Escalating Middle East tensions weigh on US equities again as funds continue flowing into Hong Kong stocks [Ping An Asset Management (Hong Kong) Weekly Market Recap]

Last week, escalating tensions in the Middle East drove a sharp spike in London Brent crude prices, which in turn heightened market expectations of further Federal Reserve rate hikes, dampening risk appetite in capital markets. Capital continued rotating from tech sectors into high-dividend defensive and traditional industries. Meanwhile, strengthened regulatory support from mainland China boosted investor confidence and stabilized capital markets, driving inflows into Hong Kong equities and pushing the Hang Seng Index higher.

The Hang Seng Index closed Friday at 24,963.23 points, up 1.63% from the previous week. Mainland A-shares also rebounded under supportive regulatory measures, with the CSI 300 Index closing Friday at 4,649.19 points, rising 2.65% for the week; the CSI 500 Index ended at 7,532.70 points, gaining 0.25% over the week; while the CSI 1000 Index closed at 6,995.69 points, down another 2.40%.

US equities were pressured by concerns over interest rate hikes, with the Nasdaq closing at 28,128.34 points, down 1.62% for the week. The S&P 500 closed Friday at 7,411.98 points, down 0.61% from the prior week. The Hang Seng Tech Index closed last Friday at 4,629.51 points, edging up 0.14% for the week, while the Wind Technology Select HKD Net Return Index closed at 3,967.85 points, falling 3.26% over the week.

Benefiting from sustained capital inflows, high-dividend sectors in the Hong Kong market continued to rally over the past two weeks. Last week, the CSI Hong Kong Dividend Index closed at 3,903.35 points, adding 4.18% following the prior week’s 3.17% gain. The Solactive Global Pacific Equity Select HKD Net Return Index closed Friday at 2,045.31 points, up 1.51% for the week.

The money market remained stable, with the latest quote for the U.S. Secured Overnight Financing Rate (SOFR) at 3.64%.

Key market events:

China's GDP growth slowed to 4.3% in the second quarter, unexpectedly falling below the official target range. The GDP deflator turned positive for the first time in three years, but the momentum may be difficult to sustain as price gains were largely confined to the oil and AI sectors. Tensions in the Middle East showed no signs of easing, with U.S. forces conducting airstrikes on Iran for more than ten consecutive days, while Tehran struck multiple U.S. military bases across the region. Yemen’s Houthi rebels attacked a Saudi oil tanker in the Red Sea, heightening maritime risks and pushing Brent crude above $100 per barrel. Iraq’s prime minister reportedly delivered a U.S.-proposed ceasefire plan during a visit to Tehran, but Iran rejected it.

The European Central Bank held rates steady, with President Lagarde noting upside risks to inflation and signaling readiness to hike rates in September. With Waller now leading the Fed, its policy path has become harder to predict, and traders are sharply divided over whether a rate hike will occur next week. UK inflation fell to a 15-month low, potentially reinforcing the Bank of England’s confidence to remain on hold in the near term. The Bank of Japan is reportedly open to considering faster rate hikes, as accelerating readings in key inflation indicators are expected to support another move this year. The U.S. plans to impose forced labor tariffs on approximately 60 economies, rebuilding a tariff wall previously struck down by the Supreme Court; many countries criticized the new tariffs as lacking legitimacy. Bloomberg Economics believes the new tariffs will not threaten China’s export engine. The U.S. and China are moving forward with establishing an investment and trade council. China is reportedly seeking clarity from the U.S. on expected outcomes and the scope of discussions regarding artificial intelligence talks. Rishi Sunak officially took office as UK Prime Minister, pledging the biggest reforms in 40 years.

High-frequency data indicate that China’s economy started the third quarter with weak momentum, and sluggish domestic demand may already be weighing on production. The State Council called for improving the efficiency of fiscal spending to ensure the achievement of annual socioeconomic targets. In July, the People’s Bank of China rolled over one-year Medium-term Lending Facility (MLF) operations at an amount exceeding maturing contracts, stepping up liquidity support. Following a sharp selloff in tech stocks that battered equity markets, Chinese regulators and major institutional investors intervened to stabilize the market.

For the week, the Hang Seng Index rose 1.63%. By sector, materials posted the largest gain, while communication services saw the biggest decline. Southbound net inflows totaled HK$3 billion for the week.

Key economic data:

On Tuesday, the Philadelphia Fed’s non-manufacturing index for July came in at 7.4.

On Tuesday, according to ADP Research and the Stanford Digital Economy Lab, private-sector employment in the U.S. increased by an average of 16,500 jobs per week over the four weeks ending July 4.

On Monday, exports of integrated circuits, electronic components, and wind turbine generators—denominated in renminbi—rose 88.7%, 62.6%, and 35.6% year-on-year, respectively, in the first half of the year.

On Friday, the University of Michigan’s consumer sentiment index for July was reported at 54.4, versus an expected 51.0.

On Friday, the University of Michigan’s preliminary five-year inflation expectation for July stood at 3.3%, matching both the forecast and the prior reading. The preliminary one-year inflation expectation for July was 4.2%, below the forecast of 4.4% and the previous reading of 4.6%.

On Friday, U.S. industrial production rose 0.1% month-over-month in June, below the forecast of 0.2%.

On Friday, the U.S. import price index rose 7.1% year-over-year in June, exceeding the expected increase of 6.5% and following a prior reading of 6.7%.

On Friday, total U.S. building permits issued in June came in at 1.367 million, below the consensus forecast of 1.4 million and down from the previous month's 1.41 million.

On Friday, U.S. housing starts in June were annualized at 1.427 million, surpassing the forecast of 1.31 million; the prior month’s figure was revised upward to 1.199 million from the initial reading of 1.177 million.

Key market news:

On Friday, the central bank announced it would conduct overnight reverse repo operations from July 29 to July 31 and on August 3 to align with short-term liquidity needs in the banking system.

On Friday, the Ministry of Foreign Affairs stated China opposes all forms of unilateral tariff measures in response to the latest round of U.S. tariffs taking effect.

On Friday, the central bank shifted to a net injection in July through medium-term instruments such as MLF and outright reverse repos to improve medium- to long-term liquidity conditions.

On Friday, the SEC approved Nasdaq's new accelerated delisting rule for micro-cap stocks, under which companies with a market capitalization below $5 million for 30 consecutive trading days will be suspended and subject to delisting proceedings.

On Friday, Dalian introduced measures to stabilize its property market, offering a three-year phased interest subsidy for second-home housing provident fund loans approved within a specified period.

On Friday, four Beijing municipal departments jointly issued measures to accelerate development led by intelligent agents, proposing initiatives such as encouraging Token-based economies and establishing a multi-tiered computing power supply system.

On Thursday, the Ministry of Commerce stated that Chinese and U.S. economic and trade teams are soliciting feedback on arrangements for the trade council and a framework for reciprocal tariff reductions, and will move swiftly to implement tariff cuts on specific products.

On Thursday, Shanghai introduced science and technology finance measures proposing to deepen reforms of the STAR Market and expand the applicability of the fifth listing criterion to support frontier tech companies in going public.

On Thursday, China's maritime authorities issued a navigation warning stating that live-fire drills will be conducted in certain areas of the Taiwan Strait, with entry prohibited during the exercises.

On Thursday, the National Development and Reform Commission and the National Energy Administration released the '15th Five-Year Plan for Renewable Energy Development,' clarifying development priorities and outlining key technology R&D and engineering validation initiatives.

On Wednesday, the Ministry of Human Resources and Social Security and three other departments issued a notice extending policies on job retention subsidies and one-time hiring incentives, with preferential support directed toward small, medium, and micro enterprises.

On Tuesday, market sources indicated that the 'national team's' renewed share purchases as a market-stabilizing measure have drawn attention and reinforced expectations of market stability.

On Monday, China Life Insurance Group said its asset management arm, China Life Asset Management, has recently actively allocated capital to equities, recording significant net buying activity in a single day.

Last Friday, the Ministry of Industry and Information Technology convened a symposium with major automakers, urging them to resist irrational competition and strengthen product testing, safety assessments, and risk inspections.

Weekly market brief:

The market is gradually emerging from a narrow trading range, with capital rotating back from AI-related stocks into sectors previously weakened by capital outflows—a rotation occurring at a very rapid pace. The Federal Reserve maintains a cautious wait-and-see stance, and escalating U.S.-Iran tensions have driven oil prices higher, raising the possibility of an interest rate hike this year. Domestically, internal demand remains persistently weak, and market participants doubt the sustainability of any near-term recovery in domestic consumption. Hong Kong stocks have rebounded from recent lows, and a period of consolidation and volatility is expected to continue. Policymakers have recently emphasized maintaining proactive countercyclical adjustments and ensuring government investment translates quickly into tangible economic activity, providing a policy floor for stable economic performance throughout the year.

Hong Kong’s equity market continues to see strong southbound capital inflows, fully reflecting mainland investors’ recognition of the long-term allocation value of core Hong Kong-listed assets. This week, China will release June industrial profits and July official PMI data. The U.S. will publish durable goods orders, personal income and spending, and PCE inflation figures. Additionally, the Federal Reserve will hold its policy meeting, with its interest rate decision drawing close attention. We are also closely monitoring shipping traffic through the Strait of Hormuz and Bab el-Mandeb amid escalating U.S.-Iran tensions. Furthermore, we are tracking developments in U.S.-China relations and assessing how related policies might affect global supply chains and Hong Kong’s technology sector.

(Source: Bloomberg, Ping An Asset Management (Hong Kong) Limited)

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