The SCMP reported that Hong Kong’s weekend home sales flopped for the fourth time in six weeks - a sign that residential property industry’s worst slump in a decade has some ways to go before recovering. Property slump is struggling to find a bottom as it has also spilled over to the secondary market due to rising unemployment and Hong Kong’s first recession in a decade are deterring buyers from making large financial commitments.

Another piece of evidence - New Residential Investment Corp (NRZ), a perceived safe mortgage REIT for many US equity investors. The shares are down to US$5.75 (lowest US$2.91) from a record-high price of US$17.66 just two months ago due to short-covering and reduction in dividend from 50 cents to 5 cents - a 90% reduction in dividend income. I also noted change in investing portfolio as players had to make the difficult decision to abandon the safehaven of CDs and money-market funds to  generate some level of spendable income. Credit card issuer American Express Co posted a 76% drop in first-quarter profit as it sets aside US$2.6 billion to cover potential losses.

If history repeats itself and if you believed that US stock market closely tracking the 2008 cycle, the divergence that we see now, is not justifiable because S&P 500 has fallen by much less than it did despite expectations for this to be a far more damaging recession. Unprecedented government spending has helped boost sentiment on Wall Street in particular, it is unlikely to accomplish its goal of keeping most workers tied to Main Street. Total number of filings for unemployment benefit rose to more than 26 million in just the past five weeks and US is far more reliant on the services sector, which provides 80% of American jobs.

A study by Bank of America on VIX (stock market's volatility gauge and a proxy for investor anxiety) showed that volatility markets are “under-pricing the risk of a secondary market shock," based on behaviour of 1987, 2002 and 2008 respectively. They predict the S&P will top out at around 2,960, about 160 points above its current level before falling through the 23rd March low in the coming weeks. This market’s condition is known as “leptokurtosis” in statistical term.

If one to expect intervention and support from central banks, Japan has proved just how laughable the idea that central banks can support markets with a record amount of ETF then. Over the next two weeks after initial support, Nikkei 225 dropped a little over 30% in March. This is because central bank is not a market, but it often pretends it can be.

Further deterioration in China-US relations is likely. It could negatively impact the prospects for global trade between the world’s two largest economies. Blaming game on virus origination got intensified in an election year. Hard-line lawmakers in Congress are pushing punitive legislation against Beijing. China’s commitment to honour the purchase US$200 billion of US products remains highly uncertain, more so after its 1Q real GDP plunged 6.8%. The US$200 billion purchases are on top of the amounts that China imported of about US$170 billion in 2017. Under the deal, China is supposedly to buy US$18.5 billion more in US energy products in the first year and another US$33.9 billion in the second year. Risk of military miscalculation increases as well. China and US are flexing military muscles in both South China Sea territorial dispute as well as Miyako Straits.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com