I. Performance and Valuation of Global Equity Indices
Data Sources: Bloomberg, Tiger Asset Management
Key Highlights
◼ Last week, global capital market volatility began to intensify. The three major U.S. stock indices, including the S&P 500, Nasdaq 100, and Russell 2000, all saw slight declines. In contrast, Chinese A-shares performed relatively steadily, driven by “anti-involution” measures and potential policy stimulus. Multiple sectors, including photovoltaic and brokerage firms, took turns leading, and both the Shanghai Composite Index and the CSI 300 Index gained over 1% in a single week.
◼ Last week, Trump's tariff suspension policy was officially extended. As we had previously predicted, it’s a “carrot and stick” approach: the suspension is delayed until August 1st, while additional pressure is placed on countries with stalled negotiations. However, unlike in April, global markets responded very calmly, with both the S&P and Nasdaq even setting new historical highs. This reflects market fatigue with the repeated tariff threats and a better understanding of Trump's mental tax rate. Currently, among the three major uncertainties in U.S. stocks, fiscal policy is resolved, tariffs are desensitized, and the biggest question mark remains when interest rates will be lowered. At present, market sentiment is very optimistic, with the main narrative back to AI. However, as the impact of tariffs gradually becomes apparent and the Q2 earnings season approaches, we advise caution while remaining involved.
◼ This week, key data points to focus on include the U.S. June CPI/PPI, June retail sales, as well as earnings reports from major tech companies like TSMC and Netflix.
II. Key Market Themes
U.S. Stocks: Unfazed by Repeated Tariff Threats, But Watch Out for Excessive Optimism
Over the past week, U.S. stock market sentiment remained exuberant, though volatility increased slightly, with the three major indices edging lower. On the macro front, the most significant development last week was the further escalation of tariffs. As we predicted in previous weekly observations, Trump extended the tariff suspension until August 1st, while simultaneously exerting additional pressure on certain countries and industries, even sending a 35% tariff threat to Canada, far exceeding expectations. However, this time, the market reacted much more calmly. U.S. stocks, bonds, and the dollar showed no significant response, and the S&P and Nasdaq even reached new historical highs. Moreover, Japan and South Korea, previously threatened by Trump’s tariffs, also remained composed, with their stock markets barely affected and even trending upwards in sync with U.S. markets.
Clearly, the market is now fatigued by tariffs. After multiple rounds of tariff uncertainty, investors have become desensitized to Trump’s repeated pressure. Let’s return to the core issue: why does Trump want to raise tariffs, and why does the market fear tariff hikes?
First, raising tariffs can increase U.S. government revenue, as confirmed by data over the past two months. However, the side effect of tariffs is that it raises costs and pushes up prices, thereby hindering inflation from coming down. The key issue is how to balance these two: generate revenue without triggering a crisis. This is also a crucial factor in estimating Trump’s expected tax rate. According to Morgan Stanley’s estimates, if the current policy is followed until August 1st, U.S. comprehensive tariffs will reach 15%-20%. Meanwhile, according to CICC's forecast, Trump only needs to maintain a 10%-14% comprehensive tariff rate to generate $300-400 billion in annualized revenue, which would offset the $300 billion in additional annual spending under the “Build Back Better” plan. Therefore, we believe there is still room for negotiation in the next month, and the final tariff rate could be even lower. Whether this will trigger another panic depends on inflation.
Data Sources: Haver, CICC Research Department, WeChat Official Account: CICC Perspectives
The good news is that the U.S. June CPI was decent, with no major surprises. The core CPI, excluding food and energy, rose by 0.2% month-on-month and 2.9% year-on-year. Though higher than the previous reading, both figures were below market expectations. Notably, core goods saw a sharp increase despite their small weight, while core services, which have a larger weight, remained relatively stable. In terms of specific items, housing renovations and healthcare showed significant price increases, while cars and housing saw some declines. Unlike before, June inflation now reflects the impact of tariffs. According to a model by a well-known institution, about half of the tariff impact has already been reflected in prices. Without Trump’s tariffs, the core goods CPI would have fallen by 0.2% month-on-month in June. In other words, up until now, the impact of tariffs on inflation has been manageable. Of course, the full transmission to the end consumer takes 3-5 months, and many major banks expect the impact to be clearer by the end of Q3. Furthermore, June PPI data will also be released this week. Compared to end-user prices, we believe PPI is more forward-looking and thus more informative. Therefore, while the outlook remains relatively optimistic, we must remain alert to potential risks.
Data Source: Bloomberg
Since the beginning of this year, we have been focusing on three major uncertainties in U.S. stocks: tariff uncertainty, fiscal and tax uncertainty, and interest rate cut uncertainty. As of now, the “Build Back Better” plan has been signed and is in effect, making expansionary fiscal policy a certainty. Tariff policies, though still volatile, are gradually becoming clearer, and the market has desensitized to them. Therefore, the remaining question is when the Fed will cut interest rates. Currently, the market has priced in virtually zero probability of a rate cut in July, with the likelihood for September now down to 50%. In response, the Trump administration has continued to apply pressure, with rumors even circulating about Powell’s potential resignation. However, Powell, as a data-driven scholar, is likely to continue waiting for a clearer path on inflation transmission before making a decision. Overall, while uncertainties are decreasing, we believe the current market optimism is somewhat exaggerated, as it is almost ignoring any macro risks. As investors, we need to participate while staying vigilant for any potential shocks. With the impact of tariffs becoming more apparent and Q2 earnings season approaching, market divergence and volatility may continue to intensify.
Disclaimer
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