Sinolink Securities released its latest analysis noting that the A-share market has shifted from a "low-volume decline" to a "low-volume consolidation" phase since July. The firm suggests that the market may have reached a pivotal juncture where a strategic transition could occur, with the key hinging on whether significant developments emerge across three critical factors: Middle East geopolitical tensions, Federal Reserve monetary policy decisions, and progress within the AI industry chain.
After more than two months of subdued trading activity, both the situation in the Middle East and the upcoming Federal Reserve meeting are poised to be the variables that could break the current deadlock. The current state of the market appears to be at a point where a shift in dynamics is possible, provided that the factors driving the downturn experience a major change and a new clear investment theme emerges, similar to what was witnessed in early April.
Looking back at April, the market rebounded when a temporary ceasefire in the Middle East coincided with a growing consensus around the AI industry's acceleration. Today, the question encompasses at least the three aforementioned dimensions: Middle East geopolitics, Fed decisions, and AI industry chain developments. When oil prices once again become a focal point, history from March onwards does not necessarily have to repeat itself.
Despite current market volume, price levels, and valuations being close to those seen after the correction in March-April, three key differences suggest that this time around, the market is unlikely to replicate the extreme trend of flocking to "certainty" that drove the rebound from April to June. First, following the recent escalation of the US-Iran conflict, the market has not entered a "crisis mode," as implied and actual volatility in US stocks and crude oil have not risen as rapidly as they did in March. This also implies that the pursuit of "certainty" may not be as strong as it was back then.
Second, current US Treasury yields are higher than they were from March to June, placing greater downward pressure on the denominator of equity valuations. August's inflation data cleared the obstacle for a September rate hike. Another notable distinction is that the current Fed Chair has explicitly declined forward guidance and minimized communication with the market, in stark contrast to his predecessor's approach in March. This has led to concerns that "the Fed is falling behind the curve." Based on the market reaction following the release of the US August CPI report—where precious metals initially fell before rebounding and the three major US stock indices opened higher—the inflation data actually served as a "clearing of negatives" that eliminated policy uncertainty. However, the sustainability of this rebound depends on the subsequent trajectory of inflation and whether the rate hike cycle truly commences.
Third, the April-to-June market rebound was led by the AI industry chain, which was precisely the sector most insensitive to interest rates and inflation in the economy. However, the AI industry chain's sensitivity to interest rates is now also increasing. Based on the firm's tracking indicators, the points where the AI chain's "negative real interest rate" advantage weakened correspond to moments when both US and A-share AI sectors underperformed the broader market. The core question facing the market is essentially a race between interest rates and inflation, with two potential paths emerging from this dynamic.
The first path is when nominal interest rates outpace inflation, leading to a rise in real interest rates and highlighting the "negative real rate" advantage of the AI industry chain. In this scenario, physical assets come under pressure from real rates, while the AI chain becomes the market's embraced source of "certainty," forming the basis for the extreme divergence seen from March to June. The second path is when nominal rates lag behind inflation, making inflation sources the only area of true certainty—in the current environment, this points to the energy chain.
The firm has repeatedly discussed the "rising volumes and prices" logic for the oil and petrochemical sectors amid "low inventories and expanding crack spreads," a logic that currently remains unrefuted. August saw robust growth in China's refined oil product exports with widening price increases. Looking ahead, even if oil prices decline due to easing Middle East tensions, the relatively lagging stock prices compared to commodity gains provide a safety cushion. Weaker oil prices would also be beneficial for crude restocking, supporting the "rising volumes and prices" at the refining end. If a scenario similar to those seen in Q4 2022, Q3-Q4 2024, or Q4 2025 emerges—with easing rate hikes but extremely sticky inflation—the US dollar would weaken, and precious metals would experience their greatest flexibility for gains. In such a case, energy and metals would not be in conflict but rather complement each other.
During this period of volatility before the fog clears, the Middle East situation and the Fed meeting will be the catalysts to break the stalemate. The current macro environment, industrial dynamics, and inflation elasticity are all significantly different from the March-to-June period, making a "copy-paste" approach inappropriate. The firm's recommendations are twofold. First, the energy and chemical chain, represented by oil, oil shipping, and refining, will continue to benefit from global restocking demand for energy. Regarding non-ferrous metals such as copper, gold, and aluminum, which serve as assets that oppose the US dollar, attention should be focused on the relative strength of interest rates versus inflation. After extreme rate hike expectations, opportunities have already begun to emerge.
Second, the sudden changes in the Middle East situation have increased uncertainty, and seeking certainty through the Q2 2026 earnings reports remains an effective tool against volatility. The firm has identified directions that offer high earnings delivery and a good match between profitability and valuations. The primary risks to watch include a significant tightening of overseas monetary policy expectations and major breakthroughs in AI industry trends.