CITIC SEC: Fed rate hike risks persist; Chinese bonds, commodities, and undervalued equities warrant attention.

CITIC SEC released a research report stating that "substantive improvement" in inflation and the non-diffusion of inflationary pressures may be the two major prerequisites for the Fed to stop raising rates, which means the Fed's rate hike process will not come to an abrupt halt, and the September rate hike should not be viewed as all bad news being priced in. With the Fed facing persistent rate hike risks, Chinese bonds, commodities, and undervalued equitiesassets with safety and certaintydeserve more attention. First, Chinese bonds mainly follow China's monetary policy rather than the Fed's monetary policy, which means that in an environment where China's money supply remains moderately accommodative, Chinese bonds will be a typical representative of safe assets; second, before the US-Iran conflict eases, the supply-demand relationship for commodities represented by energy and non-ferrous metals remains tight, and the current macro environment of global contraction and inflation diffusion also points to commodity allocation opportunities worth watching; third, valuation divergence among different A-share industries is significant, and the shift in global liquidity points to valuations across different industries tending toward balance. CITIC SEC's main points are as follows: The September Fed rate hike makes clear that inflation is the core contradiction in current Fed monetary policy. Under inflationary pressure, the bank expects the Fed's rate hike process will not come to an abrupt halt. Since the beginning of this year, US indicators such as new nonfarm payrolls and the unemployment rate have generally shown a pattern of narrow-range fluctuations, while indicators such as the job vacancy rate and wage growth remain at low levels. Although the US job market has not deteriorated further, it is also hard to say it has clearly stabilized and rebounded. With lingering concerns about employment, the Fed's choice to start a rate hike cycle in September proves that controlling inflation is undoubtedly the more core objective of current Fed monetary policy. At the September FOMC meeting, Warsh emphasized that what he set was not specific monetary policy decisions but monetary policy discipline, and that what influences his decisions is not single-month data but the trend of data changes. Therefore, with the US-Iran situation far from any sign of easing and US inflation readings facing pressure to remain elevated with risks of further diffusion, the bank expects the Fed's rate hike process will not come to an abrupt halt. Before the September rate hike, investors already expected potential rate hike risks, but under the baseline scenario, this rate hike may not be the preventive hike or "dovish hike" some investors expected, and the depth and duration of rate hike risk pricing across major asset classes may also be insufficient. Although before the September FOMC meeting, tools such as FedWatch showed that investors already expected a September rate hike, the pricing of rate hike risks across major asset classes may still be insufficient. On the one hand, at the September FOMC meeting, Warsh repeatedly emphasized the importance he attaches to "substantive improvement" in inflation and to price changes across industries not spreading, which may also be key conditions for the Fed to stop raising rates in the future. Under the baseline scenario, the US-Iran conflict may be difficult to end quickly, which points to the core of this rate hike being to control the inflation trend and strive to fulfill the Fed's inflation target, rather than simply following market expectations or placating investors. The September rate hike is only the starting point of a rate hike cycle, not a preventive hike or "dovish hike" as some investors expected. The landing of the rate hike cannot be regarded as all bad news being priced in. On the other hand, unlike the starting points of previous rate hike cycles in history, current valuations of major asset classes represented by global equity assets are clearly higher. Under high-valuation conditions, various assets may also be more sensitive to potential risks of continued Fed rate hikes. And since the July FOMC meeting, apart from US Treasuries, most other asset prices and valuations have not changed significantly, which also indicates that there may still be a gap between asset pricing of rate hike risks and investor expectations. The risk of continued Fed rate hikes will be an important main line for medium-term market pricing, and assets with safety and certainty deserve more attention under a rate hike cycle. The market combination of generally high valuations across asset classes and the Fed facing continued rate hike risks determines that asset allocation faces an impossible triangle of space, volatility, and odds, and assets with safety and certainty deserve more attention. Investors are advised to pay attention to three major opportunities. First, Chinese bonds mainly follow China's monetary policy rather than the Fed's monetary policy, which means that in an environment where China's money supply remains moderately accommodative, Chinese bonds will be a typical representative of safe assets; second, before the US-Iran conflict eases, the supply-demand relationship for commodities represented by energy and non-ferrous metals remains tight, and the current macro environment of global contraction and inflation diffusion also points to commodity allocation opportunities worth watching; third, valuation divergence among different A-share industries is significant, and the shift in global liquidity points to valuations across different industries tending toward balance. Risk factors: The duration and intensity of the US-Iran conflict exceed expectations; the Fed's rate hike intensity exceeds expectations; the performance of the US job market exceeds expectations; the speed of US inflation diffusion exceeds expectations; etc.