Breaking news from the Middle East! Will the A-shares rebound this week? — Daoda talks with Dr. Niu

Last week, the A-share market saw a volatile pullback as a result of the triple impact from external market conditions, the situation in the Middle East, and the pre-holiday effect, with trading volume shrinking dramatically. Defensive sectors such as pharmaceuticals and banks strengthened. Investors showed increased interest in the group-backing winner in optical communications, while most other sectors fluctuated or adjusted.

During the holiday period, multiple important news items hit the market—what impact will they have on this week’s trading? Will the market rebound? Today, Dage and Bull Doctor will discuss the topics everyone cares about.

Bull Doctor: Dage, hello. It’s time again for us to talk about market conditions. During the holiday period, the market brought several pieces of information, including the latest developments in the Middle East situation and U.S. nonfarm payroll data. From your perspective, how do you view the outlook for the market from here?

Dao Dào: The Middle East situation has kept sending out shifting signals, and it has had some impact on commodities such as crude oil and on global stock markets.

Earlier, Trump set April 6 as the final deadline for Iran to reopen the Strait of Hormuz. Trump said, “April 7 will be Iran’s power plant day and bridge day,” implying a heavy bombardment of Iran’s power plants and bridges.

In addition, on April 5, Trump said that if Iran does not reach an agreement with the United States as soon as possible, he would order to “blow up everything,” and “take over oil.”

According to CCTV News, according to sources familiar with the negotiations, four people said that the U.S., Iran, and a group of regional mediators are discussing a possible 45-day ceasefire agreement, which is expected to permanently end the war.

Trump’s remarks have had a clear impact on the market, and the market has even called it “drawing K-lines.” Iran has also “drawn K-lines” in the same way—for example, Iran said it would target companies in the Middle East related to U.S. high-tech companies, which has a clear impact on U.S. tech stocks.

Under the influence of statements from both the U.S. and Iran, global stock markets saw repeated swings last week, with noticeable volatility, and A-shares were the same.

International investment banks are also relatively cautious about the Middle East situation. For example, in a newly released report, the head of hedge fund business at Goldman Sachs warned that in this round of correction, the full test for U.S. stocks may not yet have arrived.

A trader at JPMorgan Chase believed that as Trump’s final “ultimatum” approaches, it seems more likely in the short term that decisive developments will emerge—either moving toward a ceasefire or an escalation of the next round of situation.

Against this backdrop, Chinese assets have become one of the options for investment banks. For example, Michael Hartnett, Bank of America’s chief investment strategist, proposed the “4C trade” for anti-risk positioning, and he said that allocating to Chinese assets is one of the options in the “4C trade.”

Besides the Middle East situation, U.S. nonfarm payroll data has also become a key focus for the market.

U.S. March nonfarm payroll employment increased by 178k, exceeding market expectations, which has weighed on market expectations for Fed rate cuts.

According to the CME “FedWatch tool,” the market-implied expectation for Fed rate cuts within the year fell from roughly 4 basis points priced in before the report was released to nearly zero. The market’s bets on rate cuts next year were also trimmed.

With the triple impact from external market conditions, the Middle East situation, and the pre-holiday effect, the A-share market saw a volatile pullback last week, and all major broad-based index weekly performances finished lower.

As for indices, this week will bring an important turning-point window.

From March 23 to today, the Shanghai Composite Index has already been in a rebound cycle for 10 trading days, and this week will see an important turning-point window. The ChiNext Index and the STAR 50 Index are already near the swing low around March 24. If they break down effectively, it could create some pull for other indices at that time.

The current market volatility is very complex, somewhat similar to the period from February 7 to March 3, 2022, and the latter half of March to the first half of April, 2022—something Dage mentioned earlier.

They share two common features: first, they are influenced by geopolitical conflicts; second, the market has relatively weak internal momentum.

From last Friday to now, external markets have brought positive developments. After the three major U.S. stock indexes opened sharply lower last Friday, they managed to rebound back to around flat. Japanese and South Korean stock markets are up today.

Overall, this week’s market is likely to enter an important turning-point window, so it may be wise to prepare on two fronts.

First, if indices turn upward, the market will still be in a rebound cycle, but volatility is unavoidable; in this regard, you can refer to the two rebound phases in 2022 mentioned above.

Second, if the broader market makes another new low, focus on whether a bottom divergence resonance appears on the 60-minute timeframe. If a bottom divergence resonance does appear, I think it would be a very good opportunity to bottom-fish.

Among the two scenarios, I’m more inclined toward the first one. Even so, given ongoing quantitative disturbances, sector rotation, and shrinking market trading volumes, timing is crucial. If you mistime it—especially if you repeatedly chase gains and then cut losses—its impact on confidence will generally be quite noticeable.

Latest news shows that a senior Iranian government official said they have received the latest ceasefire proposal submitted by the mediator Pakistan, and they are currently reviewing the relevant contents. The official said Iran will not reopen the Strait of Hormuz in exchange for a “temporary ceasefire.”

In light of the above news, gains in U.S. stock index futures have expanded. As of 5:00 p.m. Beijing time today, Nasdaq 100 futures mini and S&P 500 futures mini are up 0.64% and 0.37%, respectively. This is favorable for tomorrow’s A-share open.

On the macro side, two major events to watch this week: at 4:00 a.m. Beijing time on April 9, the Federal Reserve will release the minutes of its monetary policy meeting; on April 10, both China and the United States will publish March CPI data.

Bull Doctor: Thanks to Dage for the share. So what opportunities worth paying attention to are there this week?

Dao Dào: Judging from last week’s performance, the market showed a clear defensive style and a group-backing style. In terms of defensive style, sectors such as pharmaceuticals, banks, liquor, transportation services, and oil strengthened. In terms of group-backing, sectors such as communications equipment and optical communications were met with strong capital pursuit.

For optical communications, the industrial logic behind OCS and optical chips is clear.

According to recent research reports released by top investment banks such as Goldman Sachs, AI-driven optical communications is now entering a structural opportunity. Across their core judgments, all investment banks are highly consistent. They all believe that optical communications is moving from behind the scenes into the core position within the AI hardware stack, and that OCS and optical chips are the most favored, high-excitement sectors right now.

Among them, in the optical chip industry, supply and demand are tight: high-end optical chips are in short supply, which is the key bottleneck constraining optical module shipments; meanwhile, the OCS market is set to experience explosive growth.

For fiber optic cables, the industry is currently undergoing a demand-and-price resonance driven by AI data centers. The core view can be summarized as both volume and price rising together and a reversal in sentiment.

On pharmaceuticals, it mainly reflects the market’s defensive behavior. Looking at some major stocks in innovative drugs, they have not broken out of a declining channel—this is something to pay attention to. Once the market’s earnings-driven effect improves or the trading environment gets better, the pharmaceutical sector may face pressure to pull back.

On earnings lines, driven by the weak market environment, high-priced stocks with explosive earnings growth have seen wide swings rather than straight-up moves; at the lower and mid levels, many stocks have also shown a pattern of rallying and then giving back gains.

Personally, I believe the rally in stocks with explosive earnings growth will not be absent. Once the market turns warm again, their trend will repair.

Finally, Dage wraps up with a summary: this week’s main broad-based index will face an important turning-point window. Pay close attention to the direction choice. If it turns upward, the main theme in the next phase will still be volatility; you can refer to the two rebound phases from February to April 2022. If it turns downward and the broader market makes another new low, then watch whether a bottom divergence resonance appears on the 60-minute timeframe; if it does, it means the bottoming opportunity has arrived. Among them, the first scenario has a higher probability.

As for execution, since quantitative interference is ongoing and sector rotation affects the market, you need to pay attention to timing. If there is no certainty in terms of opportunities, try to watch more and act less. Once you frequently mistime the rhythm, the impact on confidence will generally be quite clear. On the sector front, focus on the rhythmic opportunities in sectors such as OCS and optical chips.

( Zhang Daoda )

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