Macroeconomic Overview
Important Events
1. Construction of the Yarlung Zangbo River Hydropower Project Commenced (July 19)
- Premier Li Qiang attended the ceremony. Expectations of infrastructure investment stimulus generated by the Yarlung Zangbo River Hydropower Project and price increases stemming from the earlier announcement of anti-involutionary policies fueled a rally in the A-share market this week, while the bond market saw some decline.
Economic Fundamentals
1. Industrial Enterprise Profits (January-June):
- Total profits of industrial enterprises above a designated size nationwide decreased by 1.8% year-on-year.
- The equipment manufacturing industry saw rapid growth in revenue and profits, providing significant support, while mining-related industries saw a significant decline.
- Profits of industrial enterprises above designated size were positive year-on-year from January to April, turning negative in May and June. However, the decline in June narrowed compared to May, potentially indicating a marginal improvement in profits.
2. Federal Reserve Developments:
- Trump's rare visit to the Federal Reserve building has sparked market concerns about the Fed's independence.
- With the Fed's July meeting approaching, the market is divided on the path of interest rate cuts this year.
Major Asset Class Strategies
1.Interest Rate Bond Market Analysis
Performance: The interest rate bond market retreated across the board last week, with long-term interest rates under significant pressure.
- The 10-year Treasury bond yield rose from 1.66% to 1.73%, a 7 basis point weekly increase, breaking through the upper limit of its April range and exhibiting a "bearish steepness" trend.
The pullback stems from a triple resonance:
- Anti-involutionary policies are driving up commodity prices, which in turn trigger inflation expectations; the stock-bond seesaw effect is exacerbating the suppression of risk appetite; and compounded by liquidity fluctuations.
- This is essentially an overshoot of sentiment driven by policy narratives. A subsequent correction may be triggered by weak fundamentals, particularly insufficient demand-side expectations.
Key Points to Watch for Next Week:
- Continue to monitor liquidity fluctuations, equity market performance, and news headlines.
- Expectations for anti-involutionary policies continue to ferment, but their impact on inflation and production remains to be seen.
- The central bank maintains a protective attitude, maintaining a balanced liquidity situation. Coupled with the third-quarter interest rate cuts by insurance institutions and the improved value-for-money ratio in the bond market, insurance companies and banks have recently continued to invest in the market. Further upward potential for yields may be limited.
- Equity and bond market linkages:
If the stock market continues to rise, it may significantly disrupt bond market liquidity.
If the stock market slows down, it may provide opportunities for a turnaround and recovery in the bond market.
2. Credit Bond Market Analysis
Domestic Credit Bonds:
- Yields showed a trend of correction this week. Influenced by anti-involutionary measures, supply-side reforms, and the Yajiang hydropower development, stock market and commodity sentiment remained positive. Rising risk appetite suppressed bond market sentiment, leading to some redemptions from bond funds.
- Primary Market: Issuance rates were generally at or slightly above valuation, but overall trading activity declined significantly.
Offshore Credit Bonds:
- Following the expansion of the Southbound Connect, institutional funds gradually entered the market. Strongly guaranteed Chinese offshore bonds attracted significant attention this week, with AAA-guaranteed bonds exceeding their coupon rates by multiples. However, due to regulatory concerns, issuance activity cooled this week.
- Secondary Market: High-grade bonds saw increased interest, but overall trading sentiment in high-yield bonds remained weak.
3. A-Share and Hong Kong Stock Market Analysis
A-Shares:
- The Shanghai Composite Index rose 1.08% to 3,572.61 points;
- Driving factors: Accelerated restructuring of central SOEs and increased consumer stimulus policies;
- Average daily trading volume was 1.72-1.93 trillion yuan, with the central axis higher than last week's 1.46-1.64 trillion yuan.
Hong Kong Stocks:
- The Hang Seng Index rose 1.14%, with Hang Seng Tech shares rising 2.59%;
- Driving factors: Expectations of the expansion of the Hong Kong-Shanghai Stock Connect, the launch of the digital RMB cross-border payment pilot program, Tencent's Hunyuan Large Model's national registration, and breakthroughs in semiconductor equipment import substitution.
4. Convertible Bond Market Analysis
Convertible bond prices continued to rise this week, and valuations also saw a slight increase. The median convertible bond price was 129.33 (127.03 last week), and the median YTM was -3.95%, both at extreme levels since 2015.
Currently, there's a certain level of excitement surrounding convertible bonds, and the YTM is no longer providing effective protection. However, given the extremely abundant liquidity, small- and micro-cap stocks and convertible bonds maintain strong upward momentum.
Product Trading Plan: While maintaining a certain position size, prioritize taking profits on inflated stocks and increasing positions in stocks that still offer value.
5. Commodity Market Analysis
Last Week Review: Continuing the policy-driven trend, risk sentiment recovered in the short term, boosted by easing Sino-US trade tensions and domestic policy support.
This Week's Forecast: Amidst a flurry of macroeconomic events, market risk aversion is returning, and sector performance is expected to diverge.
Overseas:
- Trade Situation: The United States reached tariff agreements with Indonesia, the Philippines, Japan, and other countries, temporarily easing global trade tensions.
The United States and China will begin their third round of trade negotiations, but the EU has adopted a €93 billion retaliatory tariff package against the United States, leaving trade policy uncertainties.
- Specific Commodities: Gold and silver prices surged, then retreated, fluctuating. Crude oil prices fluctuated at high levels, potentially dampening demand due to trade frictions. Further attention will be paid to the specific pace of OPEC+'s September production increase and market dynamics.
Domestic:
- Policy-driven: The intensive implementation of "anti-involutionary" policies has driven a rapid recovery in industrial product prices, leading to a significant rebound in the futures market.
- Performance of the ferrous metals sector: Particularly strong, benefiting from the combined effects of strengthened policy expectations, cost support (e.g., coking coal), and warehouse receipt scarcity.
- Risk Warning: The sustainability of policy effectiveness remains to be seen. Large price fluctuations may dampen companies' production appetite and disrupt the supply-demand rhythm.
6.Analysis of Overseas Asset Markets
Market Characteristics: US Treasuries appear to have returned to a "junk market" period.
- Long-term US Treasuries fluctuated primarily along two main lines: fiscal issues in Germany and France, namely, budgets and deficits; and data fluctuations related to US employment and inflation.
Pricing Logic for Different Maturities:
- 10-Year US Treasury: Pricing is based more on fundamentals. Currently, tariff easing is leading to a shift in economic fundamentals, which is positive for economic fundamentals.
- 30-Year US Treasury: Pricing is based more on fundamentals. The Fed's independence and confidence crisis, coupled with the consistent steepening of the ultra-long interest rate curve across various countries, are driven by fiscal issues related to budgets and deficits. We expect long-term US Treasury bonds to continue fluctuating around these two key trends, and we need to patiently await the direction.
Overall: Investor risk appetite has moderately improved, but market trading in response to the "anti-involution" policy has become overheated, leading to potential corrections in commodity and stock markets in the short term. Short-term price correction opportunities will also emerge.
The content of this article represents only the analytical views of our investment research team and does not represent the authoritative views of any institution. The data and information herein do not constitute investment advice and are for reference only.
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