CICC: Market Approaching Key Support Level

According to the latest report from CICC, the market is more likely to maintain a structural market in a volatile pattern in the current environment. However, after a significant pullback recently, the market is approaching the weekly and monthly support levels. Therefore, if there are no unexpected shocks, there may be some stabilization at this level.

Last week, the Hong Kong stock market continued to decline following the A-share market, with the Hang Seng Index falling to 17,000 points again. Market sentiment has become extreme, with the Hang Seng Index approaching the oversold zone and touching the lower boundary of the 20-day trading range. The risk premium has risen to the highest level since late April, with short selling reaching the highest level since early April. The turmoil and volatility of external assets such as the sharp drop in US stocks and the significant appreciation of the Japanese yen undoubtedly caused disturbances through emotional and trading factors (such as the unwinding of long and short trades by hedge funds). However, domestic growth and policy expectations have also failed to provide effective hedging, as evidenced by the weaker performance of the A-share market.

The optimistic sentiment surrounding the Fed's interest rate cut has not only failed to continue but has rapidly diminished over the past two weeks, increasing uncertainty and concerns in the US stock market. The unique short duration of this interest rate cut cycle and the market's anticipation have made the impact of the interest rate cut more forward-looking, and the actual easing may be nearing the end of loose trading. For the Chinese market, including the Hong Kong stock market, the impact of the Fed's interest rate cut is indirect and secondary, with domestic fundamentals being more important.

In response to the issue of the inversion of financing costs and investment returns leading to continued contraction of the private sector credit cycle, the central bank's interest rate cut (financing costs) and fiscal efforts (increasing investment returns and expectations) are short-term targeted measures. However, the magnitude and speed are equally important. We estimate that an additional fiscal stimulus of 4-5 trillion yuan and a 75-100 basis point reduction in the 5-year LPR could solve the credit contraction issue. The recent interest rate cuts and new measures for equipment upgrades are positive, but the scale is relatively small. With insufficient endogenous economic growth momentum, it is still necessary to intensify policy measures.

Looking ahead, following the medium- to long-term reform goals set at the Third Plenum, the short-term policy direction at the end of July's Central Political Bureau meeting is worth paying attention to. Subsequent policy support will continue to be introduced, similar to recent fiscal and monetary efforts, but expecting strong stimulus is unrealistic. Externally, the third quarter remains an important window for the Fed's interest rate cuts. In the current environment, the market is more likely to maintain a structural market in a volatile pattern. However, after a significant pullback recently, the market is approaching the weekly and monthly support levels. Therefore, if there are no unexpected shocks, there may be some stabilization at this level