Market Brief: Rising geopolitical risks trigger significant pullback in Chinese and Hong Kong stocks; short-term bonds and money market funds become safe-haven focus

Surging oil prices are tightening financial conditions, disrupting market expectations of Federal Reserve rate cuts due to growing anxiety

The Middle East conflict is entering its fourth week (as of March 23, 2026). Far from de-escalating, the situation has intensified further. The conflict has spilled over into global energy arteries. London Brent crude futures breaking above $110 not only represents a numerical milestone but also symbolizes the market's official entry into a 're-pricing of inflation' phase. Volatility in U.S. Treasury yield curves has increased amid tug-of-war between inflation expectations and risk-off sentiment, with investors now recognizing prolonged asset volatility driven by extended geopolitical risk premiums.

Reviewing last Friday (March 20), the U.S. 2-year Treasury yield closed around 3.89%, while the 10-year Treasury yield reached 4.38%, continuing to rise during today’s Asian trading session. The most symbolic aspect of analyzing the reasons behind two consecutive days of market turbulence lies in this: traders are pricing in the possibility that future interest rate decisions may diverge from Fed officials’ guidance, shifting towards pricing in the potential for 'rate hikes.' While this shift from rate cuts to hikes remains uncertain, the reversal in investor sentiment strongly reflects deep anxiety about supply chain shocks from rising oil prices, prompting the market to price in potential future rate hikes.

Looking ahead: With fluctuations in global interest rates and uncertainties in the political economy, investor demand for bonds is gradually rising.

In response to the current escalation of geopolitical risks, adopting a hedging strategy centered on short-term bonds to address uncertainty is a top priority. Allocating high-quality bonds with higher ratings and shorter durations as a defensive measure will be more advantageous in strengthening downside risk protection in portfolios amid market volatility, contributing to long-term low-volatility investment performance. In an environment of persistently high oil prices, inflation repricing, and rising interest rate uncertainty, short-duration bond strategies (1-3 years) demonstrate clear defensive advantages due to their lower sensitivity to interest rate fluctuations and relatively stable price movements. As maturity approaches, bond prices converge toward par value (100), with volatility gradually diminishing, providing a dual benefit of 'income + capital protection'.

Regarding equity assets, compared to commodities and bonds, the Hong Kong and China stock markets had not previously priced in the Middle East conflict. However, this week, even A-shares, which have a lower correlation with global markets, began reflecting possible interest rate hikes in developed markets. Structurally, it is evident that crowded sectors experienced significant short-term declines. Although Hong Kong stocks also saw notable pullbacks, we observed nearly HKD 30 billion in bargain-hunting buying today (March 23). In the short term, stock market volatility will increase, but in the medium term, we remain cautiously optimistic about the Chinese stock market.

Oil prices are the main variable influencing future inflation and interest rate trends, but compared to other energy-intensive, export-oriented Asian economies, China has a more diversified energy structure and stronger domestic demand buffering capacity.

Moreover, although Trump's visit to China has been postponed, the probability of aggressive measures against China remains relatively low while the U.S. has yet to resolve its relations with Iran. Meanwhile, China’s macroeconomic data is gradually showing signs of bottoming out. High-frequency data from February indicates robust export demand related to AI, combined with tariff reductions, driving exports to significantly exceed expectations. This year's government work report maintains an overall prudent tone, with technological development remaining a core focus. Although the economic growth target has been slightly lowered, this adjustment aims to retain greater policy flexibility amid a complex external environment.

Against the backdrop of rising geopolitical risks, the Chinese market demonstrates relative resilience, supported by improving fundamentals, counter-cyclical policy space, and attractive valuation levels. The MSCI China Index's P/E ratio remains below its 10-year average. Although the Chinese market is not entirely immune to global risk-off sentiment, it is becoming an increasingly important component for investors in highly uncertain global environments compared to countries heavily reliant on crude oil.

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