Oil prices breaking above $100 fuel expectations of rate hikes! Will the Fed act next week?

富途寰球私享匯

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With interest rates remaining high and geopolitical tensions persisting, how should assets be allocated in the second half of the year?

🧩 I. Core Framework: We Are in the Era of the 'Great Dispersion'

Great Dispersion

Within the same index, stock performances vary drastically; within the same sector, strength and weakness differ enormously.

Three cross-sectional market snapshots make it immediately clear:

South Korea： $Korea Composite Index (.KOSPI.KR)$ The index rose more than100%, yet over half of its 830 constituent stocks declined. Nearly all of the gains came from just two heavyweight stocks: Samsung and SK Hynix.Picking stocks at random will most likely result in losses.

China: Year-to-date gains for the STAR Market, defense, and data centers30%+; while$BABA-W (09988.HK)$ 、 $TENCENT (00700.HK)$ 、 $PDD Holdings (PDD.US)$ year-to-date decline20%+. A tale of two extremes.

United States: The weight of the tech and communications sectors has expanded from20% just over to nearly50%。 Even buying the Magnificent Seven may not outperform the index this year—only a handful of core hardware stocks like $NVIDIA (NVDA.US)$、 $Advanced Micro Devices (AMD.US)$ and a few others are leading the pack.

📌 Conclusion: A rising index doesn’t guarantee profits. In this era of extreme divergence, stock selection matters more than market selection.

🔥 II. Inflation: The Root of All Evil

To understand today’s market, you must first understand inflation.

Oil prices are highly correlated with U.S. CPI, following a simple relationship:

After the U.S.-Iran ceasefire, WTI has moved fromUSD 100Pull back tothe $72–74 range, the May CPI reading4.2%is expected to gradually ease, but will most likely3%hover above that level.

⚠️ The current bond market has already priced in an expectation of one interest rate hike over the next 12 months, not a cut.

Gold, bonds, and Bitcoin have all underperformed this year, driven by a consistent core logic—rising inflation expectations push up interest rates, and higher rates suppress non-yielding assets。

💰 III. The self-reinforcing cycle of wealth inequality and asset prices

The share of global wealth held by the top 1% (individuals with net worth exceeding $1 million) has expanded from approximately20%in the 1970s to roughly35%。

There is a self-reinforcing logic chain behind this:

This explains whytechnology, AI, and data centersare surging with unstoppable momentum, whileConsumer sector（ $Kweichow Moutai (600519.SH)$ 、 $PDD Holdings (PDD.US)$ 、 $Nike (NKE.US)$ 、 $Lululemon Athletica (LULU.US)$ ) are under pressure and pulling back—wealthy individuals don’t consume tenfold, but they do invest tenfold.

The other side of the coin:Excessive wealth concentration → political polarization → rising policy volatility → high market volatility.

Trump, trade wars, and Middle East conflicts are all external manifestations of this underlying social fragmentation.

IV. Bank of Japan rate hike: Dovish hike

Three sentences summarize Japan’s current economic condition:

Strong economy · Strong labor market · Inflation present

Spring wage negotiations wage increase5.02%，Returned to levels seen during the bubble economy era

April real wages year-on-year+3%，Wage-price spiral has begun

Central bank decision: policy rate raised from0.75%Upgraded to1%(highest since 1995), while also announcing that balance sheet reduction will be paused starting April 2027.

Markets interpreted this as a "dovish hike"—a rate hike,But liquidity buffers were preserved for the market, and the Nikkei still closed higher on the day.

Three key points to watch going forward:

1. The trajectory of inflation data (determining whether another rate hike occurs in October or December)

2. Whether AI-related export momentum can be sustained

3. The yen’s 160 level—a de facto red line for the Bank of Japan; intervention may be triggered if it moves beyond this level 6. China’s economy: External demand shines, while domestic demand faces broad-based pressure

🗳️ 5. U.S. midterm elections: Analysis of four scenarios

Following redistricting in 2025–2026, Republicans gained additional seats in the House of Representatives,10 itemsand markets have started repricing the likelihood of a Republican sweep of both chambers.

Core issues:

Inflation (retail gasoline prices breaking $4 per gallon—the most directly felt by consumers)

Trajectory of the U.S.-Iran conflict (a ceasefire memorandum has been signed, but implementation remains uncertain)

Two most likely outcomes:

6. China's economy: External demand stands out, while domestic demand faces broad-based pressure

Key recent data points:Strong exports, weak domestic demand。

Retail sales weakened across the board, with automobiles being the primary drag(due to tapering of trade-in subsidies and rising energy prices)

Fixed asset investment was weighed down by the property sector, with both volume and prices of newly built commercial housing declining10%+

The CPI reading rebounded somewhat,but the increase was primarily driven by energy prices rather than demand-side factors

New social financing added in MayRMB 2.03 trillion, exceeding expectations, but bill discounting accounted for a significant share87%——Corporate medium- to long-term loans posted negative growth; ample liquidity has not translated into broad credit expansion

Three core weaknesses:

1. Falling home prices → weakened household wealth effect → further contraction in consumption (this negative cycle remains unbroken)

2. Exports have benefited from sectors such as AI-related equipment and optical communications, but the underlying logic chain faces disruption risk if policy shifts occur

3. The overall property market remains weak, with insufficient momentum for domestic demand recovery

Policy outlook:

There is a window for policy action, but near-term interest rate cuts or reserve requirement ratio (RRR) reductions appear unlikely—the central bank is caught in a dilemma due to downward pressure on the PPI.

🏦 7. Kevin Walsh and the FOMC

This marks newly appointed Fed Chair Kevin Walsh’s first appearance at an FOMC meeting.

Markets have positioned him as a hawk, but his recent remarks show signs of softening. Several key stances to watch:

① Prefers trimmed-mean inflation (Trimmed PCE)

Automatically excludes extreme disturbances such as tariffs and war-related shocks, reflecting a relatively dovish stance on inflation.

② Compares AI to the electrification revolution—deflationary in the long run

Higher productivity → long-term disinflation → policy framework predisposed toward rate cuts.

③ His stance on the balance sheet is overestimated

Even if he supports balance sheet runoff, he would maintain liquidity by lowering reserve requirements—Financial market liquidity remains protected.

🫧 Eight: AI Bubble – In the Brewing Phase, Not Yet in the Bursting Phase

All six preconditions for a market bubblehave now been triggered：

✅ Equity-bond divergence (bond market being ignored)

✅ The 'this time is different' narrative is widespread

✅ Consumer/internet sector profits under pressure

✅ Capital increasingly concentrated in a few assets

✅ Retail investor leverage frenzy (heavy participation in 2x/3x ETFs and options)

✅ Abundant financial liquidity

but currently classified as"Bubble incubation phase" rather than "bubble already formed", reasons:

① AI is indeed enhancing real-world productivity, and the earnings-driven logic remains intact

② Private credit market spreads are modest, with no systemic pressure for tightening

③ Hard metric: S&P 500top 30%companies by market cap have not yet seen their forward P/E ratios break out45 times

④ There remains$7.8 trillionin cash waiting to enter the market

Hard bubble indicator: The top 30% of S&P 500 companies by market capitalization have a forward P/E ratio > 45x.

Hardware manufacturers’ stock prices have risen significantly recently, buttheir valuations remain within a reasonable range.

📌 Conclusion: The rally may still have some room to run, but every cycle ends in a bubble. Focus on returns, but also manage risk appropriately.

This document summarizes guest speaker content for reference purposes only and does not constitute investment advice.

Individual stocks or markets mentioned herein are used solely for macroeconomic analysis and do not constitute recommendations to buy, sell, or hold any securities.

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