New Changes in Global Liquidity: The "American Exception" is Resuming

Core Viewpoints

Since the beginning of this year, global funds have generally flowed out of dollar assets and returned to local markets, with the outflow of dollar liquidity leading to non-dollar markets generally outperforming U.S. assets.

However, with the easing of geopolitical tensions and the resurgence of the "American exceptionalism" narrative, there have been new changes in global capital flows. After the cooling of the Middle East situation, funds have temporarily flowed back to risk assets. The soft landing outlook for the fundamentals combined with the resurgence of AI narratives may continue to support U.S. stock performance. The Hong Kong dollar has reached the weak side guarantee, and if the Hong Kong Monetary Authority withdraws Hong Kong dollar liquidity, it may exert temporary pressure on Hong Kong stocks.

Overall, recent market performance once again confirms our judgments on macroeconomic cycles, event-driven strategies, emotional speculation, and diversified allocation. In the short term, the cooling of geopolitical conflicts combined with the Federal Reserve's dovish stance may restore global risk appetite and raise expectations for easing, making equity assets likely to have a favorable short-term outlook, while crude oil and gold may face some pullback pressure.

Core Theme: Observing the Market from New Changes in Global Liquidity

Since the beginning of this year, global funds have generally flowed out of dollar assets and returned to local markets, with the outflow of dollar liquidity leading to non-dollar markets generally outperforming U.S. assets.

With friendly European policies, low-level fundamental recovery, and frequent capital rotation between the U.S. and Europe, European stocks have become the most benefited assets under a weak dollar. The return of foreign capital, southbound funds, and liquidity injections by the Monetary Authority have supported liquidity in Hong Kong stocks. The A-share market has ample off-market liquidity and low opportunity costs, with on-market funds remaining active. In the medium to long-term trend, there have also been some new changes in global liquidity in the short term.

As the Middle East situation cools, market risk appetite improves, and funds temporarily flow back to risk assets. The "American exceptionalism" narrative has somewhat recovered, and "de-dollarization" may be temporarily paused, with funds flowing back to U.S. stocks and U.S. Treasuries showing slight trading weakness and interest rate cut expectations.

The Hong Kong dollar has reached the weak side guarantee, and if the Hong Kong Monetary Authority withdraws Hong Kong dollar liquidity, it may drive HIBOR rates up, exerting temporary pressure on Hong Kong stocks, although the long-term impact is limited. Since May, the A-share market has generally maintained a volatile trend, with a lack of performance-driven factors, policy support, and ample off-market liquidity, leading to large financial stocks (high dividends) and small-cap stocks leading the gains, with recent signs of diffusion.

Main Text: Observing the Market from New Changes in Global Liquidity

Since the beginning of this year, global funds have generally flowed out of dollar assets and returned to local markets, with the outflow of dollar liquidity leading to non-dollar markets generally outperforming U.S. assets. According to the latest TIC data released by the U.S. Treasury, after valuation adjustments, overseas investors reduced their holdings of medium- and long-term securities by $88.9 billion in April, including a reduction of $59.2 billion in U.S. stocks and $46 billion in U.S. Treasuries. By region, Canada and mainland China saw significant reductions.

For non-dollar assets:

With friendly European policies, low-level fundamental recovery, and frequent capital rotation between the U.S. and Europe, European stocks have become the most benefited assets under a weak dollar. Europe is the largest overseas holder of U.S. stocks, totaling approximately $8.5 trillion, accounting for nearly 50% of holdings among all countries Since the beginning of this year, European investors have continued to reduce their holdings in U.S. stocks and have flowed back to the domestic market. According to EPFR data, the recent net inflow of funds into European stocks over a rolling three-month period is at its highest level since 2010. If U.S. stocks weaken, there is still significant potential for future capital inflows.

Foreign capital inflow + southbound funds + liquidity injection by the Monetary Authority of Hong Kong, supporting the liquidity of Hong Kong stocks. Although some, like DeepSeek, have changed the narrative logic of Hong Kong stocks, leading the market to reassess China and Chinese assets, the improvement in profits still needs to be verified. The current rally in Hong Kong stocks reflects more of a valuation recovery under ample liquidity: first, the weakening of the U.S. dollar has driven foreign capital inflow; second, southbound funds have seen record net inflows; third, after the Hong Kong dollar rose to the strong side of 7.75, the Hong Kong Monetary Authority released a large amount of Hong Kong dollar liquidity, with subsequent attention on the marginal changes in liquidity from the three channels.

The off-market liquidity of A-shares is ample and the opportunity cost is low, while on-market funds remain active. Since the implementation of reciprocal tariffs in April, trading sentiment in A-shares has weakened, with market turnover fluctuating between 1-1.5 trillion. The change in financing balance has been minimal, ETF fund shares have steadily decreased, and foreign capital continues to flow out, with the overall focus on stock games lacking incremental liquidity. Although the 10-year government bond yield has fallen to a low of 1.63%, reducing the opportunity cost of off-market funds, whether these funds can flow into the market still depends on new catalysts, such as profit expectations and the wealth effect.

In the medium to long-term trend, global liquidity has also seen some new changes in the short term:

First, the cooling situation in the Middle East has improved market risk appetite, with funds temporarily flowing back to risk assets, while fundamental trends may affect medium to long-term capital flows. After the unexpected easing of the Israel-Palestine conflict, global equity assets have generally risen, reaffirming that the risk-averse behavior triggered by localized geopolitical conflicts will quickly repair in the short term. In contrast, safe-haven assets are generally under pressure, with oil prices significantly retreating from high levels, gradually returning to capital pricing; inflation concerns triggered by high oil prices have eased, leading to a decline in U.S. Treasury yields; after the retreat of risk aversion, gold and the U.S. dollar have weakened simultaneously; future focus will shift to fundamental data and the Federal Reserve's monetary policy statements.

Second, the "American exceptionalism" has somewhat recovered, with the prospects of a soft landing in fundamentals + a resurgence of AI narratives potentially continuing to support U.S. stock performance, while "de-dollarization" may be temporarily paused, with U.S. Treasury trading slightly reflecting weakening fundamentals and rate cut expectations. In the short term, net inflows of funds into U.S. stocks have stabilized and rebounded. According to EPFR data, as of June 18, the weekly net inflow of funds into U.S. stocks reached a new high since the beginning of the year, while the inflow of funds into U.S. Treasuries remained generally stable In the medium to long term, the pressure of "double deficits" is the crux of the U.S. exceptionalism theory, significantly impacting the U.S. dollar and U.S. Treasury bonds; however, the combination of a weaker dollar and fiscal expansion actually supports U.S. stock earnings. Potential risks include a cooling U.S. economic fundamentals and high interest rates suppressing valuations.

Third, the Hong Kong dollar quickly fell against the U.S. dollar and touched the weak side guarantee, triggering an increase in carry trade + expectations of the Hong Kong Monetary Authority absorbing Hong Kong dollar liquidity. After the Hong Kong dollar touched the strong side exchange guarantee in early May, the Hong Kong Monetary Authority injected nearly HKD 130 billion in liquidity, leading to market "short Hong Kong dollar long U.S. dollar" carry trades and causing the Hong Kong dollar to fall rapidly. At this point, although the HIBOR (3 months) and SOFR interest rate spread is nearly 2.75%, after the depreciation of the Hong Kong dollar, the 3-month forward exchange rate shows almost no arbitrage space. Due to the short positions in the Hong Kong dollar generated by carry trades, there may be a retreat, and future depreciation pressure may come more from the appreciation of the U.S. dollar and capital outflows from the Hong Kong stock market.

If the Hong Kong Monetary Authority withdraws Hong Kong dollar liquidity, leading to an increase in HIBOR rates, there may be short-term pressure on Hong Kong stocks, but the long-term impact is limited. As an offshore market, Hong Kong stocks have a more diverse range of market participants, including overseas investors, local Hong Kong investors, and mainland investors, and changes in Hong Kong dollar liquidity may only be one channel affecting the liquidity of Hong Kong stocks. From actual data, the liquidity of the Hong Kong dollar measured by the HIBOR-EFFR spread has a certain correlation with the rise and fall of Hong Kong stocks, but the strength is significantly weaker than that measured by the U.S. dollar index for offshore U.S. dollar liquidity. Moreover, as southbound funds continue to flow in, mainland capital's pricing power over Hong Kong stocks is also increasing.

Fourth, since May, A-shares have generally maintained volatility, with a lack of performance-driven factors, policy support, and ample off-market liquidity, leading to large financial stocks (high dividends) and small-cap stocks leading the market, with signs of diffusion recently. Since April, banks have become the only direction for active net inflows of funds, mainly from small and medium retail investors, reflecting more of a risk-averse demand, providing short-term support for banks; however, changes in risk appetite may lead to increased volatility in the banking sector. Small-cap stocks are mainly net bought by institutions, possibly driven by quantitative trading, with institutional funds being relatively stronger in sustainability; however, if this capital exits, small-cap stocks may face some adjustment pressure.

Authors of this article: Zhang Jiqiang, Tao Ye, Source: Huatai Securities Fixed Income Research, Original Title: "【Huatai Asset Allocation】Looking at the Market from the New Changes in Global Liquidity" Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk