Bank of East Asia has released its investment strategy for the third quarter of 2026. Gold has surpassed US Treasury bonds as the world's primary reserve asset, a status further solidified by the trend of de-dollarization and the increasing value central banks place on its allocation. Post-conflict fiscal pressures are emerging, with market expectations for increased defense spending and household subsidies. Concerns over the US fiscal situation have resurfaced, which is seen as a long-term positive for gold's safe-haven appeal.
In the near term, however, gold faces pressure. A strong US dollar, the Federal Reserve's hawkish stance, and rising real interest rates have led to a significant correction in its price. The bank expects gold prices to fluctuate primarily throughout the third quarter and has consequently lowered its year-end target price to $4,600 per ounce.
Regarding the US economy, despite a rebound in new job additions, growth is confined to specific sectors, and the overall number of full-time employees is on a downward trend. Market statistics also indicate an increase in layoffs, suggesting that labor market improvements are not comprehensive. On the inflation front, energy prices spiked sharply due to the Middle East conflict. However, crude oil prices have retreated from their March highs, and inflationary pressures are expected to recede in an orderly fashion in the second half of the year.
The bank further notes that several Federal Reserve policymakers currently hold a hawkish bias. It anticipates only one interest rate hike from the Fed in the second half of the year, clarifying that this does not signal the restart of a tightening cycle. Looking ahead, artificial intelligence is expected to enhance productivity, though its positive impact on the broader macroeconomy will take time. US economic growth for the full year is projected to remain broadly stable.
The bank states that the core impact of the US-Iran conflict since its escalation in late February has been the near-halting of traffic through the Strait of Hormuz, triggering a crude oil supply crisis that drove global inflation higher and sharply increased pressure for interest rate hikes. However, with the vigorous development of the AI industry, the global economy has shown sufficient resilience, and AI-related stock markets have surged significantly. The market has shown signs of desensitization to the US-Iran conflict. As negotiations progress and geopolitical risks become normalized, their influence has gradually diminished.
The bank points out that following the US-Iran conflict, rising inflation shifted market expectations from Fed rate cuts at the start of the year to anticipating hikes. However, the leadership transition at the Fed has somewhat delayed changes in monetary policy. Furthermore, the new Chair places greater emphasis on the "trimmed mean PCE," making the direction of monetary policy a key variable for capital markets in the second half. While rate hike expectations are in focus, the duration, magnitude, and potential to trigger a recession will have a more significant impact on capital markets. As the US-Iran conflict gradually eases, the impact of rate hikes may be lower than market expectations.
In terms of asset allocation, US equities show strong earnings growth. The bank has raised its target for the S&P 500 index to 7870 points, maintaining a positive outlook on upstream AI and cloud services, while also diversifying moderately into the financial and industrial sectors. For Hong Kong equities, the Hang Seng Index target has been lowered to 27100 points, but a rebound is expected in the second half. Focus areas include AI computing infrastructure, humanoid robots, high-end equipment, oil tankers, as well as the securities and insurance sectors, with low valuations providing a buffer against downside.
For bonds, the strategy is "stable income, controlled duration," focusing on short to medium-term maturities and selecting high-quality credit bonds. Global investment-grade yields around 5% and emerging market US dollar bonds around 6% still offer allocation value.
In foreign exchange, the US dollar is expected to remain strong, supported by rate hike expectations. Among non-US currencies, the bank is relatively more optimistic about offshore Chinese yuan, the Australian dollar, and the New Zealand dollar, and less optimistic about the euro, British pound, and Canadian dollar.
For commodities, the geopolitical premium on oil prices has receded, with Brent crude expected to fluctuate around a central point of $75 per barrel. Gold is suppressed in the short term by a strong dollar and rising real rates, but is supported in the medium to long term by de-dollarization and central bank purchases, with the year-end target revised down to $4,600 per ounce.
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