The global market is experiencing a pullback following a steep ascent, entering what can be described as an 'intermission' phase.
This phase is characterized by the prominent contradiction between intense financing demand and tight funding conditions, coupled with high market concentration and leverage.
Looking ahead tactically, the current market adjustment is likely to persist through the third quarter, with primary risks stemming from monetary policy uncertainty, rising financing pressures, and the potential spillover of risks from markets like Japan and South Korea.
Strategically, however, the technology rally is anticipated to resume after this intermission, with a continued positive outlook on broad security assets.
Post-intermission, the market advance is expected to broaden within the upper segment of the K-shaped economy, driven by security and investment themes.
Beyond AI hardware, sectors such as AI applications, industrials, and resource commodities are also poised to enter the next phase of growth.
Internal Risks in the US Market
The tension between heightened monetary policy uncertainty and robust corporate financing demand is becoming increasingly apparent.
On one hand, a lack of consensus on the Federal Reserve's direction under its new leadership creates high uncertainty, prompting markets to prepare for a worst-case scenario.
This disrupts the established market-Fed feedback loop of expectation management, market pricing, and expectation fulfillment that has been in place since 2008.
Simultaneously, financing pressures are rising significantly.
The period of marginally easing dollar funding conditions has ended, while overall liquidity remains relatively scarce, elevating liquidity risks.
Looking forward, financing pressures may intensify further.
Fiscally, the US Treasury's net debt issuance is projected to surge in Q3, with the Treasury General Account likely to remain at elevated levels, continuing to drain liquidity.
On the corporate side, AI's mid-to-upstream segments heavily rely on corporate bonds, with net issuance potentially exceeding levels seen in Q2.
Notably, net financing for US Information Technology and Industrial Manufacturing sectors grew rapidly in Q2, a trend expected to continue into Q3.
While credit default swaps for tech firms have risen, investment-grade corporate bond spreads remain near historical lows, suggesting market may not have fully priced in debt financing stress.
AI's downstream segments primarily depend on private credit.
Bank lending to non-banks, a key funding source for private credit, is projected to increase again in Q3.
The clash between rising financing needs and expectations of monetary tightening is amplifying market volatility.
Financing pressures are negatively impacting market pricing.
Since late May, a combination of rising real yields and falling inflation expectations has been supportive of the US dollar but negative for equities and resource commodities.
Comprehensive measures indicate corporate bond financing stress in the US has reached historically high levels, with further increases potentially unsettling markets.
External Shocks from Japanese and South Korean Markets
Monetary policy expectations between the US and Japan are the main driver behind the recent yen weakness.
The yen has depreciated significantly this year, with the pace accelerating recently, pushing the USD/JPY pair into uncharted territory.
Notably, the yen's movement has decoupled from the US-Japan interest rate differential.
The primary driver is the divergence in monetary policy expectations.
Hawkish signals from the June Fed meeting and a rebound in oil prices have fueled expectations of US rate hikes, driving the yen's recent decline.
There is a need for vigilance regarding potential market turmoil triggered by a reversal of yen carry trades.
Despite a narrowing interest rate differential, yen weakness has further catalyzed carry trade activity.
Measures of carry trade positioning are near historical extremes.
The current environment shares similarities with the period preceding the August 2024 carry trade reversal.
A rapid reversal from depreciation to appreciation, potentially triggered by Bank of Japan policy tightening, further FX intervention, or a global AI trade cool-down, could act as an amplifier.
It could depress US equity valuations through cross-market deleveraging and increased volatility.
Historically, during phases of yen appreciation, global equity markets have generally underperformed.
South Korean equity market volatility has increased, with significant capital divergence.
Since late June, global semiconductor sectors, exemplified by South Korea, have seen pronounced corrections and heightened volatility.
Major stocks have retreated significantly from their highs.
Concurrently, market capital flows have shown stark divergence, with retail investors being net buyers while domestic institutional and foreign investors have been substantial net sellers, reaching historically high levels of disagreement.
Deleveraging triggered by an equity correction could cause震荡 across the global semiconductor sector and broader markets.
The South Korean market exhibits high leverage concentration, and the high synchronization of capital flows between South Korean and US tech sectors since April increases contagion risk.
A downturn in South Korean equities could trigger forced selling by leveraged retail positions, levered ETFs, and derivatives.
This could then transmit to the US semiconductor sector via foreign capital redemptions and reduced risk budgets at global tech funds.
Against a backdrop of rising US tech financing needs and tight liquidity, a US stock decline could lower collateral values, tighten funding conditions, and exacerbate a global equity sell-off.
Digesting Risks During the Intermission, Embracing New Opportunities in the Next Phase
In capital markets, risk and opportunity are often two sides of the same coin.
The key question is whether the fundamental logic underpinning the current cycle has changed.
The view is that structural factors remain intact, and opportunities for cyclical upside persist after the mid-cycle adjustment.
Fundamentally, the global K-shaped economic trajectory is expected to continue.
This implies the AI-related investment cycle remains ongoing, supporting US economic growth and corporate earnings.
Conversely, the foundation for a wage-price spiral is absent, as indicated by high-frequency job vacancy data and weak hiring demand among small businesses.
Wage growth is likely to remain subdued, with real disposable income already showing year-on-year declines.
Given the expectation that the lower segment of the K-shape will remain weak, the liquidity tightening driven by rate hike expectations is unlikely to persist long-term.
The upper segment still requires substantial capital investment, and initiating rate hikes or further liquidity tightening would materially impact private credit and corporate bonds, affecting financing for the entire AI chain.
Furthermore, the weaker lower segment, tied to small businesses and household consumption financing which is sensitive to short-term rates, would likely deteriorate further with sustained hike expectations, potentially reviving rate cut expectations.
The Federal Reserve's new leadership appears pragmatic and flexible regarding the inflation framework, potentially granting greater flexibility in navigating the K-shaped economy, fiscal dominance, and the AI wave.
Alternative indicators suggest US inflation, particularly on the consumption and wage fronts, may be weaker than official metrics suggest.
Therefore, the recent risk-off sentiment and extreme rate hike expectations likely reflect uncertainty before new monetary policy standards are established.
As working groups provide more details and markets adapt to the new framework, this uncertainty should gradually dissipate.
If one-sided tightening expectations begin to ease, leading to a peak and subsequent decline in real rates and a relief in dollar funding pressures, it would significantly alleviate the negative environment of recent months.
In summary, while geopolitical issues continue to unsettle markets, prompting liquidity tightening—an effect that may be amplified by Q3 financing pressures and external market shocks—the fundamental logic of the current cycle remains unchanged.
In the near term, sufficient attention should be paid to risk scenarios.
From a medium-term perspective, however, the investment cycle driven by AI and security themes continues, provided liquidity conditions are accommodative.
Following the intermission, market advances are expected to broaden within the security and investment-driven upper segment of the K-shaped economy.
Beyond AI hardware, sectors including AI applications, industrials, and resource commodities are also set to commence their next phase of growth.
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