A-shares Surge at Noon, Treasury Futures Plunge

Today, the A-shares market opened with a significant sell-off in sectors tied to lithium batteries and power grid equipment, particularly those involved in exports to the United States. This led to steep declines in key index components like Ningde Times, which at one point plummeted more than 4%, collectively dragging down the ChiNext index. In stark contrast, high-dividend sectors such as coal and petrochemicals surged. This juxtaposition illustrates that while core assets faced a firestorm of red, those with high dividends flourished.

However, just after noon, an unusual phenomenon emerged. The People's Bank of China (PBoC) issued an announcement regarding its market operations, particularly aimed at stabilizing the bond market. This policy decision came after careful observation and evaluation of the current market climate. The central bank decided to initiate Treasury bond borrowing operations with select primary dealers in the open market, aiming to uphold the stability of the bond market.

The announcement led to a swift rebound in the yields of 10-year and 30-year Treasury bonds, which had been on a downward trajectory. This was accompanied by a sharp decline in Treasury futures. On the flip side, the high-dividend sectors that had been initially surging began to pull back, while core assets such as liquor, renewables, and electronics staged a dramatic turnaround, pushing the ChiNext index from a plunge of nearly 2% into positive territory.

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Many readers may find themselves puzzled by the implications of the central bank’s borrowing of Treasury bonds on the market. Let’s break this down: The real estate market has been underwhelming and there’s a prevailing sense of pessimism about the medium- to long-term economic outlook. This has triggered an asset shortage for the better part of two years, with Treasury bonds in fierce demand, which in turn has fueled a bull market for high dividends in the stock market.

The bond market is experiencing unprecedented demand, to the extent that the yield on China’s 30-year Treasury bonds has dipped below 2.5%. Remarkably, Japan’s 30-year bonds are yielding around 2.2%, indicating that the Chinese market is pricing its bonds similarly to Japan’s, a sign of prevailing economic pessimism.

The central bank has previously issued multiple warnings regarding risks associated with long-term bonds. The most recent alert was during the Lujiazui Forum, where the PBoC referenced the Silicon Valley Bank incident as a cautionary tale. Yet, the bond market seems to exhibit little regard for such warnings, continuing on a path of excessive optimism.

As for the borrowing operations mentioned by the central bank, these are intended to facilitate the sale of bonds in the secondary market. Essentially, this translates to an increase in supply of Treasury bonds, and with demand remaining unchanged, bond prices are likely to decline, resulting in higher yields upon maturity.

The correlation between the high-dividend stocks in the A-share market and the bond market is significant. Should the momentum in the bond sector weaken, it would inevitably have a ripple effect on the high-dividend stocks. The memory of the struggles faced by institutional investors during 2020, when core assets such as liquor, consumption, and renewable energy experienced drastic declines, still lingers. The cyclical nature of the markets is a poignant reminder that the high-dividend sector currently thriving may one day face similar downturns. When the market is on the upswing, high dividends seem attractive, but when the tide turns, years of dividends can evaporate in a single day of market loss.

Other noteworthy updates from today include the release of real estate transaction data. In June, 43 cities reported a cumulative transaction area of new homes down by 20.8% year-on-year, though it reflected a quarter-on-quarter increase of 30.5% compared to May. Cumulatively for the year, the transaction volumes are down by 33.5%. Notably, in June, 14 cities reported a year-on-year increase of 9.1% in second-hand home transactions, with a month-on-month increase of 7.0% compared to May, with an annual cumulative decrease of 9.9%. On June 30, a record day, transactions peaked with 8,433 sales, marking the highest figure this year and the highest daily transaction volume since April of the previous year.

Prior to the central bank's announcement regarding its real estate market support measures, the real estate sector had witnessed considerable growth. However, as optimism subsided in the short-term due to a lack of immediate recovery in the market, this sector found itself nearly back at square one, leading market expectations to plummet. Interestingly, recent data indicates a slight rebound in the real estate market, particularly in second-hand properties in cities like Shanghai and Shenzhen, which showed resilience. Yet, this positive shift did not reflect in stock market movements due to its underlying sluggishness.

By the end of the month, with real estate statistics released, there was finally a reaction from the market, resulting in a rally in real estate stocks, illuminated by surging shares of companies such as Zhongzhou Holdings, Binjiang Group, and Huafa Holdings, with the latter reporting a soaring sales figure of 14.93 billion yuan in June, nearly doubling from the previous month.

Turning to the battery sector, reports indicated a general decline among publicly traded companies in this industry, which was attributed to forecasts reflecting a downturn in production figures for July. In response to the speculation, Ningde Times reassured the media of its robust operational status and steady global market share growth, indicating a positive trend in their production levels both recently and projected for the third quarter.

As the trading day drew to a close, the Shanghai Composite Index posted an increase of 0.92%, nearing the psychological mark of 3,000 points, while the ChiNext index experienced a slight dip of 0.04%. The Hong Kong market observed a closure due to holidays. Trading volumes in the A-shares market diminished to 0.65 trillion yuan, with over 3,500 stocks showcasing gains, offsetting some losses when considering foreign capital involvement.

From an industry perspective, sectors such as real estate, coal, agriculture, forestry, animal husbandry, fishery, and non-ferrous metals led the charge, while food and beverage, household electronics, power equipment, electronics, and computer sectors faced declines.

Looking ahead, the window for earnings forecasts spans from now until July 15, with August marking the period for interim reports. As such, performance metrics are expected to weigh heavily in market activity. Recent raises in the A-share market across sectors like computing, semiconductors, shipping, and non-ferrous metals seem to reflect stronger confidence regarding interim reports.

As always, investing carries risks, and readers are advised to engage in their own analyses before making decisions, as this article does not constitute investment advice.