Core conclusion
Why did the US dollar index rebound? From event driven to the re differentiation of Europe and the United States. Before the conflict between Russia and Ukraine, we have repeatedly pointed out that the dollar will probably depreciate in 2022. In fact, since this year, the US dollar index has not depreciated but increased: from February 24 to March 8, it was mainly driven by the risk aversion caused by the Russian Ukrainian conflict, but after the risk aversion cooled down, the US dollar still broke through a hundred posture, or it was related to the damage to the European economy caused by the Russian Ukrainian conflict. The conflict between Russia and Ukraine not only exacerbated the inflationary pressure in Europe, but also made its economic outlook uncertain. Therefore, the expectation of the European Central Bank to raise interest rates in the first half of the year did not rise but fell instead. In contrast, the impact of the Russian Ukrainian conflict on the United States is relatively neutral. In addition, the U.S. residential sector still has a certain consumption power, so the expectation of the Federal Reserve raising interest rates after the Russian Ukrainian conflict has not weakened. The situation that the United States is strong and Europe is weak appears again, and the US dollar appreciates passively.
If the dollar breaks 100 again, emerging manufacturing countries may have liquidity risks. After FOMC in May, the Federal Reserve will implement the table contraction, and the pace of this round of table contraction will be significantly faster than 20172019, and the world will bear greater liquidity pressure. Empirically, once the US dollar index and US Treasury bond yields rise simultaneously, emerging markets will have a liquidity crisis. Under the expectation of accelerating interest rate hikes and accelerating the contraction of the table, it is difficult for US bond yields to peak temporarily. At present, the probability of emerging markets facing liquidity shocks is rising rapidly. It is worth noting that the current prices of resource products remain high, resource countries in emerging markets are relatively safe, and manufacturing countries will face greater liquidity challenges.
Once US stocks fall, global liquidity may face a second shock. We believe that the US economy will slow down in the second half of the year and the risk of recession next year is high. Since the late 1980s, a global liquidity crisis has erupted on the eve of each round of American economic recession. Empirically, the global liquidity shock will be divided into two stages: the first stage is the return of non US liquidity to the United States, and the second stage is the global liquidity shock caused by the sharp decline of US stocks. We believe that the conflict between Russia and Ukraine and the contraction of the US Federal Reserve have triggered the global liquidity to enter the first shock stage. Once the US dollar index breaks 100, the liquidity risk in this stage will further intensify. Further, with the higher yield of 10-year US bonds, the risk premium of US stocks has approached the low level of Q4 in 2018, and the sharp decline of US stocks in 2018 is the result of the sharp decline of risk premium of US stocks under the background of table contraction. However, different from that time, the post epidemic fiscal transfer payment superimposed with extremely low capital cost further increased the leverage ratio of US stocks. Once the yield of US bonds rises further and the risk premium of US stocks turns negative, the downward pressure on US stocks may be higher than Q4 in 2018, which is likely to make the world enter the second stage of liquidity shock. Fortunately, even if there is a liquidity crisis, it is limited to the financial system. Therefore, as long as the Fed loosens the currency, the risk will subside and will not last.
For China's equity market, the policy bottom was established at the meeting of the Financial Committee on March 16; In the future, if the epidemic in China cools down in mid and late April and the steady growth policy is expected to work simultaneously, the economic end of Q2 will also take shape. However, the prospect of the sharp decline of US stocks may restrict the risk appetite of A-Shares to a certain extent. Therefore, the market bottom may be officially established after the decline of US stocks and the impact of global liquidity.
Risk tip: Fed's monetary policy expectation; The change of risk premium of US stocks exceeded expectations; The situation in Russia and Ukraine exceeded expectations; China's economy and policies exceeded expectations.
