Zhongtai International: Under the expectation of narrowing Hong Kong-US interest rate differentials, the liquidity situation is expected to continue to benefit the performance of Hong Kong stocks

According to the Zhitong Finance APP, Zhongtai International released a research report stating that the current valuation of Hong Kong stocks has significantly repaired in the short term, with the predicted PE of the Hang Seng Index at about 11 times, basically returning to the peak of 2018-2019. The risk premium is at a historical low, and the AH premium has reached a nearly six-year low. Coupled with the seasonal off-peak for Hong Kong stocks entering August, the mid-term performance period will focus on verifying the fundamentals. It is not ruled out that some individual stocks may have profits from "good news realization." A technical adjustment in the short term is normal, but considering the ample liquidity in Hong Kong stocks, even if there is an adjustment, the expected magnitude is not large.

In the U.S. stock market, retail sales growth in July has orderly slowed down, and the PPI exceeded expectations, leading to a rebound in interest rate cut expectations. However, corporate earnings growth remains robust, with the S&P 500 index showing an 11.2% growth in earnings for the second quarter as of last Friday. The U.S. Treasury is replenishing the TGA account, and the ONRRP balance has fallen to $57.2 billion. Considering that $1.01 trillion in government bonds will be issued in the third quarter, the TGA account balance is expected to rise to $850 billion (currently $515.4 billion), which is likely to lead to a decrease in bank reserves. It is anticipated that liquidity in the U.S. financial system will decline in the coming weeks, suppressing U.S. stock performance.

Key points from Zhongtai International are as follows:

Hong Kong Stocks: July data on China's economy shows a marginal slowdown in prosperity, with consumption, investment, production, price, and credit data all below expectations, but market risk appetite has not been undermined.

Last week, A-shares broke new highs for the year, achieving both price and volume increases; the Hong Kong Stock Connect recorded the highest net inflow in a single day last Friday. Data from the International Institute of Finance (IIF) shows that $6.03 billion flowed into the Chinese stock market in July, with strong domestic investor sentiment, coupled with some regional foreign capital or hedge funds returning, which helps boost Hong Kong stock performance.

The market is pricing in about an 85% probability of a rate cut by the Federal Reserve in September. With expectations of a narrowing of the Hong Kong-U.S. interest rate differential, liquidity is expected to continue to favor Hong Kong stocks. The current valuation of Hong Kong stocks has significantly repaired in the short term, with the predicted PE of the Hang Seng Index at about 11 times, basically returning to the peak of 2018-2019. The risk premium is at a historical low, and the AH premium has reached a nearly six-year low. Coupled with the seasonal off-peak for Hong Kong stocks entering August, the mid-term performance period will focus on verifying the fundamentals. It is not ruled out that some individual stocks may have profits from "good news realization." A technical adjustment in the short term is normal, but considering the ample liquidity in Hong Kong stocks, even if there is an adjustment, the expected magnitude is not large. Based on the average annual volatility of around 8,000 points over the past 10-15 years, the Hang Seng Index has not seen a high this year. It is expected that the Federal Reserve will likely cut rates in September, and China's policies will continue to "increase strength at the right time" in the second half of the year. At that time, the resonance of domestic and foreign policy benefits will help push Hong Kong stocks to break new highs.

With the continued fermentation of interest rate cut expectations, attention should be paid to the valuation elasticity of technological innovation (AI/semiconductors) and biomedicine, non-bank financials (insurance, brokerage) benefiting from long-term capital allocation dividends and the recovery of the capital market, as well as high-dividend assets (utilities, energy, and some leading consumer staples).

U.S. Stocks: Retail sales growth in the U.S. has orderly slowed down in July, and the PPI exceeded expectations, leading to a rebound in interest rate cut expectations. However, corporate earnings growth remains robust, with the S&P 500 index showing an 11.2% growth in earnings for the second quarter as of last Friday. The three major U.S. stock indices are closely tied to high levels, with the VIX index hitting a new low for the year, but market breadth indicators are poor, with equal-weighted S&P 500 and equal-weighted Nasdaq 100 continuing to diverge from market capitalization-weighted indices The U.S. Treasury is replenishing the TGA account, and the ONRRP balance has fallen to $57.2 billion. Considering the issuance of $1.01 trillion in government bonds in the third quarter, the TGA account balance is expected to rise to $850 billion (currently $515.4 billion), which is likely to lead to a decrease in bank reserves. It is anticipated that liquidity in the U.S. financial system will decline in the coming weeks, suppressing U.S. stock performance. Currently, it is not recommended to chase high U.S. stocks; if the index experiences seasonal adjustments, the preferred sectors are cyclical stocks such as banks, semiconductors, software, and industrials.

U.S. Treasuries: The yield on the 10-year U.S. Treasury bond is fluctuating around 4.30%. The July U.S. inflation data is mixed, with the CPI remaining moderately supportive of easing logic, while the PPI exceeding expectations confirms the emergence of tariff transmission pressures. Coupled with resilient retail and stable unemployment claims, the necessity for aggressive rate cuts is weakened. Short-term U.S. Treasury yields may still be affected by concerns over inflation stickiness and the impact of Treasury bond issuance, leading to technical rebound pressure. Strategically, it is recommended to continue allocating on rallies, but U.S. manufacturing and services have clearly slowed down. It is expected that the technical rebound space for the 10-year U.S. Treasury yield may be limited, with a focus on key data such as the July core PCE to further confirm the impact of tariffs on inflation.

U.S. Dollar Index: Economic data continues to drive fluctuations in rate cut expectations. The cooling inflation of some goods in the July CPI supports the rate cut logic, but the PPI exceeding expectations and rising import prices confirm the emergence of tariff transmission pressures. Coupled with resilient retail, the necessity for aggressive rate cuts is weakened. Geopolitical disturbances (the easing of U.S.-Russia talks reducing risk premiums) and policy uncertainties (Trump's intervention in Federal Reserve personnel) create a tug-of-war between bulls and bears, leading to a lack of unilateral driving force for the dollar. It is expected to maintain a weak oscillating pattern in the short term, with a focus on signals from the Jackson Hole annual meeting and global PMI data guidance.

U.S. Dollar to Offshore Renminbi: Last week, the offshore renminbi fluctuated slightly more but remained around the central level of 7.18. The renminbi's midpoint remains stable and slightly strong, confirming the intention of policy support. The U.S.-China trade truce has been extended for another 90 days until November 10, and the game of resource supply replacement through technical access will continue. Trade tensions are expected to transmit to exchange rate fluctuations, with the renminbi likely facing passive pressure to test the 7.18 policy ceiling. In the short term, it is expected to continue oscillating within the 7.15-7.20 range.

Risk Warning

The international situation is complex and changeable; policy effects may be less than expected; geopolitical risks are increasing