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

The narrative logic behind the stock price rise and liquidity are 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 external U.S. market and continued to fall. All three major indices weakened collectively.

According to reporters from China Securities Journal, three major uncertainties are converging:

First, although the A-shares rebounded strongly yesterday, the margin 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 decline, with a drop exceeding that of the previous day. Since reaching its peak on January 13, this index has been steadily falling, 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 led to a significant pressure on valuations across 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 up to 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 again fell over 1%. The A50 index also saw increased declines. The Korean stock index plunged over 3% at one point, and the Japanese stock market also dropped nearly 1%.

Two more notable phenomena are: spot silver plunged again, with a decline of up to 15%, and spot gold fell over 3%; the virtual currency market experienced even larger declines, 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 represent 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, it is observed that despite a large market rally yesterday, the margin financing balance still decreased significantly.

Of course, this is also closely related to the narrative logic. On Tuesday, U.S. legal software and publishing companies’ stocks plummeted after artificial intelligence company Anthropic launched a tool for internal legal teams. 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 bubble in AI 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. leverage loan index has been continuously declining recently, reaching its highest point on January 13 before oscillating downward. The recent decline has intensified, especially from January 27 to January 30, during which the decline was particularly sharp. There was a slight rebound afterward, but last night, the decline deepened again. This indicator 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 this environment of high uncertainty, a defensive stance is recommended. Future monitoring should focus on the recovery signals of the U.S. dollar liquidity index and sentiment indicators.

Guosheng Securities (002670) states that the 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 caused the dollar liquidity index to trigger a -60% “extreme tightening” warning on January 29. Additionally, panic sentiment indicators have significantly worsened, amplifying market volatility. Monitoring global markets (OFR FSI), the U.S. market (Citi RAI), and China’s market (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 during this cross-month period, after the central bank injected a total of 1 trillion yuan of medium- and long-term funds in January, the People’s Bank of China (PBOC) has been net withdrawing funds via 7-day OMOs for four consecutive days, then resumed net injections on the cross-month day. Overall, liquidity remains stable, with a slight upward movement in interest rates, and the spread between non-bank financial institutions and banks’ overnight rates has widened significantly. As the month progresses, liquidity is expected to loosen spontaneously, with the central bank likely to focus on net withdrawals, especially considering the approaching Spring Festival (January 17), increased residents’ cash withdrawals, and continued government bond issuance, which may temporarily tighten liquidity. The central bank may also conduct 14-day reverse repos to support liquidity. Additionally, there are 700 billion yuan of 3-month reverse repos maturing, so attention should be paid to rollover scales.

GF Securities believes that the current global dollar cycle is in a declining phase after reaching its peak, and the renminbi has already gone through devaluation and is entering a moderate appreciation channel. Coupled with the inflow of foreign capital and valuation recovery shifting toward profit-driven growth, Chinese equities are in a relatively favorable re-pricing window. However, some analyses 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.