might inadvertently become a single point of failure over a longer time horizon.
Wide-spread slashing is another concern. In essence, if a substantial amount of ETH is restaked in a single protocol, then a slashing event due to malicious or unintended behavior could significantly impact honest ETH stakers. Thus, Eigen proposed a slashing committee, comprising esteemed ETH developers and trusted community members, empowered to veto such occurrences and safeguard Ethereum’s integrity.
The final risk concerns a new breed of tokens known as Liquid Restaking Tokens (LRTs), which operate atop EigenLayer. LRTs, akin to Liquid Staking Tokens (LSTs) issued by the established Lido protocol in 2021, aim to unlock similar capital efficiency by allowing users to use their re-staked ETH as collateral for lending and borrowing. Given that restaked ETH in Eigen can’t be used across DeFi platforms, users have turned to LRT protocols like Ether.fi and Renzo to seek higher levels of capital flexibility, with their restaked assets. For context, LRTs grew exponentially by a factor of 28 throughout Q1, increasing from nearly 100K units to the current figure of 2.8M, as can be seen below in Figure 3, showing its soaring demand.
Figure 3 – Growth of Liquid Restaking Tokens (LRTs) on EigenLayer
Source: @yulia_is_here on Dune
While LRTs can offer amplified gains through leveraged lending, they can also exacerbate losses, potentially increasing systemic risk in market downturns. Since some LRT protocols can’t offer withdrawal yet, users may be forced to swap their LRT token into ETH on thinly traded secondary markets and intensify their drawdowns.
All in all, the impact of Eigenlayer is not to be understated, as the excitement surrounding the new primitive has propelled it to become the second largest protocol on Ethereum by Total Value Locked (TVL), boasting an impressive $12.6B. This already eclipses the TVL of established players like Solana by fourfold, highlighting the immense potential and adoption that EigenLayer is witnessing despite its brief existence. Further, the excitement building up to its launch since they unveiled their roadmap in March has propelled the Ethereum validator entry queue to its highest level since September. The queue now necessitates a minimum waiting period of ~12 days before new validators can join the network, as seen below in Figure 4. Nevertheless, keep an eye out as we prepare to release a more in-depth exploration of EigenLayer risks over the coming weeks.
Figure 4: Ethereum Validator Entry Queue in Days
Source: ValidatorQueue
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This Week’s Calendar
Source: Forex Factory, 21Shares
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Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
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The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
ETFGI, ett ledande oberoende forsknings- och konsultföretag som täcker trender i det globala ETF-ekosystemet, rapporterar att ETFmarknaden i Europa firar sitt 24-årsjubileum med rekordtillgångar på nästan 2 biljoner US-dollar. De första europanoterade ETF:erna gjorde sin debut den 11 april 2000. Dessa två ETFer var baserade på Euro Stoxx 50– och Stoxx Europe 50-indexen, och de var noterade på Deutsche Boerse i Tyskland.
Tillgångar som investerats i ETF-branschen i Europa nådde rekordhöga 1,96 biljoner USD i slutet av mars. Under mars samlade ETF-branschen i Europa nettoinflöden på 11,02 miljarder USD, vilket ger årets nettoinflöden till 49,52 miljarder USD, enligt ETFGIs mars 2024 europeiska ETFer och ETPers industrilandskapsrapport, den månatliga rapporten som är en del av en årlig betald forskningsprenumerationstjänst. (Alla dollarvärden i USD om inget annat anges.)
Höjdpunkter
- Tillgångar som investerats på ETFmarknaden i Europa nådde ett rekord på 1,96 Tn i slutet av mars och slog det tidigare rekordet på 1,90 Tn i slutet av februari 2024.
- Tillgångarna ökade med 7,8 % YTD 2024, från 1,82 Tn USD i slutet av 2023 till 1,96 Tn USD.
- Nettoinflöden på 11,02 miljarder USD i mars 2024.
- YTD nettoinflöden på 49,52 miljarder USD är tredje högsta någonsin efter YTD nettoinflöden på 59,30 miljarder USD 2021 och YTD nettoinflöden på 49,73 miljarder USD 2022.
- Artonde månaden med på varandra följande nettoinflöden.
”S&P 500-indexet ökade med 3,22 % i mars och är upp 10,56 % YTD 2024. De utvecklade marknaderna exklusive det amerikanska indexet ökade med 3,62 % i mars och steg 5,26 % YTD 2024. Spanien (upp 10,72 %) och Italien (upp 6,34 %) såg de största ökningarna bland de utvecklade marknaderna i mars. Emerging markets-indexet ökade med 1,50 % under mars och steg 2,08 % YTD 2024. Peru (upp 10,27 %) och Columbia (upp 8,19 %) såg de största ökningarna bland tillväxtmarknaderna i mars”, enligt Deborah Fuhr, managing partner, grundare och ägare av ETFGI.
Tillgångstillväxt i ETF-branschen i slutet av mars
Källa: ETFGI
I slutet av mars hade ETFmarknaden i Europa 3 037 produkter, med 12 209 noteringar, tillgångar på $1,96 Tn, från 99 leverantörer listade på 29 börser i 24 länder.
Under mars samlade ETFer nettoinflöden till 11,02 miljarder USD. Aktie-ETFer samlade nettoinflöden på 9,81 miljarder USD under mars, vilket förde YTD nettoinflöden till 39,30 miljarder USD, högre än 19,38 miljarder USD i nettoinflöden av eget kapital YTD 2023. Ränte-ETFer rapporterade nettoinflöden på 719,00 USD YTD under 1 mars, vilket gav 25 USD nettoinflöden. miljarder, lägre än 15,49 miljarder USD i nettoinflöden YTD år 2023. Råvaru-ETFer rapporterade nettoutflöden på 75,35 miljoner USD under mars, vilket förde YTD nettoutflöden till 2,32 miljarder USD, lägre än 1,67 miljarder USD i nettoinflöden YTD 2023. på 670,27 miljoner USD under månaden, vilket samlade ett nettoinflöde för året i Europa på 2,33 miljarder USD, högre än 2,17 miljarder USD i nettoinflöden YTD 2023.
Betydande inflöden kan tillskrivas de 20 bästa ETFerna av nya nettotillgångar, som samlat in 9,63 miljarder USD under mars. iShares Core S&P 500 UCITS ETF – Acc (CSSPX SW) samlade in 918,91 miljoner USD, det största enskilda nettoinflödet.
Topp 20 ETFer efter nettoinflöden i mars 2024: Europa
| Namn | Kortnamn | Assets ($ Mn) Mar-24 | NNA ($ Mn) YTD-24 | NNA ($ Mn) Mar-24 |
| iShares Core S&P 500 UCITS ETF – Acc | CSSPX SW | 84,308.60 | 4,744.81 | 918.91 |
| UBS ETF (LU) MSCI United Kingdom UCITS ETF (GBP) A-acc – Acc | UKGBPB SW | 2,485.72 | 653.33 | 753.94 |
| Invesco MSCI USA ESG Universal Screened UCITS ETF – Acc | ESGU LN | 2,188.25 | 792.66 | 741.48 |
| Xtrackers II EUR Overnight Rate Swap UCITS ETF – 1C – Acc | XEON GY | 7,281.96 | 2,089.43 | 596.35 |
| HSBC S&P 500 UCITS ETF | HSPX LN | 6,756.08 | 661.46 | 562.23 |
| iShares MSCI EM ESG Enhanced UCITS ETF | EEDM LN | 5,000.88 | 886.95 | 556.22 |
| Vanguard FTSE All-World UCITS ETF | VWRD LN | 24,771.34 | 1,410.78 | 545.51 |
| Invesco S&P 500 UCITS ETF – Acc | SPXS LN | 25,176.99 | 939.08 | 497.72 |
| iShares MSCI ACWI UCITS ETF – Acc | ISAC LN | 12,806.01 | 1,453.06 | 469.35 |
| iShares USD Treasury Bond 0-1yr UCITS ETF | IBTU LN | 14,990.95 | 1,433.49 | 431.07 |
| iShares € High Yield Corp Bond UCITS ETF | IHYG LN | 7,694.75 | 1,427.77 | 413.53 |
| SPDR S&P 500 UCITS ETF | SPY5 GY | 12,491.17 | 3,418.58 | 388.74 |
| iShares Core MSCI World UCITS ETF – Acc | IWDA LN | 75,051.88 | 3,236.70 | 382.75 |
| Amundi Bloomberg Equal-weight Commodity ex-Agriculture UCITS ETF – Acc | COMO FP | 1,668.95 | 367.30 | 378.26 |
| iShares STOXX Europe Small 200 UCITS ETF (DE) | SCXPEX GY | 916.86 | 401.43 | 357.42 |
| Amundi MSCI Japan UCITS ETF – Acc | LCUJ GY | 4,400.85 | 158.96 | 343.86 |
| UBS ETF (CH) – MSCI Switzerland (CHF) A-dis – Acc | SWICHA SW | 1,126.17 | 354.69 | 335.87 |
| SPDR MSCI World UCITS ETF – Acc | SPPW GY | 5,653.51 | 715.38 | 324.95 |
| Amundi S&P 500 Climate Net Zero Ambition PAB UCITS ETF | ZPA5 GY | 3,965.66 | 925.46 | 320.42 |
| JPMorgan US Research Enhanced Index Equity ESG UCITS ETF – Acc | JREU LN | 7,047.30 | 1,230.55 | 315.09 |
Källa ETFGI
De 10 bästa ETPerna av nya nettotillgångar samlade ihop 1,69 miljarder USD under mars. WisdomTree Physical Silver – Acc (PHAG LN) samlade in 832,90 miljoner USD, det största enskilda nettoinflödet.
Topp 10 ETPer efter nettoinflöden i mars 2024: Europa
| Namn | Kortnamn | Assets ($ Mn) Mar-24 | NNA ($ Mn) YTD-24 | NNA ($ Mn) Mar-24 |
| WisdomTree Physical Silver – Acc | PHAG LN | 2,057.21 | 793.35 | 832.90 |
| iShares Physical Silver ETC – Acc | SSLN LN | 785.65 | 254.30 | 245.97 |
| Xtrackers IE Physical Gold ETC Securities – Acc | XGDU LN | 3,640.08 | 231.87 | 167.72 |
| AMUNDI PHYSICAL GOLD ETC (C) – Acc | GOLD FP | 4,575.61 | 307.29 | 127.12 |
| Xtrackers Physical Gold ETC (EUR) – Acc | XAD5 GY | 2,202.38 | 92.10 | 80.28 |
| WisdomTree Copper – Acc | COPA LN | 1,667.78 | 337.85 | 68.51 |
| Xtrackers Physical Gold Euro Hedged ETC – Acc | XAD1 GY | 1,335.65 | 5.06 | 50.49 |
| SG ETC FTSE MIB -3x Daily Short Collateralized – Acc | MIB3S IM | 33.07 | 88.10 | 40.49 |
| 21Shares Toncoin Staking ETP | TONN SW | 40.81 | 39.94 | 39.94 |
| Invesco Physical Gold ETC – EUR Hdg Acc | SGLE IM | 564.18 | 59.65 | 33.11 |
Källa: ETFGI
Investerare har tenderat att investera i Equity ETFs under mars.
Geopolitical Conflict on the Rise, while Ethereum Receives its Biggest Boost
H4Z7 ETF investerar i fastighetsbolag från utvecklade länder
ETFmarknaden i Europa firar sitt 24-årsjubileum med tillgångar på två biljoner USD
JPNY ETF spårar en korg bestående av 400 japanska aktier
Tillgång till obligationsmarknaden för företagsobligationer från utvecklade marknader
De mest populära börshandlade fonderna mars 2024
3 ETF:er du nog inte visste finns
FUIG ETF investerar i hållbara företagsobligationer som följer Parisavtalet
Ny fond ger tillgång till företag från tillväxtmarknader exklusive Kina
Fonder för att investera i batteriboomen…
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Nyheter2 veckor sedanDe mest populära börshandlade fonderna mars 2024
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Nyheter3 veckor sedan3 ETF:er du nog inte visste finns
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Nyheter2 veckor sedanFUIG ETF investerar i hållbara företagsobligationer som följer Parisavtalet
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Nyheter3 veckor sedanNy fond ger tillgång till företag från tillväxtmarknader exklusive Kina
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Nyheter3 veckor sedanFonder för att investera i batteriboomen…
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Nyheter1 dag sedanETFmarknaden i Europa firar sitt 24-årsjubileum med tillgångar på två biljoner USD
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Nyheter5 dagar sedanFörsvarsfond når förvaltad volym på 500 MUSD
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Nyheter2 veckor sedanNy börshandlad fond från Deka ger tillgång till S&P 500-index
