To The Moon

China's three major stock indices ended the trading session in negative territory today. The Shanghai Composite Index closed down 0.5%, the Shenzhen Component Index fell 0.87%, and the ChiNext Index declined 0.45%. The Beijing Stock Exchange 50 Index dropped 1.62%, while the STAR 50 Index slid 1.11%. Total market turnover reached 2.568 trillion yuan, a significant increase of 400.8 billion yuan from the previous session, with over 4,300 stocks losing ground.

By sector, medical services, CRO concepts, innovative drugs, biological products, and cellular immunotherapy led the gains. In contrast, precious metals, education, industrial metals, real estate, and photovoltaic equipment were among the hardest-hit sectors. The innovative drug sector saw a surge in the morning but gave back gains in the afternoon, with nearly 10 stocks including Longshenrongfa, Wanbang Pharmaceutical, Boji Pharmaceutical, and New Journey hitting their daily limit up. Xinjiang Jiang, Shangsheng Biomedical, Jinshiya Pharmaceutical, and Shutaishen also saw notable gains. The medical e-commerce segment was active, with Yiyigou, Magic Pharmacy, and Foci Pharmaceutical hitting daily limit highs, while Shanghai Kaibao, Biological Valley, and Liuyi Pharmaceutical followed suit.

The precious metals sector continued its decline, with Xiaocheng Technology, Zhaojin Gold, and Hunan Silver leading the losses, followed by Xingye Yinxi, Chifeng Gold, and Shandong Gold. The education sector deepened its losses near the close, with Chuanshi Education hitting its daily limit down, and Xueda Education, Angli Education, and Huatu Shanding also falling sharply. Industrial metals showed weakness, with Tianshan Aluminum, Zhongfu Industrial, and Hongqiao Holdings leading the decline.

Index-wise, the market opened higher and advanced in the morning, boosted by favorable external factors. Hard-tech sectors such as AI hardware, computing power leasing, and semiconductors continued to climb, creating a positive outlook. However, selling pressure intensified significantly after midday, and by 2:00 PM, the three major indices experienced a sharp straight-line decline, ultimately closing in the red. A key warning signal is that today's decline occurred on higher volume, suggesting a fresh batch of incremental buyers were trapped. If the market fails to stage a strong recovery soon, further downside may be possible.

The trigger for the afternoon sell-off

The primary reason for the sudden afternoon plunge was an unexpected development from Japan. Around midday, the Japanese yen surged sharply, with the USD/JPY pair plummeting over 214 points in a straight line. Japanese government bond futures also fell by 9 basis points to 126.48. This simultaneous movement in the currency and bond markets typically signals an impending shift in monetary policy. According to Bloomberg, market sources indicate that the Japanese Prime Minister supports a near-term rate hike by the Bank of Japan, with the next move potentially occurring in September or October. Japan's July Producer Price Index surged 7.2% year-on-year, driven by rises in petroleum, chemicals, and non-ferrous metals. Combined with the imported inflation pressure from the yen hitting a 40-year low, the triple effect of rising corporate costs, wage increases, and a weak yen has pushed Governor Kazuo Ueda to signal a September rate hike.

This news triggered a chain reaction in global markets due to the yen's unique status as a key global funding currency. Should the BOJ raise rates, it could trigger a massive unwinding of carry trades, leading to a concentrated withdrawal of leveraged capital from risk assets. Starting from midday, commodities like gold and silver saw a sharp sell-off, and afternoon gains in the Japanese and South Korean stock markets narrowed significantly. This suggests a pattern of synchronized pressure on global risk assets has begun to take shape. Adding to the concern, some analysts draw a parallel between Japan's current situation and the UK gilts crisis triggered by former Prime Minister Liz Truss in 2022, warning that policy missteps in the current inflationary environment will be punished by markets much faster. The weakening yen and rising Japanese government bond yields represent a vote of no confidence by the market in Japan's fiscal policy.

While external risks are rising sharply, the A-share market itself is in a sensitive position. The market's recent rally has accumulated a large number of short-term profitable positions, significantly increasing divergence among high-level investors. With the Shanghai Composite Index repeatedly failing to break through the 250-day moving average, it was ripe for a pullback. The unexpected external black swan of Japan's rate hike expectations acted as a catalyst, triggering a concentrated sell-off by profit-takers, thus forming the chain reaction that led to the afternoon plunge.

Outlook for the coming days

Looking ahead, in the short term, the A-share market is likely to enter a phase of consolidation and digestion. The biggest external uncertainty remains the rising expectations of a BOJ rate hike. As the yen serves as a global funding currency, any rate increase could trigger a massive unwinding of carry trades, potentially putting temporary pressure on global risk assets. However, institutions generally believe that the A-share market has the conditions for a recovery in August. For example, CSC Securities judges that the adjustment is largely over, while CSC Financial believes a W-shaped bottom has formed, and the current rebound and recovery is only about half of the historical average, suggesting there is still room for further upside. In terms of strategy, investors should maintain a balanced portfolio, avoid chasing high-flying sectors like AI hardware that have already seen significant gains, and focus on medium-term allocation opportunities in non-ferrous and precious metals like gold and copper. On a medium-term horizon, the structural bull market trend in A-shares remains unchanged. The first half of the year's gains were mainly driven by valuation, while the second half is expected to benefit from earnings as a core driver. The domestic liquidity environment remains accommodative, policy signals for economic stability are clear, the potential for retail investors to enter the market has not yet been fully realized, and fundamental improvements provide solid support for the market. In terms of allocation, the four major narratives of AI technology, security and controllability, industrial expansion, and dividend yields still offer medium-to-long-term certainty. Major brokerages generally favor the continuation of structural market trends, with AI computing power and the cyclical recovery forming the dual main themes for the second half of the year. However, investors need to continuously monitor whether the BOJ will actually raise rates in September and the direction of US economic data, as these will be key variables affecting global liquidity expectations and foreign capital flows into A-shares.

[Note: The market carries risks, and investment requires caution. Under no circumstances does the information or opinions expressed in this subscription constitute investment advice to any person. Unless otherwise noted, the research data in this article is provided by Flush iFinD. This article is for reference only and does not constitute investment advice. Investors bear the risks associated with their actions based on this information.]