Core Viewpoint - The current state of US-China trade relations is described as a "delicate and fragile balance," with the market underpricing potential risks and exhibiting overly optimistic sentiment, which is disconnected from the actual escalation of geopolitical risks [1] Market Performance - Since the escalation of tensions last Friday, the Hang Seng Index has seen a cumulative decline of less than 1%, indicating that investors generally believe both parties will return to negotiations and have not priced in potential negative scenarios [1] - Historical data shows that during previous significant escalations in US-China tensions, the MSCI China Index experienced valuation downgrades of up to 13% to 15%, suggesting that the current market calm lacks adequate risk consideration [1] Investor Strategy - Investors are advised to be cautious of potential risks and adjust their strategies by focusing on three types of companies: 1. Companies in the technology sector that achieve self-sufficiency to better cope with technology blockade risks [3] 2. Companies with strong profit fundamentals that possess greater resilience to risks [3] 3. Companies aligned with the theme of avoiding excessive competition, capable of maintaining stable development in a complex market environment [3] - Key signals to monitor for worsening situations include specific details on retaliatory measures from both sides, potential cancellations of meetings, and the inclusion of more Chinese companies on the entity list by the US [3] Downside Risks - Risk Scenario 1: Implementation of restrictions could lead to market shocks, with China's new rare earth export controls tightening approval processes, particularly affecting the chip sector, which the market has not fully absorbed [4] - Risk Scenario 2: If restrictions become permanent policies, it could result in substantial "decoupling" in key supply chains, impacting the global economy and Chinese stock markets. The US is collaborating with allies to rebuild rare earth supply chains, which, while not immediately threatening China's position, poses a long-term risk that the market has not adequately considered [4] - Execution Risk of Agreements: Even if a "narrow agreement" is reached, such as pausing additional retaliatory tariffs, the execution of such agreements faces significant political and operational risks, with a high likelihood of being fragile. The market's optimistic expectations regarding this execution risk appear overly high [4]

- The report discusses the monitoring of market adjustments using two perspectives: whether the market is in a five-wave upward trend and whether the stock-bond yield gap has reached 2 standard deviations. Currently, most broad-based indices have not triggered warning conditions[1][7] - The report introduces a timing system that evaluates market trends and potential overbought conditions using trend indicators, low-frequency thermometers, and ultra-low-frequency thermometers. These indicators suggest that the market has not yet crossed the risk threshold, but sustained upward momentum next week may trigger short-term overbought signals[7] - The report highlights the TMT sector's rising crowding level, with transaction volume accounting for approximately 34%, still below the two-year high. This indicates that the sentiment in the TMT sector has not yet reached a bubble-like state. Meanwhile, cyclical and consumer sectors are at near two-year lows in transaction volume, suggesting potential sector rotation once the market enters an overbought state[8]

Group 1 - The domestic equity market continued its strong performance last week, with the Wind All A Index rising by 2.21%, surpassing the high point from October 8 of last year, and the average daily trading volume reaching approximately 1.8 trillion yuan [1] - The commencement of the Yarlung Tsangpo River downstream hydropower project, with a total investment of 1.2 trillion yuan, positively impacted sectors related to infrastructure such as steel, construction, and building materials, with weekly gains generally exceeding 6% [1] - Since the rebound began on June 23, the Wind All A Index has increased by over 10%, and from the low point in early April due to trade conflicts, the index has rebounded nearly 25% [1] Group 2 - The upcoming third round of economic and trade talks between China and the U.S. in Sweden is crucial for the fate of the 90-day tariff suspension, which will directly affect the interests of enterprises in both countries and global market stability [2] - The U.S. may introduce non-economic issues into the trade discussions, which could complicate U.S.-China relations and potentially have ripple effects on the global energy market and economic recovery [2] - Since June 23, the market has seen a continuous rise for five weeks, with the Shanghai Composite Index surpassing the 3400, 3500, and 3600 points, indicating a potential risk of adjustment as it approaches the previous high of 3674 from October 8 [2] Group 3 - In the bond market, both interest rate and credit bond yields rose across the board last week, with an increase in net supply of interest rate bonds primarily due to significant net supply from local government bonds [2] - The funding environment showed increased volatility, with rising funding rates, alongside inflation expectations driven by the commencement of the Yarlung hydropower project and the ten major industries' growth stabilization efforts [2] - The crowded market conditions previously led to high durations in interest rate bond funds, with ultra-long bonds and non-active bonds experiencing compressed yield spreads, making the market sensitive to marginal negative news [2]