Daily Agenda: China Default Rattles Domestic Markets

While earnings season continues to dominate headlines for U.S. and European markets, investors in China are fixated on a bond market default. Baoding Tianwei Group Co., a company owned and operated by state-owned China South Industries Group Corp., defaulted on an interest payment for domestically issued bonds today. The company, which produces power transformers, now has the dubious distinction of being the first Chinese state-owned enterprise to fail to pay creditors, sending a signal that Beijing is willing to allow companies it controls to rise or fall on their own merits. To date, the only recorded defaults in the nation have been private companies, primarily in the so-calledshadow bankingsegment. For investors used to the assurance that creditors belonging to the central government are a safe bet, the prospect of more defaults as key industries struggle withslower growth in Chinais sobering.

希腊银行风险央行截止。今天，来自欧洲央行内部消息人士的媒体报道显示，欧洲央行决策者正在讨论收紧欧洲央行紧急融资渠道的应急措施Greek banks. 数据显示，仅在2月份，希腊银行存款就减少了近82亿美元，因为地中海国家的储户们都在为可能退出19国货币而努力。

西班牙加入负收益俱乐部。在今天的国债拍卖会上，西班牙政府出售了收益率为-0.29%的三个月期国债。这标志着随着欧洲央行债券购买和低通胀的持续推动，西班牙主权债务首次被定价在负区间euro-denominated marketshigher.

Sentiment mixed in Germany.ZEW economic sentiment indexes for April released today registered at weaker than forecast levels. The headline economic expectations index measured in at 53.3 versus 54.8 in March, the first sequential contraction since this past October. Meanwhile, the current situation measure leapt to 70.2 in April from 55.1 the previous month, marking the highest reading since 2011.

Earnings season continues.Verizon Communications registered quarterly earnings well above consensus forecasts at $1.02 per share, versus $0.84 the same period last year. Wilmington, Delaware–basedDuPont Co.,whose executives are currently engaged in a proxy battle with activist hedge fund firmTrian Fund Management,reported net earnings that beat analysts forecast despite dropping significantly from the same period in 2014. The chemical industry giant guided full-year projections lower on concerns over the impact of astrengthening U.S. dollar. Yum! Brands’ first-quarter financials will be released after equity markets close in New York and will be of particular note for investors trying to gauge global consumer discretionary demand.

Portfolio Perspective: China Is Nearer the End Than the Beginning—Sean Darby, Jefferies

China cut the reserve ratio requirement by 1 percent, the biggest such by the People’s Bank of China in its history. The move probably follows the 4.6 percent year-over-year drop in March producer price index readings, as well as drop in food prices, which might have heightened deflation fears. Although there was some slippage in economic data in March, some of the macro numbers, such as weak trade data, can be explained by seasonal effects — a late Chinese New Year — on exports and the impact of lower commodity prices on imports. Moreover, labor market conditions are not weak, so the authorities have not been forced to loosen fiscal policy substantially.

房地产行业仍是拖累经济增长的最大因素，未售出住宅库存同比增长24%。存款准备金率下调可能意味着流动性增加。宽松政策也可能意味着更多的资金流入美国Shanghai-Hong Kong Stock Connect进入香港。随着资本账户的自由化，美国联邦储备委员会（fed）创造的过剩流动性似乎正被来自中国的资金所增强。

投资者are wondering whether there is any precedent for any such change in money-market operations and the effect on asset prices. There are two examples. Firstly, as countries joined the euro and left behind their legacy exchange rates such as the Italian lira and the Irish punt, long bond rates converged. This was a multidecade phenomena and sovereign bond yields converged to those of the Bund. The second example is post the 1997–’98 Asian crisis as central banks broke from their U.S. dollar pegs. After months when money markets were experiencing significant volatility, the money-market rates began to drop as central banks moved away from shadow U.S. pegs to more open market operations. The result was a huge build-up in foreign-exchange reserves from countries such as Thailand and Indonesia.

香港的货币市场可能经历与欧洲相同的过程。从某种意义上说，香港的货币市场已经被中国过剩的流动性所取代。中国的外汇储备和货币供应量是香港的许多倍。从这个意义上说，股票等资产价格的倍数可能远远高于以往的经济周期，这完全取决于两个体系之间的套利能力。最终，在我们看来，内地上市的中国A股和中国公司在香港上市的国际交易H股——以及杰夫里的B股将趋同。

Sean Darby is the chief global equity strategist forJefferies在纽约。