Barclays: Fed rate cut imminent, good news for emerging markets, bullish on high-rated Chinese corporate bonds.

Barclays research team published a quarterly report on emerging markets, indicating that emerging market assets have been constrained by the US Federal Reserve policy this year, but as the Fed is about to cut interest rates, the situation is rapidly changing. The Fed's shift to a more accommodative stance is enough to support the repricing of emerging market rates in the near term, and has been implemented in some countries such as Mexico, Czech Republic, Israel, and India. In this process, there may be a divergence between emerging market rates and emerging market currencies, with rates performing better than currencies. In other words, as most central banks ease policy, arbitrage trading returns are reduced, and risk volatility may push up the US dollar against emerging market currencies, especially in the current situation where emerging market currencies reflect a lower premium for economic recession risk. Even if the Fed switches to rate cuts in September, Asian central banks in emerging markets may not follow suit Some market participants believe that the Fed is currently the main focus of Asian central banks, as these central banks are hoping to ease monetary policy. Barclays remains skeptical of this, as the overall economic activity has not reached levels that would alert policymakers. Even at the crucial moment when the Fed is expected to switch to rate cuts in September, central banks in Asian emerging markets are likely to maintain a relatively cautious and conservative stance on easing monetary policy. Concerns over financial stability in countries like South Korea, China (Taiwan), Thailand, Singapore, and Malaysia, especially considering high housing prices and heavy household debt, may inhibit the willingness of local central banks to cut rates. Optimistic about Chinese high-grade corporate bonds, the US dollar still has room for appreciation against the Renminbi Barclays is bullish on select high-quality Chinese high-grade corporate bonds, especially in the technology, media, and telecommunications industries, as well as companies and asset management companies with unique advantages. It is expected that the sector of high-grade corporate bonds in China will continue to demonstrate its defensive qualities, with earnings and fundamentals expected to improve. However, potential negative factors are also anticipated, such as the direction of US-China relations as the US election approaches, which may affect market sentiment. After the recent adjustment in positions leading to a decline in the US dollar against the Renminbi, there may be a certain degree of recovery, but the magnitude is limited, and it is unlikely to exceed 7.10. Considering that China's willingness to stimulate demand is not very strong at the moment, and taking into account the relatively loose monetary policy and the significant interest rate differential between China and the US, there is still room for the US dollar to rise against the Renminbi. Chinese government bond yield curve will steepen, unlikely to implement aggressive stimulus measures With the People's Bank of China tightening control over short-term and long-term interest rates, as well as the market gradually digesting the impact of the central bank's bond sales, the Chinese government bond yield curve will steepen. It is expected that by the fourth quarter of this year, the yields on 3-year and 10-year Chinese government bonds will stabilize at around 1.5% and 2.1% respectively, and by the third quarter of 2025, they will maintain around 1.50% and 2.20% respectively. Continuing to favor a steep strategy for 10-year and 30-year Chinese government bonds. The basic assumption is that China's monetary and fiscal policy will provide gradual support rather than large-scale aggressive stimulus measures. Following a 10 basis point cut in the main policy rate of the 7-day reverse repo operation announced in July, the People's Bank of China is expected to cut this rate by another 10 basis points in the fourth quarter of this year, as well as in the first and second quarters of next year. However, given that bank net interest margins are at historic lows, the pace of rate cuts will be cautious. Additionally, it is expected that the People's Bank of China will further reduce the bank reserve requirement ratio by 50 basis points in the coming weeks (possibly in September), and 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 for local governments and complete the annual issuance plan by the end of October or early November, providing support for infrastructure investment. The basic forecast is that after growth of 8% in the first half of 2023 and 2024, infrastructure investment growth in China in the second half of the year will remain strong, reaching 8%. The US dollar to Hong Kong dollar exchange rate is expected to decline by the end of the year, with short-term interest rates in Hong Kong likely to rise slightly The US dollar to Hong Kong dollar exchange rate is expected to remain at a range of 7.75-7.85 and its exchange rate may decline by the end of the year due to the Fed rate cuts and seasonal factors in the fourth quarter. In the short term, even if the Fed starts to gradually cut rates as scheduled, the market may still increase long positions in the US dollar against the Hong Kong dollar. Furthermore, it is anticipated that the Federal Reserve rate cut cycle will cause the US dollar to fluctuate between 7.75-7.80 against the Hong Kong dollar in 2025. Expect a "bearish trend" in Hong Kong rates in the short term, followed by a "bullish steep" trend after the Federal Reserve begins its rate cut cycle. While short-term US rates may remain stable, short-term rates in Hong Kong are expected to rise slightly, reflecting uneven local liquidity distribution.