CSC Financial: Focus on China-US high-level meeting; A-shares may enter a period of improved risk appetite.

China Securities Co., Ltd. released a research report stating that after the Fed rate hike was implemented, the market saw an improvement in risk appetite, and U.S. Treasury yields temporarily peaked. The market is hotly debating how many hikes are included in this rate hike path, but the market focus should not be on this, because the future rate hike path is uncertain. As Warsh mentioned, weakening forward guidance means that the Fed will need to take more dimensional variables into account in the future, and it is too early to discuss the number of rate hikes now. What the market really needs to focus on right now is the China-U.S. high-level meeting. China Securities Co., Ltd. tends to believe that this China-U.S. high-level meeting can release more information on improved risk appetite. Therefore, it is possible that over the next one to two quarters, the market will enter a very friendly period of improved risk appetite. Overview of global major asset class performance last week: Last week, oil prices resonated with rate hike expectations, global asset pricing turned defensive, equity assets diverged, rates rose, and commodities fluctuated. Most A-share broad-based indices rebounded and repaired, with growth style clearly outperforming; Hong Kong stocks overall closed slightly lower, with Hang Seng Tech relatively stronger. Major U.S. stock indices were mixed, with the S&P 500 basically flat and the technology sector relatively outperforming. In the bond market, China government bond yields overall edged down slightly, while U.S. Treasuries bear-flattened under the impetus of the Fed rate hike and inflation expectations, with more significant adjustment at the short end. In the commodity market, gold and copper rebounded after the rate hike was implemented, crude oil fell back after a geopolitical spike, and ferrous metals overall fluctuated lower. In foreign exchange, the U.S. dollar index rose above 100, supported by the Fed's hawkish rate hike; the renminbi appreciated against the trend, while the Japanese yen weakened somewhat. I. China stocks: AH growth outperformed Last week's review of China AH shares: AH growth outperformed. A-shares: Last week the market rebounded and repaired, with growth style comprehensively outperforming. STAR 50 surged 6.39% in a single week, leading all broad-based indices, while small- and mid-cap indices strengthened in tandem, and large-cap blue chips were relatively weak. At the sector level, electronics, communications, and machinery led gains, while coal, agriculture, forestry, animal husbandry and fisheries, and oil and petrochemicals led declines. H-shares: The Hang Seng Index closed slightly lower, while the Hang Seng Tech Index was relatively strong; the core market variable was the unexpectedly more hawkish signal from the Federal Reserve's monetary policy meeting. The new chair implemented the first rate hike after taking office and hinted that tightening could continue, and Hong Kong subsequently raised its benchmark rate in tandem. Higher HKD funding costs, a stronger U.S. dollar, and capital repatriation pressure weighed on risk appetite. Sector performance diverged markedly, with healthcare leading gains on faster innovative drug approvals, expectations for overseas cooperation, and pipeline progress in niche tracks, while the energy sector led declines, dragged down by pressure on oil price expectations. China stock market outlook: Wait for the market to repair. A-shares: As the long holiday approaches, market trading sentiment usually becomes cautious, and it may be difficult to form a sustained main line in the short term, with the market mainly characterized by weak fluctuation and structural adjustment. In terms of operations, it is recommended to follow the repair main line and position on dips, focusing on three types of high-prosperity directions: first, upstream AI semiconductor equipment and materials, where earnings realization is highly certain and allocation cost-effectiveness becomes prominent after pullbacks; second, upstream resource products benefiting from the dual drivers of a weaker U.S. dollar and supply constraints, including chemicals, industrial metals, and others; third, sectors with strong earnings resilience and relatively low valuations, including non-bank financials and others. Hong Kong stocks: Last week the Fed rate hike "landed" but the tone was hawkish, and the dot plot suggested possibly one more hike within the year. The pressure on Hong Kong stock valuations from tighter overseas liquidity will be difficult to remove in the short term. After the "bad news exhausted" expectation fell through, the market may need time to reprice a "higher for longer" rate environment. II. China bond market: Last week China government bond yields overall edged down slightly. Last week's bond market review: Last week China government bond yields overall edged down slightly. Under marginally tighter domestic funding conditions and external disturbance from the Fed rate hike, the bond market staged an independent "self-centered", with rate bonds strengthening modestly within a narrow range and medium- to long-end yields fluctuating lower. Over the full week, the 10-year government bond yield fell 0.79bp to 1.682%, the 30-year government bond yield fell 2bp to 2.126%, the short end was basically flat, and the yield curve flattened slightly. Bond market outlook: The bull-bear tug-of-war in the bond market continues, maintaining a low-level fluctuating pattern. The central bank's recent fine-tuning operations focus on smoothing cross-quarter and cross-holiday funding fluctuations, with consecutive overnight reverse repos during the tax period and the addition of 14-day reverse repos on September 18, keeping funding conditions overall in a tightening but controllable range. In the short term, current yields have been compressed to low levels, and a trend decline lacks clear catalysts, compounded by the peak in government bond supply, quarter-end assessment, and funding disturbances before the Mid-Autumn and National Day long holiday, as well as external constraints from the Fed rate hike, oil prices, and geopolitical disturbances. We maintain a judgment of low-level, mildly strong fluctuation for the market outlook and recommend neutral duration, with subsequent focus on changes in geopolitical events and attention to funding conditions. III. U.S. stocks: S&P 500 basically flat, equal-weight measure down 1.26% U.S. stock review: Last week major U.S. stock indices were mixed. The S&P 500 fell 0.08%, the Dow fell 1.69%, the Nasdaq Composite rose 0.72%, the Nasdaq 100 rose 0.94%, the Russell 2000 fell 1.50%, and the Philadelphia Semiconductor Index rose 0.83%. The S&P 500 fell for three consecutive trading days earlier in the week and closed at its lowest since July 31 on the rate decision day, then rose a cumulative 1.31% over the following two trading days, recovering most of the earlier decline. The S&P 500 equal-weight index fell 1.26% for the week, lagging the market-cap-weighted index by 118 basis points, while the Dow fell for a third consecutive week. At the sector level, 9 of 11 sectors declined, with only healthcare up 1.83% and information technology up 1.03%, while utilities fell 3.04%, financials fell 2.43%, and real estate fell 2.05%, lagging the pack. The decline in high-dividend sectors corresponded to the 10-year U.S. Treasury yield standing above 5%. The semiconductor supply chain was the main source of volatility last week: heads of three leading artificial intelligence companies called over the weekend for slowing frontier model development, and the Philadelphia Semiconductor Index fell 5.86% on the first trading day of the week, extending its drawdown from the June 22 closing high to 23.94%. Corning fell 13.70% that day and 9.78% for the week, while the software sector ETF rose 5.04% the same day. Over the following four trading days, the Philadelphia Semiconductor Index rose a cumulative 7.10%, with memory and semiconductor equipment leading gains. SanDisk rose 9.70% for the week, and Micron rose 4.16% for the week. U.S. stock outlook: The core issue currently priced into U.S. stocks is earnings sustainability, and the subsequent driver of index gains is expected to come from earnings growth, with limited room for valuation expansion. Our baseline judgment is that earnings growth will slow but earnings levels will not collapse, and we expect S&P 500 earnings per share growth of around 10% in 2027 and 2028. In the short term, focus on: pricing for another rate hike in October (currently about 55%), cloud vendors' 2027 capital expenditure guidance, memory and chip prices, and the August PCE index to be released on September 30. IV. Overseas rates: Fed hikes 25bp, U.S. Treasury curve flattens Last week's overseas rates review: Last week the U.S. Treasury yield curve bear-flattened, with the short end leading gains. Over the full week, the 2-year rose 13 basis points to 4.76%, the 10-year rose 5 basis points to 5.01%, and the 30-year fell 1 basis point to 5.34%. The 2-year hit a new high since July 2024; the 10-year touched 5.041% intraday and closed above 5%, a new high since July 2007. The Federal Reserve raised the federal funds target range by 25 basis points to 3.75% to 4.00% by a 12-0 vote, the first rate hike since July 2023. The dot plot's median rate for end-2026 rose from 3.8% to 4.1%, with 16 of 18 officials submitting projections expecting at least one more hike within the year, and the end-2027 median rose from 3.6% to 4.1%. The statement deleted the wording that part of inflation stemmed from supply shocks, and Chair Warsh called this action "withdrawing some accommodation." The market prices about a 55% chance of another rate hike in October. Overseas rates and FX outlook: After the rate hike was implemented, short-end pricing shifted from whether to hike to the terminal rate of hikes. The market has currently priced in about three more hikes before mid-2027, above the dot plot median; historically, front-end forward rates rarely peak clearly before the final hike, and the environment of a flattening curve is expected to continue before the terminal point is clear. On the long end, the wording "withdrawing some accommodation" helps inflation risk premium, while the resilience of investment spending and employment keeps long-end yields in a relatively high range, with oil prices still dominating daily fluctuations. V. Commodities: Gold and copper staged a "bad news exhausted" rebound. Last week's commodity review: Last week commodities traded under the interwoven dual main lines of "the Fed restarting rate hikes" and "Middle East geopolitical conflict," overall showing a divergent pattern of stronger precious metals and base metals, high-level fluctuation in energy, and weakness in ferrous metals. Gold: Last week gold showed a typical rhythm of "pressure before the rate decision, rebound after the rate decision": in the first half of the week, rate hike expectations were fully priced in and the 10-year U.S. Treasury yield broke above 5%, gold prices weakened continuously, and London gold fell below $4,300; in the second half of the week, gold staged a "bad news exhausted" consecutive rebound, recovering all losses and hitting a new weekly high. Copper: Last week, after bad news was exhausted, copper prices rebounded strongly and once again approached highs, supported by low domestic inventories and peak-season demand. Crude oil: Last week the crude oil market showed a typical high-volatility pattern of "geopolitical spike - expectation pullback." Early in the week, geopolitical risk premium pushed oil prices to a new stage high, but they then quickly gave back gains under multiple pressures including expectations of easing tensions, rising Fed rate hike expectations, and high oil prices suppressing demand. Domestic ferrous metals: Last week ferrous metals overall spiked and then fell back, fluctuating lower, ending the relatively strong pattern from late August to early September. Last week ferrous metals shifted from "strength led by supply contraction" to "decline led by negative feedback and policy-driven resumption expectations," with cost support weakening. Global commodity outlook: Gold: After the rate hike is implemented, if the Fed does not release signals of continued tightening, gold prices are expected to break upward from the converging triangle. Copper: New global copper mine capacity is limited, and incremental copper demand from emerging industries such as new energy, ultra-high-voltage transmission, and computing infrastructure is steadily expanding, so the medium- to long-term upward logic for copper prices remains unchanged. Crude oil: The market is in a reverse tug-of-war between geopolitical conflict support and macroeconomic pressure, and market volatility is expected to be difficult to converge. VI. FX: Hawkish Fed hike pushes the dollar higher, midpoint guidance leads the renminbi to strengthen against the trend and break through 6.70. FX review: Last week the FX market overall showed a pattern of "rapid dollar strengthening, broad pressure on non-dollar currencies, but the renminbi appreciating against the trend." The U.S. dollar index rose from around 99 to around 100.2, quickly breaking through 100 after the Fed rate hike midweek. The core driver of the dollar returned to the "rate hike path + oil prices": early in the week, oil prices spiked, pushing up inflation and U.S. Treasury yields, and the market increased bets on further Fed tightening; after the Fed hiked rates and released hawkish signals, the dollar strengthened further. Subsequently, oil prices fell back from highs and U.S. Treasury yields declined, and the dollar's gains also narrowed somewhat. In other words, the current dollar is not sensitive to oil prices themselves; what it is truly sensitive to is the transmission of oil prices through inflation expectations and U.S. Treasury yields to the rate hike path. FX outlook: Looking ahead, the dollar may maintain high-level fluctuation around 100 in the short term, with the core still depending on whether oil prices and inflation data can rise again and reinforce subsequent rate hike expectations. For the yen, a single BOJ rate hike has already proven insufficient to reverse the exchange rate; if USDJPY once again approaches 158-160, the risk of actual intervention will rise markedly. The renminbi was last week's most noteworthy unusually strong currency: if the midpoint continues to be actively strengthened, USDCNH is expected to further test 6.65-6.70; if the midpoint turns restrained again, then around 6.70 may enter a period of two-way fluctuation.