Macro-environmental analysis

Domestic: Prices bottomed out, demand to be boosted

-CPI : In June, the year-on-year growth was +0.1%, turning from negative to positive, and the month-on-month decline was -0.1%, with the decline narrowing compared with the previous month. The overall performance was slightly better than the market expectations, which may be affected by the dislocation of the "618 sales promotion".

-PPI : -3.6% year-on-year, down 0.3 percentage points from the previous month, -0.4% month-on-month, the same as the previous value, and the industrial deflationary pressure has not been substantially alleviated.

-Core situation: Price signals continue to "bottom out + structural differentiation", there are signs of marginal contraction on the supply side, but the momentum of domestic demand is still insufficient, and the pace of policy transmission remains to be seen.

- Policy impact: The "anti-involution" policy has generated positive expectations for overcapacity industries such as photovoltaics, steel, and cement, and is expected to support prices in stages. However , as the recovery in total demand remains fragile, the sustainability of the price recovery remains uncertain .

- Outlook: The July Politburo meeting is expected to reiterate the direction of stable growth. Paying attention to its policy deployment in terms of fiscal rhythm, boosting domestic demand and supporting real estate may become a key window for observing the rhythm of endogenous momentum recovery in the second half of the year.

Overseas: Tariffs are re-imposed, and the probability of redemption increases

-Trump launched a new round of trade pressure as the previous tariff exemptions were about to expire.

-Core changes: Since the extension period, the EU, Canada, Mexico, Japan, India and other countries have successively received tariff notification letters, and the tariff rate has been raised to 30% -35 % , which is significantly higher than the previous "Liberation Day" tariff setting.

- Policy background: Different from the combination of "verbal threats + last-minute compromise" in the early stage of the tariff shock in 2018, Trump may be more inclined to "realize checks and balances" in the current context of the surge in the US fiscal deficit and the constraints on the Fed's policies. The current tariff policy has a stronger fiscal function and electoral attributes, and the probability of policy realization has increased marginally.

Investment Tips and Major Asset Class Strategies

1. Interest rate bond market analysis

-Market performance: The interest rate bond market continued to fluctuate and weaken this week, with the yield curve slightly "bearish flat" and the 10-year Treasury bond yield rising slightly.

• Reasons: First, the stock-bond treadmill effect is emerging, the equity market continues to perform strongly, and the rising risk appetite puts pressure on the bond market; second, due to the expected warming of real estate policy, the market is gambling on potential incremental real estate support policies, affecting the sentiment of long bond allocations.

• Funding side: Short-term repurchase rates remain low; with the mid-month tax period approaching, liquidity may be temporarily tightened, which will impose certain constraints on interest-bearing bonds.

-Central bank operations: The central bank may not be in a hurry to introduce new easing policies. In the short term, it may mainly inject liquidity through buy-sell repo, MLF and OMO. However, with tax payments and government bond issuance, mid-month funding fluctuations may increase.

-Institutional dynamics: The scale of wealth management may expand significantly month-on-month in July, and the growth may slow down in the second half of the year; the duration of high-performance funds continues to decline; the central bank may not buy bonds until August at the earliest.

- Overall: The current absolute yields and spreads in the bond market are at a low level in recent years. For the 10-year Treasury bond to break through 1.6%, it will require central bank bond purchases, unexpected interest rate cuts, or a sharp stock market adjustment. The probability of this happening in the short term is low, and volatility is expected to remain.

2. Credit bond market analysis

- Since June 30 , the yield has obviously declined , bringing certain valuation recovery benefits. The credit spread has been relatively small. In the future, it is necessary to closely track the supply and demand relationship of funds and assets to prevent valuation risks after the supply and demand relationship reverses.

- Domestically: Funding interest rates remain at a relatively low level, and funds have a clear preference for coupon carry; in the absence of unexpected events, the trend of credit bonds will still follow the general logic of debt reduction, and the sentiment for allocating medium- and high-yield credit bonds remains strong.

- Overseas: The overall market trading sentiment is hot. There are rumors that the reporting requirements for local state-owned enterprises' new foreign debt quotas may be relaxed. The recent issuance of 364-day bonds has not been formally intervened by regulators. Enterprises have a strong desire to issue new bonds, and it is expected that new issuances will continue in the future.

3. Analysis of A-share and Hong Kong stock market

A-shares

-Continued to fluctuate upward , with a total weekly turnover of 7.48 trillion yuan and a daily average of 1.5 trillion yuan, which was larger than last week. The market trading sentiment warmed up, but some sectors took profits, and the overall market sentiment was still cautious.

-Structural highlights:

• Banking sector: The logic of interest rate spread repair is strengthened, and the market responds positively to the "deposit rate reduction" policy.

• Steel plate: The "production restriction" policy catalyzes the short-term strengthening of the cyclical logic.

• New energy track: CATL's Q2 net profit is expected to increase by 42%, stimulating expectations for innovative growth, and the ChiNext Index has led the gains in recent weeks.

Hong Kong stocks

-The Hang Seng Index rose 0.93% this week, and the Hang Seng Tech Index rose 0.62%.

-Sector performance: The technology stocks and new consumer sectors that led the gains in the previous period showed obvious adjustments, and funds had a strong willingness to take profits.

• Defensive sectors such as telecommunications (dividend yield 5.4%+) and utilities have attracted capital attention, demonstrating their anti-fall properties.

• Technology shareholding: Tencent was boosted by the news of AI filing and received continuous net inflow of southbound funds, while Meituan was under pressure from intensified industry competition.

• Biopharmaceutical sector: Affected by the price reduction policy of medical insurance, there was a significant pullback, and some leading stocks suffered a large decline in a single week.

4. Convertible bond market analysis

- Market performance: The CSI convertible bond index continued to fluctuate and rise , rising 0.76% during the week, setting a new high since June 2015; the market risk appetite has recovered, driving convertible bonds to maintain a strong pattern. The Wind Micro-Cap Index, which represents small-cap stocks, rose 2.68% in the past week, also providing some support for convertible bonds.

-Structure :

• "Anti-involution" has become the focus of the A-share market, driving a rebound in the stock prices of overcapacity industries such as photovoltaics, steel, and cement, and related financial institutions (such as banks that have lowered their expectations for the bad debt risks of these industries) have followed suit.

• Photovoltaic industry: Due to the serious overcapacity and the fact that the industry leaders are all private enterprises, there are also local government tax and employment considerations behind them. Therefore, despite policy promotion, the extent of capacity clearance remains to be seen, and corporate cash flow may take more than one year to return to positive, and the corresponding credit risk of debt conversion has not been eliminated.

- Valuation:

• The median price rose to 125.80, which was higher than last week, and the median YTM fell to -2.92%, indicating that prices continued to rise while the yield space gradually compressed.

• The conversion premium rate is 27.33% and the pure bond premium rate is 18.78%, both at historical lows, reflecting that the market still has a strong pricing preference for "conversion expectations".

- Liquidity: Trading continued to be active, with daily turnover ranging from 68.3 billion to 76.9 billion, similar to last week, and daily turnover of A shares ranging from 1.22 trillion to 1.53 trillion, providing support. The overall funding support was relatively stable, providing a basis for the conversion of bonds to maintain the current valuation level.

- Overall, the current convertible bond market has entered a stage of high valuation and high volatility . Under the interweaving of policy catalysis and capital game, the differentiation of individual bonds is expected to intensify. In the future, more attention needs to be paid to the balance between valuation safety margin and credit risk pricing.

5. Commodity market analysis

- Market performance: Overall, the market showed the characteristics of "policy expectations driving the market + fundamental differentiation", with rising volatility.

- Domestically: The "anti-involution" policy has become the core clue of the domestic commodity market, focusing on industries such as steel, cement, glass, and photovoltaics:

• The expectation of clearing on the supply side has led to a rebound in sentiment for cyclical products, but the actual correction of the mismatch between supply and demand still needs to be verified in the future.

• As policies continue to evolve on issues such as urban renewal, manufacturing investment, and energy transformation , expectations for bottoming out of midstream industrial products and new materials have been strengthened, providing medium-term support for some commodities.

- Overseas: Trump announced that he would impose a 50% import tariff on copper from August, and considered expanding it to key industrial categories such as semiconductors and pharmaceuticals. This led to the fading of the logic of "US copper arbitrage" transactions in overseas markets, and a re-pricing trend in the cross-market price structure of copper varieties.

6. Analysis of US bond and foreign exchange market

-The main cause of volatility in the global interest rate bond market this week did not originate from the United States, but from the upward trend in long-term interest rates caused by fiscal concerns in Japan and Europe.

• Japan: In early trading in the Tokyo market on July 8, the prices of Japan's ultra-long government bonds fell significantly, with the 10-year and 30-year yields rising by 3.68bp and 3.5bp respectively, and the 30-year yield breaking through 3.0%. The main reason was the pre-election fiscal stimulus promises and the expansionary policy expectations proposed by multiple parties, which strengthened debt issuance expectations and the market re-priced Japan's long-term fiscal sustainability.

• UK: Concerns about the fiscal situation have put pressure on stocks and bonds. The fiscal risk premium is spreading from marginal economies to core developed countries, which is reflected in the simultaneous rise in core asset interest rates such as German bonds.

-American debt logic:

• The main reason for the upward trend of US bond yields is external disturbances rather than endogenous economic negatives. The negative impact of the "big and beautiful" fiscal bill has been basically digested by the market. Japan, Europe and other countries are still in a stage of rising policy uncertainty, and US bonds have become the "most certain" allocation direction among interest rate bonds.

• Funding trends: Over the past year, investors have tended to prioritize non-US sovereign assets such as European and British bonds, as the ECB's rate cuts are more certain and the US has yet to start easing its policies. However, at present, signals of a policy shift by the Fed are becoming stronger, overseas fiscal concerns are rising, and the focus of trading is returning to US bonds .

The content of this article only represents the analytical views of the team's investment research personnel, and does not represent the authoritative views of any organization. The data does not constitute any investment advice, and the information in this article does not constitute any investment opinions. It is for readers' reference only.

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