A sell-off unfolded as expected! At the morning opening, the precious metals sector in the A-share market plummeted, with over ten stocks, including Xiaocheng Technology, Zhaojin Gold, Sichuan Gold, Hunan Gold, Zhongjin Gold, Chifeng Gold, Western Gold, and Shandong Gold, hitting the daily downside limit during the call 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 the silver deferred settlement contract. If the Ag(T+D) contract experiences a one-sided market situation on February 2nd, the margin level for this contract will be adjusted from 20% to 26% starting from the close clearing time, and the daily price limit will be adjusted from 19% to 25% from the next trading day.
Simultaneously, external uncertainties have re-emerged. Reports indicate that the US Leveraged Loan Index is declining, falling back to its lowest point since April 2025, which is seen as a precursor to liquidity issues. In fact, the sharp decline in the cryptocurrency market over the weekend also corroborates this problem.
The sell-off was not limited to precious metals; the plunge in natural gas significantly impacted the energy sector's trajectory. Influenced by recent forecasts for 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 up to 17% during early Asian trading to $3.62 per million British thermal units.
Consequently, this morning, the A-share oil and gas sector was almost entirely limit-down. Tongyuan Petroleum, Zhongman Petroleum, Zhunyou Shares, Sinopec Oilfield Service, and Beken Energy hit the daily limit-down during the call auction, while KeLi Shares and Potential Energy dropped over 10%.
The commodity futures market also opened mostly lower. According to Wenhu Financial Data, as of 9:04, the main Shanghai silver futures contract was limit-down, the main Shanghai gold futures contract fell over 10%, the platinum futures contract was limit-down, and the palladium futures contract dropped over 15%. Shanghai tin, nickel, and copper also experienced very large declines.
This led to corresponding significant sell-offs in the related stock market sectors. Additionally, China Mobile, China Unicom, and China Telecom all announced on February 1st that the value-added tax (VAT) category applicable to telecommunications services would be adjusted, with the rate increasing from 6% to 9%, which will impact the companies' 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 sell-off, with Ethereum falling below $2,300 and Bitcoin briefly dropping below $77,000. Reports indicate that the US Leveraged Loan Index is declining, returning to its lowest level since April 2025.
When market expectations are for the Federal Reserve to cut interest rates, yet creditors are still selling off loans, it suggests the market is beginning to worry about a wave of defaults, which is a precursor to a liquidity crisis. Is a liquidity shock imminent? Tianfeng Securities released a research report emphasizing that a US dollar liquidity shock may be approaching.
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 affects almost all global assets. The report pointed out that US stocks have entered a "very low odds - very low win rate" double-whammy pattern, and the possibility of tail risk occurring needs to be taken seriously.
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%. He has prior experience serving on the Federal Reserve Board, but the market views him as a "hawk."
A well-known stance of his is the 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, leading to the commodity crash.
So, what is the true impact potential of Warsh? A research report authored by "Mitsubishi UFJ" suggests that, considering the Fed just announced an expansion of its balance sheet again, this will be a fascinating period. However, if he pushes for balance sheet contraction, we might see a reduction in long-term Treasury holdings on the balance sheet.
Yet, Warsh is also a firm advocate for rate cuts. Therefore, an initial period of rate cuts should now actually be considered more likely. Additionally, if pursuing balance sheet contraction is a goal, then rate cuts at the short end of the curve would be an important offsetting factor.
A steepening yield curve often coincides with US dollar depreciation, and under a Warsh-led FOMC, rate cuts might be more probable. Therefore, there is skepticism that this initial rebound in the dollar will fade.
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