Foreign capital flows showed a notable shift this week, with active funds injecting USD 70 million into Hong Kong stocks, reversing last week's USD 60 million outflow, while A-shares saw USD 40 million in active inflows compared to the previous week's USD 100 million outflow. Passive flows were stronger, bringing USD 890 million into Hong Kong and USD 140 million into A-shares, a marked improvement from the prior week's outflows of USD 330 million and USD 270 million respectively, with funds dedicated to global and emerging markets seeing particularly strong participation.
In contrast, southbound flows reversed sharply to an outflow of HKD 11.58 billion, versus an inflow of HKD 90 million last week, averaging a daily outflow of HKD 2.32 billion. Buying activity concentrated in Alibaba, SMIC, and Kuaishou, while notable selling occurred in Hua Hong Semiconductor and Xiaomi.
Pressure on the AI sector has intensified once again, as the AI Bubble Pressure Index deteriorated this week, climbing to 66 and breaking its previous high. On the demand side, the pace of model capability improvements has slowed, offsetting gains from increased token usage and cost reductions. On the cash flow front, model companies' annual recurring revenue and cloud vendors' revenue growth have decelerated; however, leverage metrics, credit bond issuance, CDS spreads, and credit spreads have all shown improvement.
US Treasury market disruptions have resurfaced as the core global development last week, with long-end yields climbing persistently and amplifying technology sector volatility. In comparison, US equities have not fallen significantly, yet the dollar emerged as the biggest loser, while gold and cryptocurrencies—serving as dollar substitutes—surged. This suggests the issue lies not in earnings fundamentals or even the Treasury market's fundamental backdrop, such as real rates or rate hike expectations, but rather in the willingness to hold US debt, reflected through term premiums and subsequently transmitted to the dollar.
While various concerns and grand narratives have begun to intensify at this stage, the origin of the Treasury problem is straightforward: a short-term supply-demand mismatch. Since late June, the 10-year Treasury yield has risen 34 basis points, with term premium contributing 30 basis points while rate expectations remained essentially unchanged. A closer look reveals that recent supply-demand changes are marginal—long-dated bond supply is comparable to Q2 levels, and even the AI technology credit bond supply, often blamed as the culprit, is less than Q1's, with no significant crowding-out effect on Treasuries.
The question arises: why is the problem emerging now rather than in Q1 when supply was greater? Beyond Warsh's actions undermining market confidence in the Fed, an important factor is growing concern over short-term AI development bottlenecks—cost concerns only surface when output stalls. The current shock has not reached the severity of October 2023, although the Treasury Department's reactive policymaking has amplified market worries. A preferable approach would be for Warsh to maintain his commitment to controlling inflation in upcoming statements, refrain from equating high market rates with rate hikes, while pledging liquidity support during crises. More critically, AI industry progress matters most, just as concerns over private equity credit in Q4 were dispelled by Anthropic's breakthrough in Q1.
US equities do not warrant pessimism; any volatile pullback would actually provide better entry opportunities. Treasuries have fully priced in rate hikes and high premiums, offering short-term trading prospects. The dollar faces near-term pressure as Treasury issues damage dollar confidence. Gold has a solid floor, hedging against dollar asset trust erosion, with upside potential tied to larger crisis narratives. The Win Rate/Odds framework indicates strong scores for electrical equipment, raw materials, insurance, transportation, and energy, while innovative drugs have dropped out. The S&P 500, Nasdaq, M7, and Treasuries rank favorably, while the ChiNext board has fallen from the list.