Strong dollar, rate hike expectations, and AI siphoning

Authors: Qiu Xiang, Gao Yusen, Chen Zeping, Zhang Mingkai, Chen Feng; Source:

In early May, the strengthening of the US dollar and rising expectations of interest rate hikes coincided precisely with the acceleration of global market K-shaped divergence. The core issue is the damage to demand in non-AI sectors caused by tightening expectations. As the market stands now, the K-shaped divergence has reached an interim extreme, with even the overseas tech sector undergoing internal concentration. Pricing in stocks, bonds, commodities, and currencies has already shown signs of early recession trading. If the tightening actually occurs, it could further harm demand in the carbon-based world; if not, the K-shaped divergence may converge temporarily. Compared to the relatively volatile overseas markets, A-shares have shown more resilience, with some non-AI sectors already showing signs of left-side capital involvement, and a few undervalued sectors having a basis for recovery, merely awaiting an opportunity.

Strengthening USD and Rising Rate Hike Expectations in Early May Exactly Correspond to the Acceleration of Global Market K-Shaped Divergence

Comparing USD liquidity expectations with K-shaped divergence in equity markets, we can divide the K-shaped divergence this year into three stages: Stage 1 (early January to end of February), when Fed easing expectations still persisted and the USD index weakened from 100 to around 96, with no clear K-shaped divergence in any market; Stage 2 (end of February to April), when the market began a hawkish repricing, the USD index rebounded, and K-shaped divergence started to become prominent; Stage 3 (May to present), when rate hike expectations escalated further, the USD index rose to its year-high, and K-shaped divergence in non-US markets intensified, creating a significant gap with US stocks. Additionally, Stage 3 corresponds to a period when non-AI sectors in the A-share market experienced substantial pullbacks and cyclical stocks began to underperform their overseas counterparts. In the report "A-Share Strategy Focus 20260621 – 'Rate Hikes' Boosting Tech?", we analyzed the role of rate hikes in global market K-shaped divergence, noting that the huge disparity in growth prospects causes rate hikes to have a far greater negative impact on non-AI sectors than on AI sectors. From this perspective, when the narrative of rate hike expectations and USD strength cools, K-shaped divergence may temporarily ease, and style balance could follow.

K-Shaped Divergence Reaches an Extreme; Internal Contraction Also Occurs in Overseas Tech Sector

Market narratives and capital forces can also temporarily push reasonable divergence in trends toward an extreme of overpricing, essentially because with continuously rising tightening expectations, the market’s threshold for growth prospects also increases. At the market level, even US stocks have shown signs of internal contraction within the tech sector. Since May, when the market perceived a slowdown in Anthropic's ARR sequential growth and downstream companies began to control token budgets, the Nasdaq entered consolidation, and the Magnificent 7 began a sustained adjustment, having pulled back 12% from their highs as of June 26. The previously high-beta optical communication sector started high-level consolidation after mid-May, while the applications sector, which had rebounded earlier, came under renewed pressure in June. Within the US tech sector, semiconductors performed well initially, but by June the semiconductor index also began high-level consolidation, with a one-week decline of 7.9% this week. Currently, only the memory leader continues to rise on strong earnings.

Overseas Risk Asset Pricing Already Shows Signs of Early Recession Trading; Tightening Could Further Harm Carbon-Based World Demand

The recent price combination in overseas assets is: USD up, US stocks down, commodities down, but oil prices also falling. The decline in oil prices has eased long-term inflation expectations but has not affected short-term inflation stickiness. On June 25, the US Commerce Department released May PCE inflation data: headline PCE rose 4.1% year-over-year, while core PCE also rose 3.4% year-over-year, marking a new high since 2023, indicating that US inflation is highly sticky and not solely driven by oil prices. The latest narrative in capital markets has shifted to the idea that strong AI demand is crowding out substantial commodity resources, forcing the "carbon-based" world to pay higher prices, leading to inflation and pushing the Fed to raise rates. This week, news that Apple raised consumer electronics prices due to memory price increases further reinforced this narrative, with the market interpreting that if the Fed is forced to raise rates in response to supply-driven structural inflation, it could ultimately further damage demand in the carbon-based world. Meanwhile, the rise in real USD interest rates is seen as a result of AI's competitive advantage generating high economic growth, making the USD extremely strong. However, the rapid flattening of the US Treasury yield curve indicates that this narrative is also temporary: the current 10Y-2Y term spread is 0.31 percentage points, significantly flatter than the 0.58 ppts in early March, placing it at the 28th percentile of the past 20 years. The market may be reflecting that tightening could further damage carbon-based world demand and ultimately impair long-term growth expectations. Overall, the current pricing of risk assets is highly contradictory, possibly because the growth effects from AI technological innovation remain confined to a small loop of hardware firms, model providers, and cloud vendors, and have yet to be more broadly integrated into the larger economic cycle. This also implies that although K-shaped divergence has its rational basis, it also has inherent fragility.

A-Share Trends Show More Resilience; Some Non-AI Sectors Already Showing Signs of Left-Side Capital Involvement

Recently, the A-share tech sector has shown significantly stronger resilience compared to overseas markets, especially the domestic computing chain, which has exhibited a trend independent of overseas markets. A-share companies in the overseas-linked chain have adopted the same heavy-asset cyclical stock pricing logic as their overseas counterparts, while the domestic chain, under the narrative of domestic substitution and self-sufficiency, has additionally displayed typical growth stock premium pricing, with two different pricing frameworks operating simultaneously. Beyond the tech sector, some non-AI sectors, having undergone sufficient corrections, have started to show characteristics of incremental capital entering from the left side, with brokerages and chemicals being typical examples. The combined turnover share of brokerages and chemicals briefly hit a year-to-date high this week, with significantly increased volume, and on some trading days they were able to rise alongside AI, with stock prices also showing notable recovery. For the securities sector, its left-side logic is supported by three clues: "low valuation + reduced selling pressure from the funding side + catalyst from the tech listing boom"; for the chemical sector, the core driver comes from the widening of spreads in the "sweet spot" after oil price declines, with some companies delivering bright expected mid-year forecasts, and stock prices performing very strongly, possibly indicating that the market holds few positions and competition is not intense. Although it is extremely rare for non-AI sectors to withstand capital siphoning and rise recently, it at least indicates that there is still considerable off-market capital in the A-share market closely watching opportunities in non-AI sectors, though the marginal changes are not yet sufficient to drive broader entry of off-market funds.

Some Non-AI Low-Valuation Sectors Already Have a Basis for Recovery, Merely Awaiting an Opportunity

Since May, non-AI sectors in A-shares have underperformed their overseas counterparts, fully reflecting many negative expectations such as demand recession, monetary tightening, and twists in Middle East peace talks. They now have a certain level of value and a basis for recovery, awaiting some positive changes in their own narratives. Such changes could come from an unexpectedly large decline in oil prices after the Taiwan Strait navigation, which would lower inflation expectations, or a synchronized recovery in industrial production and social activity in the global non-AI sector. In the market environment after a strong dollar and rising rate hike expectations, we need to be more precise and patient in selecting assets. After all, without major marginal changes, the recovery of weak sectors will not be smooth and may even coincide with adjustments in strong sectors. In terms of specific allocation, we still recommend adhering to an AI + energy/chemical structure. On the AI side, we continue to favor storage, gas turbines, diesel generator sets, semiconductor equipment, and materials. On the energy/chemical side, in the new energy sector, we favor the earnings delivery of electrolyte and additives, separators, etc. In the chemical sector, the decline in oil price center and volatility brings restocking and production start-up demand, and the peak of macro liquidity expectations will be a potential pace point for the future. Currently, we prefer varieties with large cost reduction space, relatively rigid demand, and low valuations, such as refrigerants, phosphorus chemicals, spandex, dyes, and large refining. In the non-ferrous sector, we recommend computing metals with some AI exposure but temporarily suppressed valuations due to the interest rate hike narrative, such as tin, copper, and some AI small metals (tungsten). In addition, we continue to recommend increasing allocation to low-valuation brokerages; the current suppression of liquidity and other blemishes may gradually fade in the second half of the year, and mid-year performance forecasts also serve as catalysts.

Risk Factors

Escalating frictions in China-US technology, trade, and finance; weaker-than-expected domestic policy strength, implementation effects, or economic recovery; unexpectedly tight overseas and domestic macro liquidity; further escalation of conflicts in Russia-Ukraine and the Middle East; slower-than-expected digestion of China's real estate inventory.