Recent geopolitical tensions have disrupted inflation expectations, and amid hawkish statements from the Federal Reserve, markets experienced a relatively weak and volatile performance this week. However, historical data shows that rising commodity prices do not necessarily lead to widespread inflation in the United States, and the impact of Fed policy changes on A-shares is typically short-term. Despite short-term fluctuations, the overall bullish trend for the year remains intact. In terms of sector focus, technology remains the medium-term main theme, while strategic resources and domestic demand-related traditional assets warrant attention.

Trading volume increased this week as the Federal Reserve's hawkish tone unsettled global equity markets. Since early March, escalating tensions between the U.S. and Iran have driven up prices of strategic resources like crude oil. The ongoing uncertainty surrounding the blockade of the Strait of Hormuz continues to pose risks to future oil prices and inflation. The Fed's interest rate decision emphasized that "the impact of developments in the Middle East on the U.S. economy remains unclear." Against this backdrop, the Fed maintained a hawkish stance, with Chair Powell noting that most officials have scaled back their expectations for interest rate cuts and have not ruled out the possibility of further hikes. Following the meeting, market expectations for rate cuts declined rapidly, leading to broad weakness in global stock markets, with A-shares underperforming relatively.

Historically, rising commodity prices have not always coincided with broad-based inflation. Looking at commodity price trends since the 1970s, there have been four notable upward cycles, each with varying effects on U.S. inflation. For instance, the commodity booms in the 1970s and 2021–2022 were accompanied by widespread inflation, whereas during the 2003–2008 and 2009–2011 periods, U.S. core inflation remained relatively stable. The differing inflationary outcomes can be attributed to several factors: the declining weight of oil in the U.S. economy, the monetary policy environment influencing the strength of inflation transmission, wage rigidity affecting the potential for a wage-price spiral, and variations in the drivers of price increases. Current U.S. macroeconomic conditions may not support a rapid rise in inflation.

First, the significance of oil in the U.S. economy has diminished considerably, meaning that commodity price increases have a smaller direct impact on overall inflation compared to the 1970s. Second, the current monetary policy cycle is distinct, with policy rates remaining at elevated levels—unlike the low-rate environments that preceded the inflationary periods of 1973–1979 and 2021–2022. Third, the labor market is not strong enough to sustain a wage-price spiral, as U.S. job vacancy rates and wage growth have both declined from their 2022 peaks. Overall, while rising commodity prices may temporarily push inflation higher and disrupt the timing of rate cuts, they are unlikely to trigger a reversal in Fed policy.

Changes in Fed policy do affect A-shares, but the impact is generally short-lived. Each time the Fed begins a new rate-hiking cycle, equity markets experience some degree of short-term correction. However, over the longer term, markets tend to recover and resume their upward trajectory as underlying fundamentals improve.

For A-shares, Fed rate hikes primarily influence market sentiment through external market volatility. For example, in December 2015, A-shares saw significant short-term adjustments due to the start of Fed tightening and weak domestic fundamentals. However, from early 2016 onward, supportive growth policies helped restore market confidence, leading to a sustained upward trend. Compared to A-shares, Hong Kong stocks are more susceptible to shifts in overseas monetary policy, largely due to the higher proportion of foreign ownership in the Hong Kong market.

Short-term volatility and consolidation do not alter the full-year bullish outlook. Structural emphasis should be placed on strategic resources. This week, unresolved geopolitical tensions and the Fed's hawkish stance have dampened rate-cut expectations. With A-share earnings season approaching, market risk appetite may remain under pressure, and short-term disruptions are likely. Nevertheless, the bullish sentiment that began on September 24, 2024, remains intact from a medium-term perspective. As economic recovery broadens and household funds continue flowing into the market, the A-share bull market is expected to progress into its later stages by 2026. Strategically, attention should be given to strategic resources and domestic demand-oriented traditional assets, with technology continuing to serve as the medium-term core theme.

Risk warning: Global liquidity tightening may exceed expectations.