Oil shock and Fed pivot reshape China's market

The probability of a Federal Reserve rate hike in September has surged to 50-65% as Brent crude broke through $94 per barrel and briefly touched $100, fundamentally altering global liquidity expectations and triggering a dramatic rotation in China's A-share market.

The Strait of Hormuz crisis, which escalated from late August into early September with direct U.S.-Iran military confrontation, has transformed from a geopolitical risk into a structural pricing variable. The waterway carries approximately 20% of global oil trade—about 16 million barrels per day—and its disruption has created sustained upward pressure on energy costs and inflation expectations.

China's tech-led rally fractures

The shift in Fed rate expectations has exposed vulnerabilities in China's AI-dominated market structure. The STAR 50 index plunged 25.9% in July—its worst single-month decline on record—while the ChiNext index fell 23%, marking the second-largest monthly drop in its history.

On September 2, combined Shanghai-Shenzhen trading volume contracted to 1.79 trillion yuan, a five-month low that signals extreme caution among speculative capital. The limit-up seal rate dropped to 78%, down from 84% on August 28, indicating deteriorating appetite for high-risk momentum plays.

Funds are rotating aggressively from hard-tech heavyweight positions into pharmaceutical stocks, broad electronics plays, and defensive sectors. Bank stocks—Industrial and Commercial Bank of China, Bank of China, and China Construction Bank—all hit record highs on September 1 as investors sought refuge in high-dividend assets.

AI fundamentals remain strong despite stock weakness

The divergence between AI industry fundamentals and stock performance has become stark. Anthropic signed a $35 billion cloud computing agreement with Lambda, while Nvidia committed $105 billion to support OpenAI's data center construction. Samsung plans to double HBM5 performance relative to HBM4E.

Upstream materials have entered a pricing cycle. South Asia Plastics announced a 20-25% price increase for copper-clad laminates and prepreg materials effective September 1. Goldman Sachs research indicates the AI server MLCC market is expanding at approximately 80% compound annual growth, with upstream ceramic powder supplies constraining production.

Yet A-share CPO and computing power leaders have experienced deep corrections following historic volume spikes. The market has shifted from beta-driven broad rallies to alpha selection based on order visibility and pricing power.

Policy response shifts from quantity to structure

Chinese policymakers face competing constraints. The State Council identified insufficient domestic demand as the primary contradiction on August 17, and the Finance Ministry expanded fiscal-financial coordination measures on August 1, widening subsidy scope to 400 participating institutions.

In late August, three ministries extended personal consumption loan subsidies to cover credit card installment plans, consumer financing, and cash advance installments, with annual interest subsidies of 1 percentage point. The central bank conducted 14 trillion yuan in outright reverse repo operations to maintain liquidity, while managing daily overnight reverse repos below 600 billion yuan to match short-term needs.

However, imported inflation pressure from surging oil prices and exchange rate stability concerns—amid the U.S.-China interest rate differential and Fed tightening expectations—have weakened expectations for broad monetary easing. Policy has shifted toward "moderate price guidance plus precise quantity hedging," with structural tools targeting technology innovation, domestic demand expansion, and small-to-medium enterprises replacing aggregate reserve requirement ratio cuts or interest rate reductions.

K-shaped divergence completes data loop

Economic K-shaped divergence has intensified. External demand and new economy sectors remain strong while domestic demand stays weak. From January to July, profits at large-scale high-tech manufacturing enterprises grew 50.1% year-over-year, contributing 9.6 percentage points to total industrial profit growth—completing the data loop showing historical divergence between old and new economic drivers.

The capital markets have been repositioned within a framework of "enhancing resilience and confidence," with comprehensive investment-financing reform underway. However, the market has entered a phase of extreme rotation under stock-pool competition, with funds switching violently between sectors and error tolerance at minimal levels.

Geopolitical risk premium becomes permanent

The U.S.-Iran confrontation over Hormuz Strait control has escalated from short-term conflict to long-term structural opposition. In June-August 2026, Iran repeatedly announced strait closures, failing to issue transit permits for over 96 hours. On August 6, Iran's parliament published a strategic management plan proposing to ban U.S. and Israeli vessels. On August 14, the Revolutionary Guard navy commander stated the strait was in a closed state. On August 18, Iran's parliament speaker said closure would continue until U.S. conditions were met.

The blockade has created real supply disruption. Trump imposed a 20% fee on strait cargo, dramatically raising shipping costs. Super-large oil tanker rates from the Middle East to Asia approached $500,000 per day. Domestic crude oil futures surged, with methanol and ethylene glycol hitting daily limits.

Goldman Sachs reiterated its forecast that gold prices will reach $4,900 per ounce by end-2026, as investors increasingly use gold call options to hedge macroeconomic and geopolitical risks.

Transmission mechanism reshapes valuations

The high oil price transmission path runs: strait blockade → oil risk premium → global inflation expectations rise → Fed tightening expectations strengthen → high-valuation growth stocks face pressure. This benefits energy, oil transportation, military, and gold assets while pressuring shipping costs, chemicals, and aviation.

The 10-year U.S. Treasury yield has risen to approximately 4.75%, with global bond markets experiencing selloffs. The Fed's September rate hike probability shift has completely reversed earlier optimistic expectations for no hikes or rate cuts within the year. Global risk-free rates are being repriced, creating sustained downward pressure on high-valuation growth stock valuation centers.

What to watch next

The Fed's September meeting and dot plot will determine whether global liquidity expectations can stabilize. August and September U.S. CPI and PCE data will verify whether oil prices have transmitted to core inflation. The 10-year Treasury yield trajectory—particularly whether it breaks through 5.0%—will be critical for growth stock valuations.

For China's market, watch whether bank sector crowding intensifies as high-dividend strategies become microscopically overcrowded. Monitor technology sector chip-clearing signals: whether leading stock trading volumes contract to normal levels and institutional positions decline. Track small-cap seal rates and emotional cycles to identify the true water level of market risk appetite.

The AI supply chain pricing realization and storage chip shortage remain crucial. Market reaction to MLCC price increases, HBM/DRAM price trends, and Samsung's HBM5 plus Nvidia's Rubin CPX mass production progress will determine earnings realization for semiconductor, advanced packaging, liquid cooling, and upstream materials sectors.

The market is transitioning from an AI single-mainline extreme structural bull to a multi-thread balanced recovery phase, but the path runs through external stagflation concerns and internal sentiment retreat. The original linear logic of "inflation cooling → liquidity easing → tech growth dominance" has been broken.