Recently, both safe-haven and risk assets have experienced varying degrees of pullback. The core logic of the current market is not about seeking safety but rather about liquidity contraction, with the root cause being the shutdown of the U.S. federal government.
According to Zhitong Finance APP, Guosen Securities issued a research report stating that recently, both safe-haven and risk assets have experienced varying degrees of retracement. Meanwhile, the yield on U.S. Treasury bonds has stabilized with a slight decline. The core logic of the current market is not risk aversion, but liquidity contraction, which stems from the shutdown of the U.S. federal government. After reaching a high in early October, Hong Kong stocks are in a phase of valuation digestion. However, the core logic of the Federal Reserve's interest rate cuts remains highly deterministic, which limits the retracement space for Hong Kong stocks. Recently, the accelerated growth of the U.S. M2 in September has bolstered confidence. A combination of medium-term positive liquidity and short-term negative factors is expected to provide investors with a good opportunity to position themselves in Hong Kong stocks.
The main viewpoints of Guosen Securities are as follows:
The essence of the global multi-asset decline: Liquidity contraction
Recently, various assets have shown significant retracements: S&P 500 and Nasdaq 100 futures fell below MA20; core broad-based indices in Japan and South Korea significantly retreated; gold fell back below 4000; cryptocurrencies broke below the annual line. Both safe-haven and risk assets have experienced varying degrees of retracement. At the same time, the yield on U.S. Treasury bonds has stabilized with a slight decline. These performances indicate that the core logic of the current market is not risk aversion, but liquidity contraction.
U.S. government shutdown causes a liquidity gap of 150-180 billion USD
The root cause of liquidity contraction lies in the shutdown of the U.S. federal government. The logic is that when the federal government shuts down, its expenditures will significantly decrease, but its income will not. This means that the shutdown of the U.S. government continues to absorb funds from the economy while slowing down the pace of returning funds to the market.
According to calculations, the shutdown of the U.S. federal government would reduce annualized revenue by $85 billion, yet lower annualized expenditures by $1.93 trillion, ultimately creating an annualized funding gap of $1.85 trillion in the private sector, absorbing $35.5 billion in liquidity per week. A five-week shutdown of the U.S. government would result in a liquidity gap of approximately $180 billion in the market. Direct observation of the U.S. Treasury General Account (TGA) balance shows that between the last week of September and the last week of October, the TGA account balance increased by $152.9 billion.
The shutdown of the U.S. federal government is expected to be resolved in the short term.
Currently, U.S.-based investment banks predict that the U.S. federal government will resume operations within two weeks. According to Wall Street News: Republican Senator Markwayne Mullin expressed 'great confidence' in a bipartisan agreement on fiscal issues being reached between Wednesday and Thursday of this week. Meanwhile, some Republican lawmakers believe that after Tuesday's local elections, Democrats will no longer have grounds to continue pressuring over fiscal matters.
U.S. Stocks: Valuations Are Not Expensive, Pullbacks Present Favorable Buying Opportunities
Amid market pullbacks, doubts about U.S. stocks stemming from stock/flow ratio metrics (e.g., P/E, market cap/GDP) deviating from historical norms are amplified, which overlooks the long-term acceleration in liquidity injections. Models based on intrinsic earnings anchored in established fundamentals indicate that the fair valuation range for the S&P 500 is 6900-6950, suggesting that U.S. equities currently bear no significant valuation burden. This pullback is believed to present a favorable buying opportunity.
Hong Kong Stocks: High-Certainty Rate Cuts Have Not Fully Played Out; Accelerated Liquidity Contraction Aids Valuation Digestion
Since peaking in early October, Hong Kong stocks have been in a phase of valuation digestion. However, the core logic behind the Federal Reserve’s rate cuts remains in a high-certainty unfolding process, limiting downside potential for Hong Kong equities. Recently, accelerated M2 growth in the U.S. for September has bolstered confidence. The combination of medium-term liquidity tailwinds and short-term headwinds could create favorable entry points for investors in Hong Kong stocks.
Mid-Level Analysis: Focus on the Combination of Liquidity Headwinds and Fundamental Tailwinds
Strong sectors face significant profit-taking pressure ahead of liquidity crises but will also encounter greater opportunities once liquidity recovers. Key recommendations include: 1) Semiconductors: Memory chips are currently in a major pro-cyclical narrative, and a liquidity crisis can help release technical overbought pressures, creating rare catch-up windows; 2) Materials: Focused primarily on non-ferrous metals. Gold continues to benefit from stable beta (currency expansion) and strong alpha (substituting U.S. Treasuries), while industrial metals continue to gain from robust demand.
Risk Factors
Uncertainties arising from bipartisan political maneuvering within the United States; uncertainties in U.S. foreign economic and military policies; uncertainties surrounding the Federal Reserve’s monetary policy.
