Mass sell-off! Three major variables, sudden attack on the stock market!

The narrative logic behind the stock price rise and liquidity are both indispensable!

Last night, U.S. tech stocks continued to decline. This morning, the A-share market also experienced adjustments. The coal sector that rose yesterday saw a significant drop today, and stocks in the non-ferrous metals sector also collectively declined. The tech sector followed the decline of U.S. stocks and continued downward. The three major indices all weakened.

Jiangsu Securities reporters have identified three major developments:

First, although A-shares rebounded strongly yesterday, the financing balance decreased by 13.9 billion yuan compared to the previous trading day. It can be said that “structural deleveraging” is underway.

Second, last night, the leverage lending index in the U.S. market continued to fall sharply, with a decline exceeding that of the previous day. Since reaching its peak on January 13, this index has been steadily declining, with occasional small rebounds, but the overall trend remains unchanged.

Third, the narrative logic of technology is undergoing significant changes. On one hand, Oracle’s layoffs have made the market realize that AI financing is not as smooth as imagined; on the other hand, the ongoing narrative of AI impacting software companies continues to unfold. This has put considerable pressure on the valuation of the entire AI sector.

Collective Adjustment

This morning, the A-share and Hong Kong markets followed the external market trend and declined collectively. The Shanghai Composite Index initially fell by 1%, the ChiNext Index dropped over 2%, and the Shenzhen Component Index fell nearly 2%. Leading sectors such as precious metals, photovoltaics, semiconductor chips, and power grid equipment saw the largest declines, with nearly 3,500 stocks in Shanghai, Shenzhen, and Beijing falling.

Meanwhile, the three major Hong Kong indices once fell over 1%. The A50 index also saw increased declines. The Korean stock index once plunged over 3%, and the Japanese stock market also dropped nearly 1%.

Two phenomena are particularly noteworthy: spot silver experienced another sharp plunge, with a decline of up to 15%, and spot gold fell over 3%; virtual currency markets declined even more sharply, with Bitcoin briefly dropping below $71,000, a nearly 6% decline. Ethereum also fell more than 6%. The sharp declines in these two asset classes indicate liquidity shocks.

Fundamentally, the rise and fall of stock prices are driven by the ongoing narrative logic and liquidity dynamics. Looking at the A-share market, although overall liquidity remains abundant, as the Spring Festival holiday approaches, leverage ratios are in a phase of downward adjustment. Therefore, despite yesterday’s strong market rally, the financing balance still showed a significant decrease.

Of course, this is also closely related to the narrative logic. On Tuesday, U.S. legal software and publishing stocks plummeted, following the launch of a new AI tool for corporate legal teams by Anthropic. The sell-off in this sector showed no signs of easing on Wednesday. Additionally, recent events such as Oracle’s layoffs and OpenAI’s funding have sparked market doubts: AI financing is not as easy as it seems. The market is beginning to question the AI bubble and the changes it may bring to the industry, leading to a weakening market.

The root cause of the decline ultimately comes down to liquidity. The U.S. leveraged loan index has been declining steadily, reaching its highest point on January 13 before oscillating downward. The recent decline has accelerated, especially from January 27 to 30, during a period of intense selling. Although there was a slight rebound afterward, the decline intensified again last night. This indicator’s decline depicts a process of “deleveraging.”

What’s next?

Previously, overheated market sentiment and excessive liquidity, combined with the Federal Reserve’s hawkish expectations, triggered a rapid collapse of major assets. Short-term risk aversion soared, and in an environment of high uncertainty, a defensive stance is recommended. Moving forward, close monitoring of the U.S. dollar liquidity index and sentiment indicators’ recovery signals is essential.

Guosheng Securities (002670) states that U.S. dollar liquidity has sharply tightened, currently in the warning zone at -60%. With net liquidity shrinking, the Federal Reserve’s expected shift to a hawkish stance last month and the unexpectedly tight signals from the announcement have triggered a -60% “extreme tightening” warning on January 29. Additionally, panic sentiment indicators have worsened significantly, amplifying market volatility. Monitoring global markets (OFR FSI), U.S. markets (Citi RAI), and China’s markets (China Sovereign CDS) shows that recent indicators have all risen sharply, indicating increased market panic and higher investment risks.

Domestically, GF Securities’ research reports suggest that after a month of cross-month liquidity injections totaling 1 trillion yuan in January, the People’s Bank of China’s 7-day OMOs have been net draining for four consecutive days, with net injections resuming on the cross-month day. Overall, liquidity remains stable, with short-term interest rates slightly rising, and the spread between non-bank and bank overnight rates widening significantly. As the month begins, liquidity is expected to loosen spontaneously, with the central bank likely to focus on draining liquidity through operations, especially considering the upcoming Spring Festival (January 17), increased residents’ cash withdrawals, and continued government bond issuance, which may temporarily tighten liquidity. The central bank may conduct 14-day OMO operations to support liquidity. Additionally, about 700 billion yuan of 3-month reverse repurchase agreements will mature, so attention should be paid to rollover scales.

GF Securities also notes that the current global dollar cycle is in a declining phase after reaching its peak, and the renminbi has already cleared out its depreciation and entered a moderate appreciation channel. Coupled with foreign capital inflows and valuation recovery shifting toward profit-driven growth, Chinese equities are in a relatively favorable re-pricing window. However, some analysts warn that if the AI narrative continues to deteriorate and U.S. leverage levels keep declining, the impact on global assets should not be underestimated.

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