A wave of selling hit without warning! At the morning open, the A-share precious metals sector plummeted sharply, with over ten stocks, including Xiaocheng Technology, Zhaojin Gold, Sichuan Gold, Hunan Gold, Zhongjin Gold, Chifeng Gold, Western Gold, and Shandong Gold, falling by their daily limit at the auction. The oil and gas sector and commodity futures also mostly faced severe selling pressure. The Shanghai Gold Exchange issued an announcement adjusting the trading margin requirements and daily price fluctuation limits for its silver deferred settlement contracts. It stated that if a one-sided market condition occurs in the Ag(T+D) contract on February 2nd, the margin level for that contract will be raised from 20% to 26% starting from the closing settlement, and the daily price limit will be adjusted from 19% to 25% from the next trading day. Simultaneously, new uncertainties emerged in external markets. Reports indicated that the US Leveraged Loan Index is declining, having fallen to its lowest point since April 2025, which is seen as a precursor to potential liquidity issues. In fact, the sharp drop in the cryptocurrency market over the weekend also corroborates this concern. The sell-off was widespread across the board. The external market weakness was not confined to precious metals; a steep decline in natural gas also significantly impacted the energy sector. Influenced by recent forecasts predicting warmer weather, US natural gas futures prices fell sharply, nearly erasing all gains from the previous trading session. Reports stated that the front-month contract fell by as much as 17% during the Asian morning session to $3.62 per million British thermal units. Consequently, this morning, the A-share oil and gas sector saw almost universal limit-down moves. Tongyuan Petroleum, Zhongman Petroleum, Zhunyou Shares, Sinopec Oilfield Service, and Beken Energy all hit their daily limit down at the auction, while Keli Shares and Potential Energy fell over 10%. The commodity futures market also opened mostly lower. According to Wenhuacai data, as of 9:04 AM, the main silver futures contract on the Shanghai Futures Exchange was limit-down, the main gold futures contract fell over 10%, the main platinum contract was limit-down, and the main palladium contract plunged over 15%. Contracts for Shanghai-traded tin, nickel, and copper also registered very large declines. This led to significant corresponding sell-offs in the related stock market sectors. Furthermore, China Mobile, China Unicom, and China Telecom all issued announcements on February 1st stating that the applicable value-added tax rate for telecommunications services would be adjusted from 6% to 9%, which would impact their revenues and profits. The three major telecom operators collectively weakened, with China Mobile falling over 5% to hit a new low since June 2024, while China Unicom and China Telecom both dropped over 4%. More notably, although precious metals saw a rebound in early overseas trading, they were quickly suppressed again, and US stock index futures fell across the board. The cryptocurrency market experienced a full-scale rout, with Ethereum falling below $2,300 and Bitcoin briefly dropping below $77,000. Reports pointed out that the US Leveraged Loan Index is declining, having returned to its lowest level since April 2025. At a time when the market expects the Federal Reserve to cut interest rates, creditors are still selling off loans, suggesting growing market concern about a potential wave of defaults—a harbinger of a liquidity crisis. Is a liquidity shock approaching? Tianfeng Securities released a research report emphasizing that a US dollar liquidity shock may be imminent. By the end of January, its tracked US dollar liquidity index had fallen to -60%, entering an extreme tightening zone. Historical data shows that such extreme tightening impacts almost all global assets. The report pointed out that US stocks have entered a "very low odds—very low probability of winning" situation where both factors are negative, highlighting the need to pay attention to the possibility of tail risks. Furthermore, many market participants attribute the recent high volatility to Kevin Warsh, the new Fed Chair nominee put forward by Trump. For most of last year, prediction markets gave Warsh a probability of becoming Fed Chair rarely exceeding 20%. While he has prior experience serving on the Federal Reserve Board, the market perceives him as a "hawk." He is known for advocating a combination of "interest rate cuts + balance sheet reduction." Warsh is a staunch advocate for Federal Reserve independence, so concerns about eroded independence should subside, which also supports the US dollar. These factors have raised market expectations for the dollar, consequently contributing to the commodity market crash. So, what is the true impact potential of Warsh? A research report authored by "Mitsubishi UFJ" suggests that, considering the Fed has just announced a renewed expansion of its balance sheet, this will be a fascinating period. However, if he pushes for balance sheet contraction, we might see a reduction in the long-term Treasury holdings on the balance sheet. Yet, Warsh is simultaneously a firm advocate for interest rate cuts. Therefore, an initial period of rate cuts should now actually be considered more likely. Furthermore, if pursuing balance sheet contraction is a goal, then rate cuts at the short end of the yield curve would be an important counterbalancing factor. A steepening yield curve often coincides with a weaker US dollar, and under an FOMC led by Warsh, rate cuts might be more probable, leading to skepticism that this initial rebound in the dollar will fade.
Comments