The recent focus in China's capital market has been on two topics: the renminbi exchange rate and the non-ferrous metals market. The recent strong year-end performance of non-ferrous metals, represented by copper and aluminum, is primarily driven by the pricing of key strategic resource security and unexpectedly loose monetary policy from the United States. The essence of the non-ferrous metals rally is pricing the transition between the old and new global orders; therefore, copper is destined to take over from gold and silver, and the copper rally is not yet over. $13,000 is not the ultimate peak for copper prices in this cycle, and we are optimistic about the risk-reward profile for copper prices in 2026. Being bullish on renminbi appreciation does not equate to anticipating a rapid breach of the 7.0 level for the onshore listed price in 2026, followed by a swift move towards 6.8 or 6.6. The core of being bullish on renminbi appreciation is anticipating the return of capital held overseas to the domestic market, sparking a revaluation of renminbi-denominated assets. It is foreseeable that future peaks in foreign exchange settlement will be accompanied by discussions about renminbi appreciation and signs of liquidity pricing for domestic assets. However, regarding the onshore listed price itself, the renminbi exchange rate is expected to remain stable in the short term. Focus for next week: China's December financial data; US December inflation data.
Review of global major asset performance this week: Chinese A-shares started the year with gains, while H-shares experienced a minor adjustment. Equity markets performed strongly at the beginning of the year, while the bond market saw a pullback. Renewed geopolitical risks provided a boost to both gold and crude oil markets. I. Chinese Stock Markets: A-shares started strong, H-shares adjusted slightly. Review of Chinese AH-shares this week. A-shares: The market started 2026 on a positive note, with the Shanghai Composite Index surpassing 4100 points, hitting a fresh 10-year high, and the STAR 50 Index surging nearly 10%. Among China Securities primary industries, most sectors advanced, led by National Defense Military, Media, Non-ferrous Metals, and Computers; only the Banking and Transportation sectors declined. H-shares: Hong Kong stocks experienced a slight adjustment this week, but with significant sector divergence. The Pharmaceuticals, Technology, and Non-ferrous Metals sectors performed relatively well, accompanied by sustained substantial inflows of southbound capital. The AI theme regained momentum, the pharmaceutical sector rebounded strongly on multiple positive catalysts, and the non-ferrous metals sector was primarily lifted by rising commodity prices. Outlook for Chinese Stock Markets. A-shares. Current market risk appetite continues to improve, and the "Spring躁动" rally is expected to persist. Future market movements warrant close monitoring of trading volume trends, with a focus on three key directions: the technology growth theme (AI industry chain), sectors benefiting from synchronized domestic and international demand recovery (e.g., new energy), and non-ferrous metals. H-shares. In the short term, expectations for loose liquidity may lead to a recovery in the Hong Kong market. From a medium-to-long-term perspective, abundant liquidity in Hong Kong, continuous southbound capital inflows, and the ongoing Fed rate cut cycle provide support for both Hong Kong's capital flows and valuations. Sectors with strong underlying industrial logic merit continued attention. II. Chinese Bond Market: Bonds pulled back this week. Bond Market Review this week. The bond market experienced a pullback, with rates initially rising then falling during the week. Stronger A-share performance in the first half of the week, the stock-bond跷跷板 effect, and pressure from new bond supply led to the correction. The 10-year government bond yield briefly broke above 1.9%, and the 30-year yield surpassed 2.33%. After the equity market cooled, bond market sentiment recovered somewhat, with the ultra-long end returning to 2.3%. This week, the 2-year government bond yield rose 7.25 bps to 1.43%, the 10-year yield increased 3.6 bps to 1.89%, and the 30-year yield climbed 3.8 bps to 2.3%. Bond Market Outlook. Bond market sentiment remains weak, pressured by strong equity performance and supply shocks. A cautious approach is advised for short-term operations. III. Overseas Rates and FX: USD weakened, US Treasury yields edged higher. Review of overseas rate and FX assets this week. This week, the 2-year, 10-year, and 30-year US Treasury yields rose by 9 bps, 4 bps, and 1 bp to 3.54%, 4.18%, and 4.82% respectively. The US December unemployment rate fell by 0.2 percentage points month-on-month, contributing to the yield increase. US Treasury yields moved higher this week. The US ISM Manufacturing PMI missed expectations, while the Non-Manufacturing PMI exceeded forecasts. The unemployment rate within the non-farm payrolls data declined noticeably, indicating overall resilient economic data that pushed yields upward. Japanese government bond yields generally edged higher. The Bank of Japan Governor stated that interest rates would continue to be raised if the economic outlook is realized. A decline in the bid-to-cover ratio at a 30-year JGB auction subsequently pushed yields to new highs. German bond yields saw a slight decline. The year-on-year Harmonised Index of Consumer Prices growth rate dropped to 2.0% in December from 2.6% in November, cooling more than expected. Concurrently, geopolitical uncertainty surrounding the Greenland scenario dampened market expectations for ECB rate hikes. UK gilt yields also fell slightly, primarily influenced by the larger-than-expected drop in German inflation. Markets anticipate UK inflation will decline in the coming months, increasing the likelihood of further Bank of England rate cuts. The US Dollar Index rose 0.69% this week to 99.14. The Japanese Yen depreciated 0.69% against the USD, and the Euro fell 0.77% against the USD. Resilient US economic data coupled with rising geopolitical risks contributed to a slight strengthening of the dollar. Outlook for Overseas Rates and FX. Key focuses for next week include a speech by NY Fed President Williams, US December CPI (Tuesday), US December PPI (Wednesday), and the US January Markit Manufacturing PMI (Thursday). While December's non-farm payrolls were largely in line with expectations, the December CPI data will be the market's primary focus. This week's US data, featuring a weaker-than-expected ISM Manufacturing PMI, a stronger Non-Manufacturing PMI, and a notable drop in the unemployment rate, points to continued economic resilience, further suggesting a tendency towards a soft landing for the US economy. Short-term inflation risks appear manageable, with employment being the primary concern; the trend towards rate cuts remains unchanged. Trump has begun rolling back previous tariff policies, while developments in Venezuela and Ukraine continue to pressure oil prices, suggesting potential relief for commodity-driven inflation pressures. The US consumer staples sector has shown a clear downward trend since August, reflecting slowing employment and income growth for the general populace; high-frequency withholding tax data also appears relatively weak. The main risk to the US economy currently lies in employment, hence trading based on expectations of rate cuts remains the overarching trend. From a medium-to-long-term perspective, markets are increasingly focusing on the possibility of an economic recovery in the near future, suggesting limited room for US Treasury yields to decline significantly from current levels. Recent Trump policies have shown a tendency to shift from "Mega" right-wing towards populist left-wing measures, such as the Department of Justice launching an antitrust investigation into the meatpacking industry to lower prices; Trump criticizing the health insurance industry and planning to redirect Obamacare subsidies from insurers directly to voters; the White House proposing 50-year mortgages; and offering a $2,000 tax rebate to families earning under $100,000. This may indicate that, aiming for the midterm elections, Trump's policies will focus more on boosting income for lower-tier residents, which is a key area of weakness in the current US economy. Furthermore, tax cuts from the large "Big and Beautiful" bill are expected to begin in early 2026, alongside increased tax refunds at the start of the year, potentially leading to a recovery in household income. IV. Commodities: Commodities showed strong performance. Commodity Review this week: Renewed geopolitical risks benefited both gold and crude oil markets, while copper prices remained strong underpinned by global inventory reallocation logic. Firstly, gold prices successfully broke through the $4,500/oz barrier. Although the latest non-farm payrolls haven't shown a "deceleration," structural weakness in employment, sticky wages, and low labor force participation contribute to underlying "stagflationary" concerns. Secondly, copper prices broke above $13,000. The structural imbalance in global copper inventories remains the primary logic supporting current copper price performance. Thirdly, driven by both rising geopolitical risks and a larger-than-expected drop in inventory data, the crude oil market also showed a significant rebound. Global Commodity Outlook: Gold: Next week's market focus will shift to the US December CPI inflation data and retail sales report. If inflation data cools more than expected, it would further strengthen rate cut expectations, providing upward momentum for gold. Copper: After reaching historical highs, copper prices have entered a phase of technical correction. Short-term pressures include profit-taking and weak immediate fundamentals, but structural demand continues to provide strong underlying support. Crude Oil: The current rise in oil prices is mainly driven by geopolitical risk premium rather than fundamental improvement. Although declining US crude inventories offer short-term support, the global daily supply surplus limits long-term price upside. V. Policy and Economic Data: Anti-internal competition measures continue in光伏, batteries, and food delivery platforms. Policy Review: Anti-internal competition initiatives continue to advance in the光伏, battery, and food delivery platform service industries. The 2026 People's Bank of China Work Conference was held. It emphasized the continued implementation of appropriately accommodative monetary policy. Key considerations for monetary policy include promoting high-quality economic development and a reasonable rebound in price levels. The PBOC will flexibly and efficiently utilize various monetary policy tools such as RRR and interest rate cuts, maintain ample liquidity, keep overall social financing conditions relatively accommodative, guide reasonable growth in financial aggregates and balanced credit allocation, ensuring that growth in total social financing and money supply aligns with economic growth and price level targets. It aims to promote low comprehensive financing costs for the society. The Ministry of Finance and the State Taxation Administration announced the cancellation of VAT export tax rebates for products like光伏, effective April 1st. From April 1st to December 31st, the VAT export tax rebate rate for battery products will be reduced from 9% to 6%; starting January 1st, 2027, VAT export tax rebates for battery products will be cancelled. The State Council Anti-Monopoly and Anti-Unfair Competition Committee Office, pursuant to the Anti-Monopoly Law of the People's Republic of China, is conducting an investigation and assessment of the competitive landscape in the food delivery platform service industry. Future Policy and Domestic Economic Data Outlook: Both December CPI and PPI increased by 0.2% month-on-month, performing better than expected. Besides internationally priced non-ferrous metals, prices for domestically driven items like durable consumer goods, industrial products such as coal, lithium batteries, cement, and new energy vehicles also generally improved, indicating some success from anti-internal competition measures. Since the start of the year, anti-internal competition measures have continued in the光伏, battery, and food delivery platform service industries. Monetary policy continues to emphasize these efforts. Exiting deflation is expected to be a key policy focus and main theme for the year.
The sustainability of the consumption recovery remains uncertain. Consumer spending has begun to recover this year but has not yet returned to pre-pandemic normalized growth rates. Whether this recovery and improvement can be sustained requires close monitoring. If consumption weakens again, the momentum for economic recovery would significantly diminish. Whether the real estate sector can continue its improvement is also uncertain. This downcycle in property has persisted for a considerable time. While there are signs of a brief warming trend, many indicators remain in negative growth territory. Observing whether this warming trend can be maintained is necessary. The impact of tightening monetary policies in Europe and the US might exceed expectations, potentially dragging on global economic growth and asset price performance. Geopolitical conflicts remain a source of uncertainty, disturbing global growth prospects and market risk appetite.
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