Massive Adjustment! Three Major Variables Shake Up the Stock Market! What's Next?

The narrative logic behind the stock price rise and liquidity are both indispensable!

Last night, U.S. tech stocks continued to decline. This morning, the A-share market also experienced adjustments. The coal sector that rose yesterday saw a significant drop today, and stocks in the non-ferrous metals sector also collectively declined. The tech sector followed the decline of U.S. stocks and continued to fall. The three major indices all weakened.

Journalists from Securities Times found that three major uncertainties are converging:

First, although the A-shares rebounded strongly yesterday, the financing balance decreased by 13.9 billion yuan compared to the previous trading day. It can be said that “structural deleveraging” is underway.

Second, last night, the leverage lending index in the U.S. market continued to decline, with a sharper drop than the previous day. Since reaching its peak on January 13, this index has been steadily falling, with occasional small rebounds, but the overall trend remains unchanged.

Third, the narrative logic of technology is undergoing significant changes. On one hand, Oracle’s layoffs have made the market realize that AI financing is not as smooth as imagined; on the other hand, the ongoing narrative of AI impacting software companies continues to unfold. This has put significant pressure on the valuation of the entire AI sector.

Collective Adjustment

This morning, the A-share and Hong Kong markets followed the external market trends and declined collectively. The Shanghai Composite Index initially fell by 1%, the ChiNext Index dropped over 2%, and the Shenzhen Component Index fell nearly 2%. Leading sectors included precious metals, photovoltaics, semiconductor chips, and power grid equipment, which saw the largest declines. Nearly 3,500 stocks in Shanghai, Shenzhen, and Beijing declined.

Meanwhile, the three major Hong Kong indices once again fell over 1%. The A50 index also saw increased declines. The Korean stock index plunged over 3%, and the Japanese stock market also dropped nearly 1%.

Two more notable phenomena are: spot silver plunged again, with a decline of up to 15%, and spot gold fell over 3%; the virtual currency market experienced even larger declines, with Bitcoin once dropping below $71,000, a nearly 6% decline. Ethereum also fell more than 6%. The sharp declines in these two asset classes indicate liquidity shocks.

Fundamentally, the rise and fall of stock prices are driven by the ongoing narrative logic and liquidity dynamics. Looking at the A-share market, although overall liquidity remains abundant, as the Spring Festival holiday approaches, leverage ratios are in a phase of downward adjustment. Therefore, it is observed that despite a large market rally yesterday, the financing balance still decreased significantly.

Of course, this is also closely related to the narrative logic. On Tuesday, the stock prices of U.S. legal software and publishing companies plummeted after AI company Anthropic launched a tool for internal legal teams. The sell-off in this sector showed no signs of easing on Wednesday. Additionally, recent events such as Oracle’s layoffs and OpenAI’s funding have sparked market doubts: AI financing is not as easy as it seems. The market is beginning to question the bubble in AI and the changes it may bring to the industry, leading to market weakness.

The root cause of the decline ultimately comes down to liquidity. The U.S. leverage loan index has been declining steadily, reaching its peak on January 13 and then oscillating downward. The recent decline has accelerated. From January 27 to 30, it experienced a sharp drop. There was a slight rebound afterward, but last night’s decline widened again. This indicator’s decline depicts a process of “deleveraging.”

What’s next?

Previously, overly optimistic market sentiment and excessive liquidity, combined with the Federal Reserve’s hawkish expectations, triggered a rapid collapse of major assets. Short-term risk aversion soared, and in this environment of high uncertainty, a defensive stance is recommended. Moving forward, close monitoring of the U.S. dollar liquidity index and sentiment indicators for signs of recovery is advised.

Guosheng Securities states that the U.S. dollar liquidity has sharply tightened, currently in the warning zone at -60%. With net liquidity shrinking, the Federal Reserve’s expected signals last month quickly shifted to hawkish, and the unexpected tightening signals indicated a cautious stance, with all price-related variables turning negative, triggering a -60% “extreme tightening” warning on January 29. Additionally, panic sentiment indicators have worsened significantly, amplifying market volatility. Monitoring global markets (OFR FSI), the U.S. market (Citi RAI), and China’s market (China Sovereign CDS) shows that recent indicators have all risen sharply, indicating increased market panic and higher investment risks.

From a domestic perspective, GF Securities’ research reports suggest that during this cross-month period, after the central bank injected a total of 1 trillion yuan in medium- and long-term funds in January, the 7-day OMOs have been net withdrawn for four consecutive days, but on the day of the month change, net injections resumed. Overall liquidity remains stable, with short-term interest rates slightly rising, and the spread between non-bank financial institutions and banks’ overnight rates widening significantly. As the new month begins, liquidity is expected to loosen spontaneously, with the central bank mainly withdrawing funds. Considering the upcoming Spring Festival (17th), residents’ cash withdrawal demand will increase, and banks’ reserve requirements and government bond issuance will continue to expand, causing temporary tightening of liquidity. The central bank is expected to conduct 14-day OMOs as needed to support liquidity. Additionally, there are 700 billion yuan of 3-month reverse repos maturing, so attention should be paid to the scale of rollovers.

GF Securities believes that currently, the global U.S. dollar cycle is in the declining phase after reaching its peak, and the renminbi has already gone through devaluation and entered a moderate appreciation channel. Coupled with the inflow of foreign capital and valuation recovery shifting toward profit-driven growth, Chinese equities are in a relatively favorable re-pricing window. However, some analysts point out that if the AI narrative continues to deteriorate and U.S. leverage levels keep declining, the impact on global assets should not be underestimated.

(Source: Securities Times)