Sinolink: If the US economy confirms a "hard landing," the next risk will be "debt default."

Sinolink released a research report stating that the unexpected monetary policies and minutes of the Federal Reserve suggest that the risk of a "hard landing" in the United States is increasing. Once the U.S. economy confirms a "hard landing," it may lead to a risk of U.S. bond default. Maintain a strategy of "large-cap value defense" and recommend: bottom position in banks; "offensive" in gold + innovative drugs; non-cyclical industries with potential for sustained high dividends. Sinolink's main points are as follows: Review of previous views: Bottom allocation during the rate cuts by the Federal Reserve: Selection of innovative drugs and their combinations. The bank still suggests the "right-side trading logic," whether the rate cuts in September are important decision-making moments for offense and defense. If the rate cuts in September are not realized or the magnitude is lower than 25bp, market volatility may enter an "accelerated uptrend" channel, maintaining a bottom position in "gold + innovative drugs," banks, and high-dividend large-cap value defense. Innovative drugs will significantly benefit from the Fed's easing of monetary policy. For the A-share market, it focuses on the three factors of "reliance on external demand + non-leaders + high ROE," while for the Hong Kong stock market, it focuses on the two factors of "reliance on external demand + leaders." Current market focus: 1. The impact and response if the rate cuts in September are not realized domestically; 2. How to interpret the impact and response of the Federal Reserve's unexpectedly large rate cuts of 50bps; 3. How does the leverage of U.S. government debt and the level of interest expense as a percentage look? And what potential risks will it bring? 4. How to horizontally compare the background, evolution, and essence logic of the "European debt crisis"? 5. If the U.S. economy confirms a "hard landing," will the next risk be a "U.S. debt crisis"? The "volatility" of both domestic and foreign markets may face a new round of upward pressure The unexpected monetary policies and minutes of the Federal Reserve both indicate that the risk of a "hard landing" in the United States is increasing. Based on the minutes of the Fed's September interest rate meeting, on one hand, the pressure on the slowdown of the U.S. economy is increasing, with the upward trend of the unemployment rate and strong dynamics; on the other hand, the impact of inflation on monetary policy constraints is weakening marginally. Based on the research framework for the possibility of a "hard landing" in the U.S. economy, the bank believes that a 4.4% unemployment rate target for Q4 2024 may be seen as an important threshold. Once it breaks through and continues to rise, it may guide the Fed to cut rates by another 50bps within the year. The rate cuts in September in the domestic market were not realized, and market volatility may trend upward again. The bank predicts that the "profit bottom" may be further postponed at least until Q3 2025. Currently, the most direct and effective way to activate economic activity rebound and credit recovery is to reduce the cost of liabilities to hedge the downward pressure on the asset side. However, considering that the rate cuts in September were not realized, the bank tends to believe that market "volatility" may experience another round of uptrend. The bank's maintained prediction: If the People's Bank of China lowers interest rates before the U.S. economy experiences a "hard landing", especially by at least 50bp in the 5-year loan prime rate (LPR), maintaining the actual return rate of enterprises in a controllable range (-1% ~ 0%), there is a chance to avoid domestic liquidity risk, control real estate risk, and promote M1 recovery within the year, at which time the "market bottom" may appear, still recommending the "right-side trading logic" for rate cuts. Before that, maintain a bottom position in "gold + innovative drugs," banks, and high-dividend large-cap value defenses. In terms of bulk commodities and overseas equity assets, (1) except for gold, bulk commodities tend to be cautious; (2) sell off high positions in U.S. stocks; (3) Hong Kong stocks are relatively difficult to achieve excess returns compared to A-shares. Once the U.S. economy confirms a "hard landing," it may lead to a risk of U.S. bond default Background, evolution and essence logic of the European crisis: High corporate debt leverage and excessive fiscal deficits of peripheral countries have buried potential risks of crisis; The slowing economic growth of peripheral countries leads to the deterioration of their national balance sheets due to unsustainable debt; The downgrade of sovereign credit ratings makes it difficult for European countries to maintain their debt repayment, also becoming the trigger for debt defaults; Loss of independence of domestic currencies leads to passive increase in debt pressure and exacerbates the degree of debt defaults; The close connection between banks and sovereign debt (Doom loop) leads to a rapid increase in non-performing loans, causing a "chain reaction" of defaults in European peripheral countries. Taking the example of the Greek government, once investors see a downgrading of credit ratings, they sell off their sovereign debt, which leads to a cycle of "rising government bond yields greater debt burden fiscal consolidation to meet regulatory standards further economic decline eventual government bankruptcy." How to deduce the debt difficulties and even crises that the U.S. federal government may face? (1) In addition to the unexpected 50bps rate cut, attention needs to be paid to the continued marginal expansion of the U.S. fiscal deficit. The fiscal deficit in the past 12 months as a percentage of GDP has recently risen again, reaching 7.22% in August. At the same time, the leverage ratio of U.S. government debt and the proportion of interest expenses are at historic highs, even comparable to the level of the "European debt crisis." (2) The probability of the U.S. confirming a "hard landing" around November is estimated to be 60%-70%. (3) Once the above two conditions are met, there may be pressure to downgrade the U.S. sovereign credit rating, prompting the risk of U.S. bond default. (4) Once U.S. credit weakens, it will significantly reduce global demand for holding U.S. dollars, further increasing the risk of U.S. bond default. This means that the U.S. government will face difficulty in normal repayment and interest payment. At that time, the Federal Reserve will have to restart balance sheet expansion to accommodate the refinancing needs of government debt i.e., the U.S. may face a "technical default" on its debt. Risk warning: Domestic export slowdown exceeds expectations; the pace and intensity of domestic "loose monetary policies" are lower than expected; U.S. bond yield rebounds more than expected; historical experience has limitations.