Goldman Sachs Traders' Market Observation: The Real Star This Summer is the Chinese Stock Market

Goldman Sachs believes that the performance of the Chinese stock market in the summer exceeded expectations, but valuations remain low, and net long positions are relatively low.

Goldman Sachs trader Mark Wilson recently pointed out that, looking back at the performance since 2025, the Chinese stock market is undoubtedly one of the biggest highlights of the summer. The performance of the Chinese stock market has far exceeded expectations, becoming one of the most surprising trading opportunities in the market.

Wilson mentioned that the Chinese stock market remains undervalued, with a low holding ratio, while trading momentum continues to strengthen. This market state itself may drive the stock market to self-reinforce, forming a reflexive effect.

Specifically, the Shanghai Composite Index has broken a 10-year high, and the margin financing balance of retail investors is approaching the peak during the 2015 stock market bubble. The A-share spot trading volume has exceeded 2 trillion yuan for 12 consecutive days, setting a record for the longest duration in history, while Goldman Sachs' Asia-Pacific business also recorded its largest single-day trading volume this Wednesday.

In addition, from a longer-term perspective, the net long positions in the Chinese stock market remain at a low level (only at the 56th percentile over a 5-year period). Since the beginning of this month, Goldman Sachs' proprietary trading has recorded the highest net inflow of funds in history, mainly from long buying. Overall, the low valuation of the Chinese stock market and the increasingly active trading are worth noting.

U.S. Stock Market: Rate Cut Expectations Drive Upward

Regarding the U.S. stock market, Wilson analyzed that rate cut expectations have become a key factor driving the stock market upward. The market expects the Federal Reserve to start cutting rates in September, with a pricing probability as high as 85%. As U.S. employment data becomes increasingly unstable, the upcoming August non-farm payroll data (next Friday) and the CPI data on September 11 will become particularly important.

It is worth noting that although the revenue of S&P 500 constituent companies grew by 4.8% year-on-year in the second quarter, the sales growth rate has slowed after adjusting for exchange rates. In particular, the actual revenue of small and medium-sized companies has shown negative growth.

From now until the end of the year, managing liquidity risk will become an important focus for the Federal Reserve and investors. The minutes from the July FOMC meeting mentioned that the rebuilding of the TGA (Treasury General Account) could affect fluctuations in the money market and funding conditions. Especially with the alternation of TGA rebuilding and changes in SLR (Supplementary Leverage Ratio) rules, as well as the end of Quantitative Tightening (QT), these are all worth paying attention to. Goldman Sachs believes that QT may end in October as funding pressures increase.

European Market: Shrinking Risk Premiums in Italy and France

Although the expectation of a rate cut by the Federal Reserve in August has become the focus, more structurally significant interest rate changes occurred in Europe this summer. This summer, the European market experienced structural changes. Since the establishment of the euro in 1999, there has always been a spread between the core and peripheral countries in the European bond market, but this difference is gradually narrowing. In particular, the risk premium gap between Italian BTP bonds and French OAT bonds is shrinking, and this historic difference is about to disappear At the same time, the political turmoil in Europe has added uncertainty to the market. The "no-confidence vote" proposal by French Prime Minister Élisabeth Borne (September 8) has triggered a sovereign risk premium, while the Dutch government is also considering similar voting issues, and the UK is facing fiscal difficulties. Nevertheless, the Eurozone PMI has reached a 15-month high, and the gap in GDP growth forecasts between Europe and the United States for 2026 is narrowing, indicating a recovery momentum in the European economy, even somewhat ahead of market expectations.

Goldman Sachs pointed out that European bank stocks have risen by 52% this year, but as stock prices increase, investors are beginning to consider how to protect these gains, especially in light of potential impacts from political and interest rate changes on the stock market. Additionally, for domestic French stocks, if the spread returns to the levels seen after the resignation of former Finance Minister Bruno Le Maire last year, the French stock market could face a downside risk of 10-15%