CITIC Construction Investment: Trend correction still needs to be confirmed, and it is expected that Hong Kong stocks will be dominated by shocks and bottoming out
The Zhitong Finance App learned that CITIC Construction Investment Securities released a research report saying that after a sharp drop last week, the valuation pressure on Hong Kong stocks has been released in stages: the Hang Seng Technology Index has fallen to a low level of more than two years, and growth stocks have sufficient valuation. The rebound in market volume on Friday also showed that low-level underwriting capital is beginning to be active. High dividend assets such as domestic banks and utilities still have allocation value in an environment with high interest rates, providing bottom support for the index. However, the trend correction still needs to be confirmed. It is expected that the index level will be dominated by shocks and bottoming out, and the dumbbell structure is relatively superior in terms of configuration where dividend defense is at the bottom and where the growth sector stabilizes clearly.
A summary of the performance of major global asset classes last week:
The situation in the Middle East has boosted oil prices, AI capital expenditure and financing concerns have suppressed risk appetite, and most global stock markets have adjusted. A-shares held back and then rose, and the index continued to fall under pressure during the week; Hong Kong stock Hang Seng Technology outperformed the market; US stocks had weak technology weight, which was relatively superior to the small market.
Safe-haven demand is driving back yields on US bonds, German bonds, and Japanese bonds. The domestic bond market has relaxed capital, but the ultra-long-term performance is weak.
On the commodity side, crude oil rose, and gold recovered clearly due to austerity expectations and deleveraging; copper prices fell slightly; the US dollar fluctuated overall, and the RMB and yen were relatively strong.
1. China Stock Market: Simultaneous adjustment of AH shares
Last week's review of China's AH shares: A-shares bottomed out and rebounded, and Hong Kong stock Hang Seng Technology outperformed the market.
A-shares: Last week, A-shares as a whole showed a V-shaped trend of suppressing growth and then bottoming out. There was a marked differentiation between large and small market styles, and transactions showed distinct characteristics of low and high back. The index continued to fall under pressure during the week, and the GEM index hit new lows one after another. The concentrated entry of bottom-breaking capital on Friday drove an overall rebound, and the growth track ushered in a concentrated recovery. The small and medium capitalization index bucked the trend last week, and the market growth weight performance was relatively weak. At the industry level, the computer, machinery and automobile sectors led the way, while the coal, communications, power equipment and new energy sectors led the decline.
H shares: The Hang Seng Index fluctuated in a narrow range last week, and the Hang Seng Technology Index clearly outperformed the market. The trend of Hong Kong stocks is mainly affected by a combination of three factors: rising expectations of overseas interest rate hikes, high interest rates on US bonds suppressing valuations, the geographical situation in the Middle East and risk aversion brought about by high oil prices, and domestic CPI and PPI showing a weak recovery in domestic demand in September. The industry level shows the characteristics of capital growth from overvalued technology to undervalued blue chips and defense sectors. Non-essential consumption, finance, and utilities are leading the way, and growth sectors such as semiconductors, AI hardware, and pharmaceuticals are clearly under pressure.
China Stock Market Outlook: Short-term overfall recovery window opens.
A shares: After the concentrated release of panic selling pressure on Friday, the short-term overfall repair window officially opened. The current policy underpinning the signal is clear, and there is limited room for the index to decline further. However, this round of rebound is still a technical correction rather than a trend reversal. Subsequent verification is needed to confirm the sustainability of the volume and the pace of the three-quarter results. Overseas liquidity disturbances still exist, and the bottoming process may still be repeated. Structurally, technological growth flexibility prevails.
Hong Kong stocks: Looking further, after a sharp decline last week, the valuation pressure on Hong Kong stocks has been released in stages: the Hang Seng Technology Index fell back to a low level of more than two years, and growth stocks lost sufficient valuations. The rebound in market volume on Friday also showed that low-level underwriting capital was beginning to be active. High-dividend assets such as domestic banks and utilities still have allocation value in an environment with high interest rates, providing bottom support for the index. However, the trend correction still needs to be confirmed by two conditions. One is that the pressure on overseas discount rates is substantially relieved. If expectations for interest rate hikes in December fall significantly from above 5%, the valuation flexibility of high-term growth stocks can only be restored; second, the return of southbound capital and the entry of incremental capital have once again formed a synergy. The reversal of southbound resale and ETF outflows last week is a core signal for observing the inflection point of capital. Prior to that, it is expected that the index level will be dominated by shocks and bottoming out, and the dumbbell structure with dividend defense at the bottom and waiting for a clear signal to stabilize the growth sector would be relatively dominant.
2. China's bond market: Liquidity easing continues, and the trend in the ultra-long term is weak.
Last week's bond market review: Last week (10/19-10/23), the long-term side of Chinese debt was mainly disrupted by guidance from the regulatory window, and the ultra-long term was relatively weak.
Short-term interest rates declined slightly throughout the week, and long-term bond yields fell and then rose. The decline in the first half of the week was driven by relatively loose funding and the Financial Street Forum's release of a signal to change the anchor of monetary policy. On the financial side, DR001 continues to operate at around 1.26%; in terms of policy, the Financial Street Forum clearly “explores opportunities to switch the central bank's open market operating period to overnight.” The second half turned upward, with disturbances centered on market expectations for guidance from the regulatory window and the impact of the “equity and debt seesaw”. The weekly 2Y and 10Y treasury bond yields were down 0.7 bps, 0.9 bps, and 30Y up 0.7 bps, respectively, from the previous week.
China debt outlook: China bond odds are really limited.
Recently, funding has continued to be relaxed, and capital interest rates have been operating at a low level, supporting China's debt. However, regulatory restrictions on long-term bond transactions have become apparent. As trading behavior and duration may face restrictions, long-term upward risks rise accordingly. Combined with demand to take profit after the rise in the previous period, and long-term bond yields have been reduced to a low level, the odds are getting thinner, and the continuation of the decline requires new macroeconomic or policy catalysts.
Looking back, the underlying environment of easy capital is still there, but the amplification of equity market fluctuations may cause phased disturbances in the bond market. Follow-up recommendations focus on tax periods and cross-month liquidity, regulatory attitudes towards long-term interest rates, long-term attitudes, and sustainability of equity markets.
3. US stocks: the weight of technology is under pressure, equal weight and small market dominates
US stock review: Major indices of US stocks were divided last week, and adjustments in technology weight coexisted with the relative strength of the non-technology sector.
The S&P 500 fell 0.5%, the Nasdaq Composite Index fell 0.7%, the Dow Jones rose 0.4%, the Russell 2000 rose 2.0%, and the Philadelphia Semiconductor Index fell 3.2%, falling for the third week in a row, with a cumulative decline of 17.9% over three weeks. Weighted indices such as the S&P 500 rose 1.1%, outperforming the market capitalization-weighted index by 1.6 percentage points.
In the sector, artificial intelligence hardware chains and communication services registered the highest declines, while the software, defense, and energy sectors rose. Communications services fell 6.2%, industry fell 1.9%, information technology fell 0.3%, energy rose 1.5%, healthcare rose 1.5%, and software sector ETFs rose 5.99%. Meta fell 9.40% throughout the week. The company raised its annual capital expenditure floor and disclosed future spending promises of about $825 billion. Free cash flow turned negative for the first time since listing, and market concerns about large technology companies borrowing to expand capital expenses spilled over to semiconductor equipment, power equipment, optical communications, and emerging cloud service providers. CrowdStrike rose 13.27% throughout the week, and software and cybersecurity stocks rebounded as concerns about artificial intelligence substitution were mitigated and the PHP vulnerability incident. Falling interest rates supported housing and some defense sectors, while rising oil prices supported energy.
US stock outlook: Last week's pullback was accompanied by centralized institutional deleveraging. We expect US stocks to remain volatile in the short term. We expect US stocks to remain volatile in the short term. Regaining upward momentum in US stocks will require more clear signals of easing and stabilizing AI credit risk.
The first focus of attention next week is the financial reports of the three major cloud vendors. The capital expenditure and financing arrangements of the tech giants determine whether AI transactions can be stabilized on the credit side; the second is the interest rate meeting between the Federal Reserve, the European Central Bank, and the Bank of Japan. The interest rate hike window focuses on December. The Federal Reserve's post-meeting guidelines and the US core PCE decide to raise interest rates in December.
4. Overseas interest rates: US bond yields are declining, and the curve is flat
Overseas interest rate review last week: US bond yields declined overall last week, and the curve leveled off.
Risk asset adjustments caused by artificial intelligence capital expenditure, weakening housing demand, and overseas safe-haven demand have jointly supported US debt, and bear compensation has amplified the decline in interest rates. 2-year US Treasury bonds declined 5 basis points to 4.69%, 10-year bonds declined 9 basis points to 5.00%, and 30-year bonds declined 10 basis points to 5.33%. Keeping interest rates unchanged at the October interest rate meeting was still the main expectation of the market, and interest rate hike pricing declined somewhat during the year. On the last trading day, oil prices rose to a high level since late April, and yields rebounded 4 basis points.
Overseas interest rate and exchange rate outlook: We are inclined to suspend interest rate hikes at the October meeting, but the continued decline in the long run still requires growth to match inflation data.
The slowdown in housing demand and the tightening of technology financing are beneficial to US debt performance. At the same time, Brent crude oil rose 6.2% to $116.72 per barrel throughout the week, which means that energy inflation constraints are still in place. Next week, we will focus on the Federal Reserve's trade-off between growth and inflation risks, third-quarter GDP, and September core PCE. If oil prices remain high, the decline in interest rates driven by this round of risk aversion may still be repeated.
5. Commodities: Supply-side constraints and austerity narratives collide once again
Last week's commodity review: the differentiation between gold and crude oil intensified, and “supply-side constraints” collided once again with the “narrative of austerity”
The Middle East conflict has pushed oil prices above 110 US dollars, and high oil prices have in turn suppressed precious metals through inflation expectations. In the window period where interest rate hikes became a new anchor in December and basically confirmed no action in October, commodity differentiation intensified, and continued to be interpreted along the path of “hard supply constraints (crude oil, copper) outperforming, and demand and financial attributes dominated (precious metals, black).
Last week was the week with the strongest retracement of gold during the year. The price of gold fell below the $4,000 integer mark, a new low since July, the worst weekly performance since June. The dominant logic is that the Middle East conflict boosts oil prices, raises sticky expectations of inflation, and strengthens the Federal Reserve's “higher and longer” pricing until the December interest rate hike.
The rise in oil prices last week was driven by the “attack on Saudi facilities and the shipping process in the straits”, rather than actual supply losses. Middle Eastern crude oil exports have returned to more than 90% before the war, and the hard gap in refined oil products (especially diesel) forms a strong bottom support.
The dominant logic of the copper market last week was that LME inventories changed from storage to accumulation. Previously, the bullish logic of “tight supply in non-US regions” loosened, but tight mining on the industrial side (TC maintained a deep negative value and production fell to a low point during the year) held back the bottom of the price, and the decline in copper prices was limited.
Global Commodity Outlook:
Gold: ETF selling pressure has been suspended, and commercial positions on the industrial side have increased, causing differentiation with speculative market retreat. Once interest rate expectations peak, the recovery may be more flexible.
Copper: Short-term price focus or slight decline. Last week, LME inventories increased 48,000 tons in a single week, the strike premium was cleared, and the tariff policy still had no clear conclusion. It will take time to digest; however, hard mining restrictions (TC fell to a new low of -248 US dollars/ton, low production in October during the year) determined that there was limited space below.
Crude oil: The risk premium has risen rapidly, and the win rate has declined in the short term, but until signs of easing the situation appear, there is also limited room for correction.
6. Foreign exchange: The sharp rise in oil prices has failed to drive the US dollar, and the market is shifting from “inflation trading” to “growth and credit risk trading.”
Foreign exchange review: The biggest characteristic of foreign exchange last week was that oil prices rose markedly, but the US dollar did not strengthen at the same time.
The US dollar index basically settled at around 101.8. It once rushed to 102.1 during the week, then fell back to a low of around 101.5. At the beginning of the week, the price of oil was still around 108 US dollars. The situation in the Middle East escalated again in the second half of the week. Oil oil rose to 116.7 US dollars on Friday, a record high of nearly half a year. According to previous logic, high oil prices should drive up inflation, expectations of the Fed's interest rate hike, and the US dollar, but this chain weakened markedly last week.
The core reason is that the market is beginning to simultaneously trade the two opposing forces of “oil price inflation” and “AI financing pressure.” The capital expenditure and financing needs of technology companies such as Meta have once again raised market concerns about the return on AI investment. Technology stocks plummeted on Thursday, and capital poured into US bonds. Yields once fell by nearly 20 bps in a single day; market expectations for the Fed to continue to raise interest rates at the end of the year also cooled down. As a result, although high oil prices raised the risk of late inflation, they did not continue to push up interest rates on US bonds. As a result, the US dollar lacked the driving force for further breakthroughs in interest spreads. In other words, the market is understanding AI financing pressure as America's own risk of growth and financial conditions, rather than simply “risk-off buying dollars.”
Foreign exchange outlook: Looking ahead to the future market, the US dollar will still fluctuate more in the 101-103 range in the short term, and there are no conditions for a renewed unilateral upward trend for the time being. If high oil prices eventually lead to inflation and re-boost the probability that the Fed will raise interest rates at the end of the year, US bond interest rates and the US dollar may still resonate upward; however, if AI financing and technology capital expenditure concerns continue to depress US bond yields, it may be difficult for the US dollar to break through previous highs even if oil prices remain high. Next week's Fed, ECB, and BOJ meetings will be the new pricing nodes.