Following the Federal Reserve's rate hike, markets have entered a period of improved risk appetite, with US Treasury yields having likely reached a cyclical peak, according to a research note from China Securities Co., Ltd.. The firm argues that intense debate over the exact number of future rate hikes is premature and misdirected, given that the Fed has weakened forward guidance and now considers a broader set of variables. Instead, the report suggests the market's true focus should be on the upcoming high-level US-China meeting, which is expected to deliver clarity and further boost market sentiment.
The brokerage leans toward the view that this high-level engagement could release information that significantly improves risk appetite. Consequently, the next one to two quarters may present a particularly favorable window for sentiment-driven market gains, potentially ushering in a friendlier environment for equities.
Last week's global asset performance was shaped by the interplay of oil prices and rate hike expectations, pushing global asset pricing into a defensive stance. Equities showed divergence, interest rates rose, and commodities traded in a mixed fashion. In China, most broad A-share indices recovered, with growth styles clearly outperforming. Hong Kong's benchmark index edged lower, though the Hang Seng Tech index was relatively resilient. US equities were mixed, with the S&P 500 roughly flat while tech outperformed. In bond markets, Chinese yields slipped slightly, while US Treasuries experienced a bearish flattening driven by the Fed's hike and inflation expectations, with the short end seeing more pronounced adjustments. Among commodities, gold and copper rebounded following the rate decision, oil retreated after geopolitical spikes, and the black metal complex weakened. In FX, the US dollar index broke above 100, supported by the hawkish Fed; the yuan appreciated against the trend, while the yen weakened.
China Equities: AH Growth Styles Lead
In the A-share market, a broad rebound took hold with growth styles leading across the board. The STAR 50 index surged 6.39% for the week, outperforming all broad-based indices. Small and mid-cap indices strengthened in tandem, while large-cap blue chips lagged. By sector, electronics, communications, and machinery led gains, while coal, agriculture, forestry, animal husbandry, and fishery, alongside petroleum and petrochemicals, led declines.
In Hong Kong, the HSI closed slightly lower, with the Hang Seng Tech index showing relative strength. The core market variable was the Fed's unexpectedly hawkish surprise, with the new chair's first hike signaling that tightening may continue. Hong Kong followed by raising its base rate, lifting funding costs. A stronger dollar and capital outflow pressures weighed on risk appetite. Sector performance diverged: healthcare led gains on faster innovative drug approvals, overseas cooperation prospects, and pipeline progress, while energy lagged on lower oil price expectations.
Looking ahead, A-shares are likely to consolidate as pre-holiday trading sentiment typically turns cautious, making it difficult to form a sustained market theme. The near-term picture suggests range-bound, structurally adjusted trading. For positioning, the report recommends focusing on high-prosperity areas: AI upstream semiconductor equipment and materials with strong earnings visibility; upstream resources benefiting from a weaker dollar and supply constraints, including chemicals and industrial metals; and sectors showing earnings resilience with relatively low valuations, such as non-bank financials.
For Hong Kong, the Fed's "hawkish cut" and dot plot signaling another potential hike this year means external liquidity tightening will continue to pressure valuations. With the "bad news out" trade failing to materialize, markets may need time to reprice a "higher for longer" rate environment.
China Bonds: Yields Drift Lower
Chinese bond yields trended slightly lower last week. With domestic liquidity marginally tightening and external Fed-driven volatility, the bond market pursued independent momentum. Rate bonds strengthened modestly, with medium-to-long-end yields declining. The 10-year government bond yield fell 0.79bp to 1.682%, the 30-year yield dropped 2bp to 2.126%, while short-end rates were largely unchanged, leading to a modest flattening of the yield curve.
Looking forward, the bond market remains range-bound amid a tug-of-war between bulls and bears. Recent central bank operations have been calibrated to smooth cross-quarter and cross-holiday funding fluctuations. With tax periods, new 14-day reverse repos, and overall liquidity in a controllable but tightening phase, yields have compressed to low levels. Trend-following downside lacks clear catalysts, especially with government bond supply peaks, quarter-end assessments, pre-holiday funding disruptions, and external headwinds from the Fed's hike and oil price volatility. The report maintains a low-range, slightly firm outlook and recommends keeping duration neutral, while closely tracking geopolitical developments and liquidity conditions.
US Equities: S&P 500 Flat, Equal-Weight Down 1.26%
US equities were mixed last week. The S&P 500 slipped 0.08%, the Dow Jones fell 1.69%, the Nasdaq Composite gained 0.72%, the Nasdaq 100 rose 0.94%, the Russell 2000 dropped 1.50%, and the Philadelphia Semiconductor Index added 0.83%. After three straight days of losses and closing at its lowest since July 31 on the Fed decision day, the S&P 500 staged a two-day counter-rally, rising 1.31% to recover most of its earlier decline. The equal-weight S&P 500 index fell 1.26% for the week, underperforming the cap-weighted index by 118 basis points, and the Dow declined for a third consecutive week.
Sector-wise, 9 of 11 S&P sectors closed lower. Only healthcare gained 1.83% and information technology rose 1.03%, while utilities dropped 3.04%, financials fell 2.43%, and real estate declined 2.05%, with high-dividend sectors correlating with the 10-year Treasury yield breaking above 5%.
The semiconductor supply chain was the primary source of volatility. Three leading AI company heads called for a slowdown in frontier model development over the weekend. The Philadelphia Semiconductor Index plunged 5.86% on the first trading day, extending its drawdown from the June 22 closing high to 23.94%. Corning fell 13.70% that day and 9.78% for the week, while a software ETF jumped 5.04% the same session. Over the following four sessions, the semiconductor index rebounded 7.10%, led by memory and equipment names, with SanDisk gaining 9.70% and Micron adding 4.16% for the week.
Looking ahead, the core valuation issue for US equities is earnings sustainability. Future index upside is likely to be driven by earnings growth rather than multiple expansion, which has limited room to stretch. The base case is for slowing but non-collapsing earnings, with S&P 500 per-share earnings growth projected around 10% in 2027 and 2028. Near-term watch points include October rate hike pricing at approximately 55%, cloud capital expenditure guidance for 2027, memory and chip prices, and the August PCE index release on September 30.
Overseas Rates: Fed Hikes 25bps, Curve Flattens Bearishly
US Treasury yields exhibited a bearish flattening last week, with short-end leads. The 2-year yield rose 13bps to 4.76%, the 10-year gained 5bps to 5.01%, and the 30-year slipped 1bp to 5.34%. The 2-year hit its highest level since July 2024, while the 10-year notched an intraday high of 5.041% before closing above 5% for the first time since July 2007.
The Federal Reserve unanimously voted 12-0 to raise the federal funds target range by 25 basis points to 3.75%-4.00%, its first increase since July 2023. The dot plot's median for end-2026 rose to 4.1% from 3.8%, with 16 of 18 officials projecting at least one more hike this year. The 2027 median also moved higher to 4.1% from 3.6%. The statement omitted language attributing inflation to supply shocks, with Chair Warsh describing the move as "withdrawing some accommodation." Market pricing for another hike in October stands at roughly 55%.
Following the hike, short-end pricing shifts from whether to hike to where the terminal rate lies. Markets now price roughly three additional hikes before mid-2027, above the dot plot median. Historically, front-end forward rates rarely peak decisively before the final hike in a cycle, suggesting curve flattening should persist until the terminal rate becomes clear. On the long end, the "withdrawing some accommodation" language could help compress inflation risk premiums, while resilient investment and employment keep long-term yields elevated, with oil prices dominating daily fluctuations.
Commodities: Gold and Copper See 'Bad News Out' Rally
Last week, commodities traded under the twin themes of a Fed rate hike and Middle East geopolitical conflict, resulting in stronger precious metals and non-ferrous metals, choppy energy prices, and a weaker ferrous complex.
Gold followed a typical pre-meeting decline and post-meeting rebound pattern. In the first half of the week, fully priced rate hike expectations and a 10-year yield breaking above 5% pushed gold down, with London gold briefly trading below the $4,300 level. In the latter half, gold staged a robust "bad news out" rally, recouping all losses and posting new weekly highs.
Copper also rebounded strongly after the rate decision, supported by low domestic inventories and seasonal demand strength, approaching recent highs. Crude oil exhibited high volatility, spiking early on geopolitical risk premiums before sharply retracing amid expectations of de-escalation, Fed tightening concerns, and demand destruction from high prices. In China's ferrous complex, prices surged then faded, ending the strong run seen from late August to early September as supply-side contraction gave way to negative feedback loops and policy-driven resumption expectations, with eroding cost support.
Going forward, gold could break above its converging triangle if the Fed avoids signals of sustained tightening. Copper's medium-to-long-term uptrend remains intact, supported by limited new mine supply and steadily expanding demand from new energy, ultra-high-voltage, and computing infrastructure. Oil is expected to remain volatile as geopolitical support and macro headwinds battle, keeping market volatility elevated.
FX: Hawkish Fed Lifts Dollar; Yuan Gains on Fix Guidance
The FX market last week was defined by a stronger dollar and widespread non-USD weakness, though the yuan bucked the trend. The dollar index climbed from around 99 to near 100.2, breaking above 100 decisively after the Fed's move. The dollar's core narrative returned to "rate path plus oil": early-week oil spikes boosted inflation expectations and Treasury yields, reinforcing tightening bets; after the hike and hawkish signals, the dollar accelerated. Later, as oil retreated and yields eased, dollar gains moderated. Notably, the dollar's sensitivity to oil itself is low; what matters is the transmission of oil through inflation expectations and yields to the rate path.
Looking ahead, the dollar may maintain high-level consolidation around 100, with the key being whether oil and inflation data can reignite expectations for further hikes. For the yen, the BOJ's single hike has proven insufficient to reverse the trend; should USD/JPY approach 158-160 again, actual intervention risk rises markedly. The yuan was the most noteworthy outperformer last week: if the daily fixing continues to be set firmer, USD/CNH could test the 6.65-6.70 zone; should the fixing turn more restrained, the pair may enter a two-way consolidation around 6.70.
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