According to a research report, the central bank governor's statement that foreign exchange reserves will continue to increase their asset allocation proportion in Hong Kong has driven a second consecutive week of significant gains for Hong Kong stocks. While the proportion of outstanding short positions to market capitalization in the Hong Kong market has slightly retreated from its mid-June peak to 2.43%, it remains near a level more than three standard deviations above the historical average. As both internal and external disruptive factors gradually ease, a substantial decline is anticipated. However, signs of pair trading have also been quite evident in the Hong Kong market recently. In the short term, it is advisable to focus on sectors with high fundamental certainty and event-driven catalysts, including innovative pharmaceuticals, aviation, robotics, and industrial metals. In the US stock market this week, momentum trading around the AI theme has notably returned. The stock price increase following SK Hynix's US listing confirms sustained enthusiasm for the AI hardware supply chain. Meta's expansion of data centers and Amazon's bond issuance to raise funds demonstrate the resilience of capital expenditure among tech giants, effectively alleviating market concerns about a slowdown in AI investment. It is expected that US stocks will maintain a volatile upward trajectory. Recommendations include focusing on the software, defense, energy infrastructure, and financial sectors. The main viewpoints are as follows:
Foreign Exchange Reserves to Increase Asset Allocation in Hong Kong
According to the central bank's official website, on July 7th, the People's Bank of China, the Hong Kong Monetary Authority, and the Securities and Futures Commission of Hong Kong jointly announced 11 new measures to further deepen cooperation between the financial markets of Hong Kong and the mainland. These measures aim to improve the development of Hong Kong's fixed income and money markets and support arrangements for Hong Kong's offshore renminbi hub. During his speech, the Governor of the People's Bank of China stated that the central bank will cooperate with the Hong Kong local government and financial regulatory bodies to build, consolidate, and develop Hong Kong's financial center. In his address, he mentioned that the national foreign exchange reserves will continue to increase their asset allocation proportion in Hong Kong, injecting more momentum into the development of Hong Kong's capital markets. This statement was first made by the Governor at the 18th Asian Financial Forum in 2025, after which Hong Kong stocks experienced a second round of gains following September 24th, with the Hang Seng Index rising nearly 30% within 45 trading days. According to the annual report of the State Administration of Foreign Exchange, the currency structure of China's foreign exchange reserves exhibits higher diversification and dispersion compared to the global average. In terms of yield, the average return on China's foreign exchange reserve investments from 2010 to 2019 reached 3.2%. In the Hong Kong stock market, the TTM dividend yield of the Hang Seng High Dividend Yield Index is currently as high as 6.0%, demonstrating a clear and strong income advantage.
Short Squeeze and Pair Trading Coexist in Hong Kong Market
Over the past two weeks, the sectors leading gains in Hong Kong have primarily been those with the highest proportion of outstanding short positions to market capitalization, such as healthcare (4.07%), consumer discretionary (3.03%), and technology (2.83%). Overall, while the proportion of outstanding short positions to market capitalization in the Hong Kong market has slightly retreated from its mid-June peak to 2.43%, it remains near a level more than three standard deviations above the historical average. As both internal and external disruptive factors gradually ease, a substantial decline is anticipated. However, since the overall rebound in Hong Kong stocks on June 29th, the A/H premium index has widened by 2.1%. In particular, the premium rates for H-shares that previously traded at a premium have noticeably narrowed recently, including stocks such as Montage Technology, GigaDevice Semiconductor, and Contemporary Amperex Technology. Coupled with signs of renminbi appreciation re-emerging in the last two trading days and continued outflows from southbound ETFs (cumulative outflows of 125.6 billion yuan since March 5th), this also indicates the influence of pair trading on H-shares. In the short term, it is still advisable to focus on sectors with high fundamental certainty and event-driven catalysts, including: 1) Innovative pharmaceuticals (resilient performance + share buyback support + overseas business development); 2) Aviation (peak travel season + declining oil prices); 3) Robotics (catalyst from Optimus's expected mass production); 4) Industrial metals (high earnings growth + receding interest rate hike expectations).
AI Momentum Trading Revives in US Stocks This Week
This week, momentum trading around the AI computing power theme became active again in the US stock market, with a simultaneous increase in market risk appetite. The information technology, energy, and communication services sectors led the gains, with the Philadelphia Semiconductor Index rising 2.7%. SK Hynix's US ADR closed up 12.8% on its first day of trading, with oversubscription and strong performance providing solid evidence for the continuation of AI momentum trading. In early July, Meta signaled the sale of some excess computing power, sparking market concerns about a slowdown in capital expenditure by tech giants and significantly amplifying volatility in the semiconductor sector. However, market sentiment has recently reversed again. Meta announced a 13 billion Canadian dollar investment to build a new data center in Canada, sending a strong signal that capital expenditure willingness is increasing rather than decreasing. Meanwhile, Amazon submitted a dollar bond issuance filing to the SEC this week, initiating bond issuances across eight maturities. According to media reports, the total size of Amazon's bond issuance is approximately $25 billion. Although there are short-term disagreements in the market regarding the sustainability of AI capital expenditure, the actual actions of leading companies have not turned conservative. The narrative of the computing power arms race still holds, serving as a key fundamental basis supporting the continuation of this round of momentum trading. With the US stock market's AI hardware chain and cloud computing capital expenditure themes mutually reinforcing, previous concerns may gradually dissipate, and the characteristics of momentum trading are expected to persist. As of July 10th, the forward P/E ratios of the S&P 500 (20.4x) and the Nasdaq 100 (23.3x) expanded by 0.9 and 2.4 percentage points respectively compared to the previous week but remain at relatively low levels compared to the June 2nd highs. Simultaneously, the year-end earnings growth forecasts for the Nasdaq 100 and the "MAG8" were revised upward again by 0.36 and 0.08 percentage points, respectively, compared to the previous week. Considering the current valuation levels and the ongoing trend of earnings revisions upward, it is judged that US stocks will maintain a volatile upward pattern in the short term. Recommendations include focusing on: 1) The software industry, which may see further capital inflows; 2) The defense sector, with high demand certainty amid prolonged geopolitical risks; 3) Energy infrastructure benefiting from data center construction and electrification transformation; 4) The financial sector (banks and Fintech) driven by both capital returns and regulatory improvements.
Key Risk Factors to Consider
Risk factors include: renewed escalation of global geopolitical conflicts; deterioration of Sino-US relations; global central banks tightening monetary policy beyond expectations; domestic economic recovery and policy implementation falling short of expectations; slower-than-expected progress in AI commercialization; actual US corporate earnings falling short of expectations, with forecast data potentially containing deviations.
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