A shift in bond market pricing is anticipated to gradually transition towards government bond supply dynamics and signals from high-level political meetings, with expectations for funding conditions stabilizing. Chinese A-shares are expected to continue their rebalancing between growth and value sectors. There is potential for a loosening in US dollar liquidity, which may present opportunities for Hong Kong stocks and gold.

Internationally, the June US non-farm payrolls report came in significantly below expectations, while the unemployment rate declined. The ISM Manufacturing PMI showed a slight dip. Coupled with dovish commentary from Federal Reserve officials, this did not further fuel market expectations for monetary tightening, leading to a rebound in precious metals. Additionally, within the tech sector, Meta's leasing of surplus computing capacity has raised market questions about the scarcity of such resources, contributing to weakness in global tech hardware stocks.

Domestically, the June manufacturing PMI showed a stronger-than-seasonal rebound to 50.3%. Sub-indices for new orders and new export orders both recovered to above the expansion-contraction threshold, indicating support from export and semiconductor industry chains for production activity. Influenced by global tech sector volatility, the extreme divergence between growth and value styles that had persisted recently has shown signs of convergence.

Market Strategy Overview

Regarding bonds, the yield curve steepened last week. Although substantial net withdrawals by the central bank at the start of the quarter initially raised funding concerns, these worries eased as the central bank shifted to net injections via its 3-month reverse repo operations. However, the central bank may still have requirements for managing government bond yield levels. With the third quarter underway, the primary focus for bond market pricing is expected to gradually shift from funding conditions to the pace of government bond supply and signals from political meetings. The bond market is anticipated to return to a consolidating pattern overall, highlighting the allocation value of high-coupon and long-duration assets.

Perspective on A-Shares

Over the past week, the market has shown signs of style rebalancing, influenced by external sector catalysts and easing expectations for Federal Reserve rate hikes. The market trend since mid-April had become extremely divergent, with multiple indicators for market crowding and structural differentiation reaching historical extremes by early July. Looking ahead, excessive trading heat may not necessarily signal a market peak but rather points to increased volatility and higher risks of pullbacks. It is expected that the extreme sector divergence in the A-share market will likely be followed by a period of rebalancing in the near term. From an industry perspective, as July progresses, attention will turn to earnings pre-announcements, with a focus on potential internal dispersion within the growth sector and structural opportunities in resource-related stocks and brokerages.

Outlook for Hong Kong Stocks

The weakness in Hong Kong stocks in 2026 stemmed from a combination of subdued domestic demand/real estate and tight US dollar liquidity. Subsequent stabilization in Chinese growth and a rise in the inflation trend could benefit Hong Kong stock earnings. However, valuations may still face short-term disturbances from overseas risks. As the phase of acute US dollar liquidity tightening has passed, a relatively more accommodative funding environment is expected to provide support for the Hong Kong market.

Crude Oil Market Analysis

Geopolitical de-escalation presents a short-term headwind for oil prices. However, with supply releases remaining slow and restocking demand providing a floor, the price level is likely to remain higher than it was before the outbreak of US-Iran tensions.

Gold Market Assessment

Gold prices remain under pressure in the short term from tightening liquidity, but this factor appears largely priced in. A potential period of US dollar weakness could provide a catalyst for gold.