China Galaxy Securities: How will the market move in the face of geopolitical conflicts and interest rate cut expectations?

According to the Zhitong Finance APP, China Galaxy Securities released a research report stating that the escalation of the situation in the Middle East and the resurgence of the Russia-Ukraine conflict have driven safe-haven funds into the gold market. The moderate U.S. CPI data and rising expectations for interest rate cuts have weakened the dollar, further enhancing the attractiveness of gold. Although the brief U.S.-China economic and trade consultations suppressed safe-haven sentiment, geopolitical risks dominated market fluctuations, with gold prices oscillating and strengthening under the support of repeated conflicts and easing expectations. In the medium to long term, gold remains in an upward channel, with geopolitical conflicts and the trend of de-dollarization stimulating safe-haven demand. The Federal Reserve's interest rate cuts, expanding fiscal deficits, and resilient inflation suppress real interest rates, reducing the cost of holding gold, while the central bank's gold purchasing spree and emerging market allocation demand provide support.

The main points from China Galaxy Securities are as follows:

Commodity Market: (1) Gold: This week, gold fluctuated and closed higher. The escalation of the situation in the Middle East and the resurgence of the Russia-Ukraine conflict have driven safe-haven funds into the gold market. The moderate U.S. CPI data and rising expectations for interest rate cuts have weakened the dollar, further enhancing the attractiveness of gold. Although the brief U.S.-China economic and trade consultations suppressed safe-haven sentiment, geopolitical risks dominated market fluctuations, with gold prices oscillating and strengthening under the support of repeated conflicts and easing expectations. In the medium to long term, gold remains in an upward channel, with geopolitical conflicts and the trend of de-dollarization stimulating safe-haven demand. The Federal Reserve's interest rate cuts, expanding fiscal deficits, and resilient inflation suppress real interest rates, reducing the cost of holding gold, while the central bank's gold purchasing spree and emerging market allocation demand provide support.

(2) Crude Oil: This week, crude oil prices fluctuated and rose. The situation in the Middle East changed abruptly due to Israeli airstrikes on Iranian nuclear facilities, raising concerns about shipping disruptions and supply constraints. The escalation of the Russia-Ukraine conflict also increased geopolitical risk premiums. On the demand side, the summer travel peak in the Northern Hemisphere accelerated the depletion of U.S. crude oil inventories, and progress in U.S.-China economic and trade consultations alleviated macro pressure, supporting oil prices in a tight supply-demand pattern. In the medium to long term, crude oil prices may fluctuate and trend weakly. OPEC+ is increasing production in July, with core oil-producing countries releasing significant production capacity, while demand growth is slowing. Geopolitical risk premiums are unlikely to last; if major shipping routes are not blocked, the impact of conflicts on supply will be limited, and premiums will be retracted.

Bond Market: (1) U.S. Treasuries: This week, U.S. Treasury yields fluctuated and declined. The moderate growth of the U.S. CPI in May alleviated inflation concerns, and rising expectations for interest rate cuts boosted demand for U.S. Treasuries. Although fiscal deficits are climbing, strong auction demand is suppressing yields. In the medium to long term, U.S. Treasury yields are expected to fluctuate slightly lower at high levels. The expansion of fiscal deficits and the debt ceiling crisis will push up term premiums, but interest rate cuts and safe-haven demand may hedge risks, while employment and inflation data will affect future trends.

(2) Chinese Bonds: This week, Chinese bond yields fluctuated and declined. Although the central bank net withdrew funds, it announced a 400 billion yuan reverse repurchase operation, with stabilizing signals offsetting government bond supply pressure. The easing of U.S.-China economic and trade frictions has led the market to expect reserve requirement ratio cuts and interest rate cuts, lowering long-end rates. In the medium to long term, Chinese bond yields are expected to fluctuate and decline, but the space is limited. Easing monetary policy and slow economic recovery are suppressing the interest rate center, but government bond supply and banks' capacity to absorb pressure may trigger a rebound, while the Federal Reserve's interest rate cuts and stock market diversion also restrict the downside space of the bond market.

Currency Market: (1) U.S. Dollar Index: This week, the U.S. dollar index fluctuated and declined. Poor U.S. core CPI and PPI data in May, along with rising expectations for interest rate cuts, weakened the interest rate differential advantage, leading to sell-offs. Rising fiscal deficits, concerns about debt sustainability, immigration enforcement protests, and mutual government accusations have weakened the credit foundation of the dollar Despite the easing of tariff risks in Sino-U.S. economic and trade consultations, the market is concerned about structural contradictions in the U.S. dollar. In the medium to long term, the U.S. dollar index may enter a downward cycle, influenced by the Federal Reserve's interest rate cuts, slowing economic growth, re-inflation pressures, uncontrolled debt, and global de-dollarization.

(2) USD/JPY: This week, the USD/JPY exchange rate fluctuated downward. Poor U.S. inflation data has increased expectations for Federal Reserve interest rate cuts, leading to a decline in the U.S. dollar index; tensions in the Middle East have heightened demand for the yen as a safe haven. Although dovish comments from the Bank of Japan Governor have downplayed interest rate hike expectations, the upward revision of Japan's GDP data supports expectations for a policy shift, which is expected to narrow the interest rate differential between the U.S. and Japan, putting downward pressure on the USD/JPY exchange rate. In the medium to long term, the USD/JPY may fluctuate weakly, as the Federal Reserve's interest rate cuts and the normalization of the Bank of Japan's policy will narrow the interest rate differential, promoting yen appreciation. Additionally, global de-dollarization and the normalization of geopolitical risks will strengthen the yen's safe-haven attributes, but Japan's structural contradictions and the resilience of the U.S. economy may limit the yen's gains.

Equity Market: Some Asian markets achieved gains, while most European and American markets experienced declines. Following the inauguration of new South Korean President Lee Jae-myung, economic stimulus measures were introduced, boosting market confidence and sustaining the strength of the South Korean stock market. The A-share market exhibited a prominent structural trend, supported by favorable policies and liquidity easing, which bolstered market resilience. Dragged down by the valuation correction of technology stocks and geopolitical risks, the three major U.S. stock indices fluctuated downward. European stock markets, heavily reliant on energy and sensitive to geopolitical issues, saw the two major indices leading the global decline.

Risk Warning: Uncertainty risks from overseas interest rate cuts; uncertainty risks from Trump's new policies; risks from geopolitical disturbances; risks from unstable market sentiment; risks from domestic policy implementation falling short of expectations