Yang Delong: In-Depth Analysis of the Current Global Situation and Its Impact on Major Asset Classes

The Federal Reserve’s decision from the March meeting aligns with previous expectations, keeping interest rates unchanged and pausing rate cuts. This decision was mainly influenced by the escalating situation in the Middle East. The sudden outbreak of conflict in March led to a significant rise in international oil prices, which surged from $73 per barrel before the conflict to $119 per barrel. Oil is the lifeblood of industry, and the sharp increase in oil prices is bound to drive up global inflation, particularly having a more direct impact on inflation in the United States.

The Federal Reserve has two monetary policy objectives: the first is to prevent inflation, and the second is to maintain full employment. Given the strong inflation expectations, the Federal Reserve can only choose to pause rate cuts and observe further. From Powell’s comments after this meeting, it is clear that whether to cut rates in the future will depend on changes in the international situation and price performance.

In the past few months, U.S. non-farm employment data has not been ideal; however, for the Federal Reserve, the more important goal is to prevent inflation. Powell has always been cautious. Although Trump applied significant pressure on Powell last year to accelerate rate cuts, Powell managed to withstand this immense pressure, maintaining his pace and attempting to preserve the independence of the Federal Reserve’s monetary policy, avoiding interference from the president. The Federal Reserve is the world’s central bank, and it is not solely an official institution of the United States. The monetary policy of the Federal Reserve impacts central banks globally; if the Fed Chair were to heed the directives of the U.S. president, and cut rates simply because the president requested it, the Fed would become a political pawn, losing its independence in monetary policy, which would deal a fatal blow to the credibility of the dollar. Therefore, even under immense pressure, Powell has maintained his judgment.

In May of this year, Federal Reserve Chair Powell’s term will end, and he will be succeeded by Walsh, a new Federal Reserve governor nominated by Trump. Walsh is historically known for his hawkish rhetoric, and investors are concerned that he may implement a balance sheet reduction to withdraw liquidity after taking office, but he is unlikely to raise interest rates, as Trump would not nominate someone who would completely disregard his directives as Fed Chair. I expect that after Walsh takes office, he may choose to cut rates, possibly as early as June, but it could be postponed until the end of the year, depending on how long the Middle Eastern conflict lasts and how high international oil prices remain.

Iran has already blocked the Strait of Hormuz, which is a vital artery for global oil transportation, controlling 20% of the world’s oil trade and transport. If the Strait of Hormuz remains closed, international oil prices will stay high. Trump has organized a multinational fleet to escort ships through the Strait of Hormuz, but it remains uncertain whether this will alleviate the security alert in the Strait. Merchant ships will worry about potential escort failures and the risk of tankers being sunk, leading to substantial losses. Insurance companies have now stopped providing coverage for merchant ships in the Strait of Hormuz due to the excessive risk.

The future of the Middle Eastern situation is uncertain, and high international oil prices will have a significant impact on the Federal Reserve’s monetary policy decisions. The Fed’s decision not to cut rates this time aligns with previous market expectations and has not had a significant impact on the market. By keeping interest rates unchanged, the Federal Reserve, as the world’s central bank, may deter other countries’ central banks from engaging in liquidity easing or rate cuts, leading to an overall negative impact on global capital markets.

Recently, the A-share market has experienced significant adjustments. On one hand, the increased uncertainty due to the Middle East conflict, and on the other hand, the Federal Reserve’s decision to maintain interest rates has raised concerns about whether the central bank can further ease monetary policy, which has affected the market’s short-term trends. International gold prices have reacted sharply; the recent significant drop in gold prices has largely been a response to the Fed’s delay in rate cuts. Gold is a safe-haven asset; theoretically, in times of international turmoil, gold prices should rise significantly, as the saying goes: “When the cannon fires, gold will be worth a fortune.” The fact that gold prices did not surge but instead dropped significantly is clearly a reaction from the market to the Fed’s delayed decision on rate cuts.

The long-term trend of gold is determined by de-dollarization. I have firmly held a positive view on gold’s long-term performance over the past few years. I believe that the U.S. government’s mounting debt and the continuous increase in the supply of dollars will lead to a rise in the price of gold priced in dollars under the backdrop of de-dollarization. In the short term, gold has already broken through the $5,000 mark, accumulating substantial profit-taking pressure. The recent drop in gold prices, apart from the delayed Fed rate cut expectations, is also significantly due to profit-taking pressure, with early profit-takers escaping. In the short term, gold prices will likely maintain a fluctuating adjustment trend, repeatedly digesting profit-taking. I remain confident in the upward trend of international gold prices in the medium to long term; the long-term price trend of international gold remains upward.

Although the U.S. is attempting to reshape dollar hegemony through war, especially to restore the status of the petrodollar by forcing some oil-producing countries to settle oil trade in dollars, this approach may backfire. Multiple countries will promote the diversification of trade currencies, as complete reliance on the dollar makes them vulnerable to dollar hegemony and potential sanctions. Therefore, the trend of de-dollarization will not change, and the long-term trend of international gold prices remains upward. Gold can be considered a long-term asset for allocation, without overly focusing on short-term fluctuations; each significant drop may present an opportunity to buy gold-related assets. I have consistently recommended allocating about 20% of investment portfolios to gold-related assets over the past few years, and this strategy remains effective. The recent drop provides a good opportunity for positioning. It is impossible to precisely buy at the lowest point, as the lowest point is the result of market speculation and can only be confirmed after the fact. Investors may adopt a phased approach to build positions and avoid making a one-time purchase. Gold prices have now fallen over 10% from their highs, and we expect extreme adjustments may be around 20%, with limited downward space. A strategy of buying more as prices drop and building positions in phases can be adopted.

Due to the blockade of the Strait of Hormuz, there are no signs of an end to the U.S.-Iran conflict. Trump has only verbally expressed a desire to end the war quickly. The short-term trajectory of the war remains uncertain, exerting upward pressure on oil prices, and after adjustments, oil prices are likely to reach new highs. If the conflict lasts longer, oil prices may rise further. If the U.S. sends ground troops, dragging the war into a prolonged conflict, international oil prices could reach historical highs. The rise in international oil prices is an uncertain factor for global economic development because oil is the lifeblood of industry. Rising oil prices significantly increase production costs across various industries, pushing up global price levels and creating imported inflation, which countries find difficult to manage, ultimately having to compensate for rising costs by increasing product prices.

For China, rising oil prices elevate industrial production costs, narrowing the decline in the Producer Price Index (PPI), and may even push the PPI from negative to positive, causing industrial product prices to rise. At this time, we should focus on stimulating domestic demand and boosting consumption to absorb excess production capacity, allowing industrial companies to appropriately raise product prices to offset the cost increases from rising oil prices. On the other hand, we should continue to vigorously develop new energy, gradually replacing traditional energy with new energy and electric vehicles with fuel vehicles, reducing dependence on imported oil. Particularly in the power generation sector, China has made great achievements. According to statistics, the total amount of photovoltaic and wind power has surpassed that of thermal power, indicating a tremendous success in the new energy strategy. The development of new energy has significantly reduced our reliance on traditional energy sources like oil and coal, allowing us to maintain stability amidst international turmoil. Meanwhile, China has sufficient oil reserves; the short-term rise in oil prices and the turmoil in the Strait of Hormuz do not significantly impact oil security and energy security. However, if the war lasts too long, the impact will gradually increase, and we must prepare response plans for various scenarios. If oil prices remain high at $110 per barrel, it will be beneficial for the domestic oil and gas sector, enhancing the profitability of oil companies, but it will negatively impact chemical products, as high import crude prices will raise costs in the chemical industry, eroding profits for some chemical companies and affecting profitability in the chemical sector. Additionally, if the Strait of Hormuz remains blocked for an extended period, oil reserves will gradually be consumed, and the cost of imported oil will rise, ultimately impacting the profitability of the three major oil companies reliant on imported oil. Therefore, these changes essentially depend on the safety of international oil transportation and the duration of high international oil prices, with differences in short-term and long-term impacts.

(Author is the Chief Economist and Fund Manager at Qianhai Kaiyuan Fund)

MACD golden cross signal formed, these stocks are performing well!

Sina’s statement: This information is reprinted from Sina’s cooperative media, and the publication of this article on Sina.com is for the purpose of conveying more information and does not imply endorsement of its views or verification of its descriptions. The content of the article is for reference only and does not constitute investment advice. Investors take risks based on this operation.

Massive information, precise interpretation, all available on the Sina Finance APP

Editor: Shi Xiuzhen SF183