Goldman Sachs China has released a research report outlining the current market situation. The key points are twofold: first, the technology sector appears overextended, and second, liquidity tightness remains a concern. This includes factors such as the ongoing withdrawal of funds by the domestic central bank, the Bank of Japan's anticipated rate hike next week coupled with the significant size of yen carry trades, the upcoming debut speech by the Federal Reserve's Waller, and the potential for SpaceX's rapid inclusion in indices to divert capital from similar companies.
These liquidity headwinds are well-known and, in a baseline scenario, their impact is considered manageable. For instance, the Bank of Japan's rate hike is largely expected, Waller is unlikely to be more hawkish than anticipated, and SpaceX's fundraising amount is roughly equivalent to less than three weeks of U.S. stock dividends and buybacks. Furthermore, if the Iran deal is indeed reached this Sunday as suggested by Trump, it would serve as a positive "good news" event to stabilize expectations.
Barring unforeseen circumstances, May's inflation figure is likely to be the peak for the year. This implies that the Federal Reserve faces challenges in implementing rate cuts at this stage. However, the market's expectation of a rate hike is considered overly pessimistic. Calculations suggest that sustained oil prices above $120 per barrel would be necessary to create pressure for a hike.
The report's main findings are as follows: Foreign capital saw active outflows of $420 million from Hong Kong stocks (compared to $410 million last week) and $150 million from A-shares (compared to $200 million last week). Passive foreign capital inflows into Hong Kong stocks were $390 million (vs. outflows of $800 million last week), while outflows from A-shares were $15.7 million (vs. outflows of $140 million last week). Emerging market funds experienced the largest outflows.
Southbound flows showed a net inflow of HK$4.25 billion (vs. HK$22.82 billion last week), averaging HK$850 million daily (vs. HK$4.56 billion last week). The largest purchases were in Tencent and Kingboard Holdings, while Alibaba and SMIC saw the most selling.
The week began with continued volatility, including sharp swings in the South Korean market and concerns over high leverage risks. Fortunately, the lower-than-expected U.S. CPI data and renewed easing of tensions with Iran provided relief, leading to a pullback in oil prices and market stabilization. Friday's record SpaceX IPO was met with a mild market reaction.
However, the significant turnover and style rotation seen last Friday, combined with persistent liquidity concerns, have led the market to question whether liquidity tightness will continue to cause turbulence and whether a rotation out of technology stocks is imminent.
The current scenario is characterized by high crowding in technology and ongoing liquidity concerns. These include the domestic central bank's continued fund withdrawals, the Bank of Japan's rate hike next week amid sizable yen carry trades, the Fed's Waller's upcoming speech, and the potential capital diversion from similar firms due to SpaceX's rapid index inclusion.
These liquidity headwinds are well-known. Their impact in a baseline scenario is considered controllable, as the BoJ hike is expected, Waller is unlikely to be overly hawkish, and SpaceX's funding is relatively small compared to U.S. stock payouts. Additionally, a potential Iran deal this Sunday could be a stabilizing "good news" event.
Barring surprises, May's inflation is likely the year's peak, meaning Fed rate cuts are difficult now. Yet, market expectations for a hike are too pessimistic; only sustained $120 oil would create hike pressure.
Nevertheless, the coincidental clustering of multiple events warrants attention for tail risks. The scale of carry trades has returned to July 2024 levels, and the Iran situation could still change. The market is watching Anthropic's ARR growth and token price declines. U.S. AI stock trends typically follow a pattern of two strong quarters followed by one weak quarter, aligning with the current market's wait for new catalysts, alongside the upcoming July-August earnings season.
High crowding does not alter the underlying trend, which is driven by industry fundamentals. However, it can amplify volatility, especially during periods of liquidity stress. Therefore, volatility driven purely by liquidity can help digest high expectations and crowding, offering better re-entry opportunities and representing a healthy correction.
Of course, if the situation evolves towards extreme risk, it is not advisable to rely solely on long-term industry logic to withstand short-term tightening pressure, as seen in the performance of U.S. stocks and gold during the 2022 rate hike cycle.
In terms of strategy, when facing possible but not fully predictable surprises, absolute return investors may consider controlling position sizes, while relative return investors might respond more by "narrowing their focus."
From a rotation perspective, a decline in U.S. Treasury yields could serve as a catalyst for rotation and rebalancing. However, the direction of rotation should follow credit trends—favoring cyclical sectors over consumer sectors, for example. Assets sensitive to the discount rate, such as the Hang Seng Tech Index, could also partially benefit.
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