Before the holiday, the A-share market quickly heated up. During the long holiday, the A50, Hong Kong stocks, and Chinese concept stocks all saw significant increases. Therefore, many investors believe that after the holiday, A-shares will accelerate even further. The current market indeed shows an unstoppable momentum. However, uncertainties have once again emerged.

Just as the stock market soared, over the past week, the offshore Renminbi against the US Dollar plummeted nearly 1200 points, dropping again to the 7.1 level. At the same time, the US Dollar Index continued to rise, and the expectation of a rate cut by the Federal Reserve narrowed during the National Day holiday. Some analysts believe that under this backdrop, global macro constraints may tighten again, hinting at a force that seems to be competing for capital.

So, how significant will the impact be on A-shares after the holiday?

A competition?

In the past week, there have been significant fluctuations in the exchange rate market. The US Dollar Index started at 100.17 and increased for 5 consecutive trading days, reaching 102.45 by now. Against this backdrop, the Renminbi has also been continuously falling over the past week, with a drop of nearly 1200 points.

It is worth noting that non-US currencies have also experienced widespread declines in the past week, with major currencies like the Japanese Yen dropping to around 149 at one point. The Thai Baht had a decline of over 3% on Friday, and the South Korean Won had a decline exceeding that of the Renminbi. During this period, there seems to be a deliberate force guiding capital inflows. Moreover, we can also see that under this scenario, the liquidity in the US market is also noticeably stabilizing, with the SOFR rate showing a significant drop after a brief rebound from September 26th to 30th.

The reason the US Dollar continues to rise is closely related to interest rate expectations. The latest data released by the US Department of Labor shows that the US unemployment rate dropped to 4.1% in September; the non-agricultural sector added 0.254 million new jobs, significantly higher than market expectations. As a result, many US research institutions stated on October 4th that due to the outperformance of the latest US non-agricultural employment figures compared to market expectations, the Federal Reserve may maintain caution in adjusting rate policies. It is expected that the rate cut in November may narrow to 25 basis points from the previous 50 basis points.

Secondly, it is related to the situation in the Middle East. On October 1, Iran launched a large-scale missile attack on Israel. Subsequently, Israel threatened to retaliate, and U.S. President Biden said he is discussing the attack on Iran's oil facilities with Israel. According to Israeli media citing officials, Israel may first strike Iran's oil fields and other energy facilities in the future. If Iran retaliates, they will consider targeting Iran's nuclear facilities. Iran declared readiness to respond to the attack and plans to launch a second round of attacks in response to Israel's military strikes. As a result, in the past week, international oil prices have risen by nearly 10%. If the situation between Israel and Iran continues to deteriorate, international oil prices may be in a trend of easy rise and difficult fall, which will affect the direction of global inflation.

How will A-shares evolve?

Recently, the market seems to be ignoring the variables brought by the foreign exchange market. In the past week, the Hang Seng Index in Hong Kong has risen by over 10%, and the Hang Seng Tech Index has risen by over 17%; the A50 has risen by over 14%, and remained strong with nearly 1% increase in the night session on Friday. The three times leveraged China ETF listed in the U.S. has had a weekly increase of over 35%. Therefore, many people believe that after the opening on October 8, the heat of A-shares will continue to rise.

Galaxy Securities believes that this increase should not be simply interpreted as a market rebound driven by policy, but should be seen as a strategic policy turning point with significant implications for China's economic transformation. Over the past two years, continuous policies to stabilize growth have been introduced, but the weak expectations of the real economy and capital markets have been the main issues constraining the effectiveness of policies. Behind the introduction of this policy is a major change, that is, a change in the way expectations are managed, leading to the appearance of the long-awaited policy exceeding expectations, becoming the most direct catalyst for driving the market up.

However, sustained high heat may also trigger the need for consolidation and volatility. China Securities Co., Ltd. believes that based on the experience of 2015, 2019, and 2020, after emotions enter the euphoric zone, the market often continues to rise in the short term. Subsequently, as emotions fall back, the market may experience some adjustment, but this adjustment does not mean the end of the bull market. Based on the current position of the emotion index, the market sentiment at the end of September is equivalent to historical levels on March 5, 2019, or July 7, 2020. Now it is more important to make investment decisions with a bullish mindset.

So, will exchange rates affect the market's rhythm? Analysts believe that this variable should not be ignored. Looking back, the reason why the A-share market from 2020 to September 2021 had a very good period of systematic and structural connection in the bull market was precisely due to being in a downward cycle of the US dollar against the offshore renminbi. The rally at the end of 2018 and the beginning of 2019 was in a relatively favorable exchange rate environment. Of course, there are exceptions, such as in 2014 when the super bull market started, the exchange rate environment was not good, but it improved during the acceleration phase of the bull market in 2015. The impact of exchange rate variables on equities actually depends on the weighting of monetary policy objectives. If the weight is more towards the macro economy, it may break the constraints of the periphery. Of course, it is also necessary to observe further changes in the foreign exchange market, to see if they are still within a controllable range.

Editor/Somer