The Hong Kong Monetary Authority (HKMA) has indicated they will follow The Federal Reserve’s interest rate policy. Their relationship started back in 1983 and has continued since. Hong Kong’s exchange rate policy is also linked to the US, or roughly $1 USD to $7.75 HKD.
Consequently, the Hong Kong market is very much interwoven within the monetary policy of the United States. A forward looking indicator for both markets can be interest rate related derivatives. The Fed Funds futures market has rallied significantly into the Fed’s next meeting, but key variables like the USA’s employment numbers are due out prior to the Dec 15-16th meeting. The Federal Reserve has indicated that they intend to start raising rates, but this is always data dependent on key variables that relate to their mandate, unemployment and inflation. According to market prices, there is currently a 43% chance the Fed will hike in December.
Hong Kong has also been active with their monetary policy. The HKMA has been operating quite often in the FX market to help boost stock prices and spark more economic activity. Due to recent volatility however, open market operations have been challenging. The HKMA has reportedly lost, “$63.8B HK (or $8.2B USD), representing 1.9% of total assets, on its investments in the three months to September 30, 2015,” according to the Financial Times (FT). The FT gave further context; these recent operations come close to the size of losses experienced during the financial crisis.
Given the only precedence of recent events was during the great financial crisis, it is important to explore funding, liquidity, and lending options for market orientated businesses and professional investors. There plenty of institutions that provide liquidity to clients, but most liquidity options do not give upside to investors. Given recent volatility in the market, selloffs can be retraced in days or hours. A cash injection simply does not provide the upside protection that traditional loans or position sales give up. Squadron Lending, however, provides upside to clients with stock-based loans.
When clients enter a share lending transaction with Squadron, they still have the ability to remain invested in their securities, giving them the upside to earn more than the coast of the loan in some cases. The 1-yr bond in Hong Kong is currently yielding roughly 0.7%. Considering interest rates are at historic lows and are likely moving higher, locking in financing now is a wise trade. This also means that the break even for share lending transactions is also at historic lows.
