I. Performance of Global Equity Indices(in US Dollar)
Source: Bloomberg, Tiger
Key Highlights
◼ Last week, global capital markets experienced heightened volatility, with mixed intraday movements and wider daily fluctuations. After weeks of strong rallies, China’s A-shares faced temporary pressure, with both the CSI 300 and the Shanghai Composite Index retreating by about 1%. Meanwhile, U.S. equities — including the S&P 500, Nasdaq, and Russell indexes — posted modest gains but remained range-bound overall.
◼ In the U.S., August employment data fell well short of expectations, with nonfarm payrolls adding only 22,000 jobs and the unemployment rate rising to 4.3%, the highest in nearly four years. In addition, the manufacturing PMI contracted for the sixth consecutive month, while the employment component of the services PMI also slipped below the expansion threshold. Against this backdrop, markets are increasingly divided between a “rate-cut trade” and a “recession trade.” This week’s CPI and PPI prints will be key to shaping the narrative. In Greater China markets, strong earlier rallies gave way to significant volatility, as foreign inflows into A-shares slowed and outflows from Hong Kong stocks continued. Overall, the A-share “water buffalo” rally has entered a cooling phase. Looking ahead, under the backdrop of Fed rate cuts, if corporate earnings expectations continue to improve, the market could shift from being policy- and sentiment-driven to earnings- and liquidity-driven over the medium to long term.
◼ This week, key focuses include the U.S. August PPI/CPI releases, long-term Treasury auctions, and earnings reports from tech names such as Oracle.
II. Key Market Themes
Rate Cuts or Recession? That Is the Question.
Last week, the U.S. August nonfarm payrolls report once again disappointed. Data showed that only 22,000 jobs were added in August, far below market expectations of 75,000. To make matters worse, previous figures were revised down once again, with June and July combined revised lower by 21,000. This brought the three-month average monthly gain to just around 29,000. From a sectoral perspective, the picture was equally weak: the private sector added only 38,000 jobs — roughly half the pace of the previous month — while government payrolls not only failed to expand but actually shrank by 16,000. Meanwhile, the unemployment rate rose to 4.3%. Although in line with expectations, it marked the highest level in nearly four years. Thus, rather than describing the U.S. labor market as cooling, it may be more accurate to say it is approaching stagnation.
Source: Bureau of Labor Statistics, tradingeconomics
In addition, last week also brought a series of other economic indicators, including PMI and job openings. Manufacturing PMI came in at 48.7, marking the sixth straight month of contraction. While the new orders sub-index returned to expansion, output and employment remained notably weak. By contrast, services PMI continued to signal expansion, but the employment sub-index fell to 46.5, reflecting heightened caution among firms in hiring. On the demand side, labor market pressures also cannot be ignored. July JOLTS job openings stood at 7.18 million, little changed month-on-month, but down by more than 3 million from the post-pandemic peak, sitting at the lowest absolute level in over three years.
Overall, whether from nonfarm payrolls, the unemployment rate, or other economic indicators, all point to the same undeniable fact: the labor market has become severely strained. Combined with Powell’s remarks at Jackson Hole last month, the question is no longer whether the Fed will cut rates in September, but rather by how much and how many times. In our earlier weekly outlook, we noted that if employment were to weaken sharply while inflation remained broadly under control, the pace of rate cuts would likely accelerate. Conversely, if inflation were also to spiral out of control, the worst-case scenario of stagflation could emerge. From Friday’s “rally–selloff–rebound” trading pattern, it is clear the market is divided, with rate-cut trades and recession trades now locked in a tug-of-war. Against this backdrop, we prefer to stay cautious and maintain low exposure until the macro narrative becomes clearer. Looking ahead, the Fed enters its blackout period this week, making the midweek PPI and CPI prints short-term signposts that will largely determine the policy stance at next week’s FOMC meeting.
Meanwhile, after the sharp rally in previous weeks, Greater China markets showed signs of heightened volatility last week. Investor divergence widened amid speculation that regulators might step in to cool overheated trading, and high-beta sectors saw sharp swings. The STAR 50 Index fell more than 6% in a single session last Thursday, while leading name Cambricon at one point approached the 20% limit-down threshold — signaling that the one-way surge has temporarily cooled.
On capital flows, data from CICC and EPFR show that overseas active funds recorded net inflows of about USD 130 million into A-shares for the third consecutive week. However, this amount was still less than one-third of the two-week total inflows seen last October, and last week’s pace of inflows clearly slowed. In Hong Kong equities, overseas active funds extended their outflows for a fifth consecutive week, with a cumulative withdrawal of over USD 800 million. In contrast, southbound capital continued to buy aggressively, becoming the dominant source of recent demand. Overall, while this liquidity-driven rally has been powerful, overseas active funds have not meaningfully increased positions, suggesting that the momentum is largely supported by domestic investors and overseas passive flows.
At the macro level, China released its August trade data last week, with exports rising 4.4% YoY — below both expectations and the prior reading, and the weakest print in six months. Against this backdrop, we continue to maintain our view of a “water-buffalo rally.” Importantly, a water-buffalo market does not mean it cannot rise. Historically, A-shares have often decoupled from fundamentals for extended periods, as seen during the major bull markets in 2007 and 2014. Moreover, Hong Kong equities have historically tended to lead A-shares, and this year has been no exception: driven by DeepSeek, Hong Kong stocks rebounded earlier in the year, followed by a sharp rally in A-shares starting in July. On the earnings side, Hang Seng Index EPS expectations (blue line in chart below) have been improving since mid-2024, while CSI 300 EPS expectations (red line) had shown little progress until only very recently.
Source: Bloomberg, Tiger Brokers
Overall, China’s A-share water-buffalo rally is undergoing a cooling phase — a healthy development that should not cause concern. Looking into the second half, under the backdrop of Fed rate cuts, if earnings expectations continue to improve, Greater China markets may shift from being policy- and sentiment-driven toward being earnings- and liquidity-driven. In this context, we remain constructive on undervalued cyclicals and high-quality technology names within Greater China.
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