Confidence Is Wavering: A Few Market Observations

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1. Domestic shift, liquidity may face pressure in the next two weeks

Money is leaving the market, especially from major players, although retail investors are still buying the dip and bottom-fishing (see below). Trading volume continues to shrink, with daily average turnover dropping from 3 trillion yuan at the beginning of the month to 2.5 trillion, then to last week’s weekly average of 2.2 trillion, with no signs of stabilization.

On the institutional side, public funds have completed their first round of reducing positions, with many products already at the minimum contractual holdings, and subsequent selling pressure will mainly come from passive redemptions by retail investors.

It’s worth noting that low-risk preference funds like pensions and insurance are “preparing” to withdraw. Over the past year, these long-term funds significantly increased their equity positions, but their tolerance for drawdowns is very low—once net asset value drops, clients start to act. Last week, there was a large-scale redemption of secondary bond funds by pension funds, with some accounts liquidating all holdings at once. If product yields approached zero in Q4 last year and Q1 this year, reducing and redeeming from fixed income + ETFs is a natural response.

Since last year, bullish sentiment has been strong, with many recalling muscle memory from trade wars and expecting quick rebounds after holding on. In the past two weeks, some hesitated to reduce positions. But now, cracks in confidence are visible to the naked eye. The next two weeks could be the most intense phase of selling pressure.

2. US stocks are gradually pricing in inflation risks

An interesting phenomenon—over the past three weeks, Asian trading sessions have been filled with panic, but every time US markets open, especially in the afternoon, markets tend to V-shape recover. The reason is simple—American retail investors rely heavily on past experience and are slow to perceive risks. US stocks only began to truly price in “higher oil prices lasting longer + stagflation” logic last week, and retail investors are still buying on dips—reflecting the typical mindset of American households holding stocks, as shown in the screenshot below, which explains why US stocks have been relatively unperturbed despite ongoing warnings.

Bank of America’s private client data illustrates this well: among managing assets of $4.2 trillion, stocks account for 63.7% (though the lowest since June last year), but these clients have been net inflows into equity ETFs for seven consecutive weeks, while increasing holdings in TIPS, healthcare, and discretionary consumer stocks, and reducing holdings in precious metals, utilities, and industrials. They are not panicking; in fact, they are actively reallocating.

But this is precisely the hidden risk. Currently, US households’ net assets have nearly 40% in stocks, far above the 10% during the 1990s energy shocks. This means that if US stocks continue to decline, the negative impact on consumption via wealth effect could far exceed historical levels. The S&P 500 has already fallen over 4% this year; if the decline persists, consumer spending could be 1.5 to 1.8 percentage points lower than current forecasts, equivalent to a real GDP reduction of over 1%. In an environment where other sectors of the economy are generally weak, this transmission chain cannot be ignored.

As financial markets continue to digest pricing, liquidity shocks may also become concentrated in the next two weeks.

3. Ceasefire does not equal falling oil prices: war pace and supply chain recovery are two timelines

Oil prices and the Strait of Hormuz transit situation, along with occasional messages from Trump and battlefield updates, are two different issues.

Market pricing of Middle East tensions often contains a misconception: equating ceasefire news with supply recovery. But history repeatedly shows that the end of military conflict and normalization of energy supply often have a lag of several months or even longer.

The classic example is the 1973 Yom Kippur War. Ceasefire on the battlefield came quickly—20 days after the start of the war, in late October, the UN Security Council passed Resolutions 338, 339, and 340 calling for a ceasefire (faster than this round). However, actual disengagement of forces was delayed until early 1974 (with the Sinai Accords) and even until the end of May (with the Syria agreement).

And the oil embargo? It was only officially lifted at the OAPEC Washington meeting on March 18, 1974, more than five months after the outbreak of war. In other words, the guns fell silent, but the pressure on oil prices only started to ease then.

Returning to the present, the trends in oil prices and the Strait of Hormuz traffic, along with messages from Trump or battlefield updates, are fundamentally two different logics. Energy is a strategic weapon, and its impact is inherently lagging and long-term. Even with positive diplomatic signals, physical supply chain recovery takes time, and markets should not overreact to “good news headlines.”

4. Why isn’t gold rising?

In this conflict, gold’s performance has puzzled many—geopolitical risk escalation, why isn’t gold rising but falling?

First, there is a mismatch in correlation. In recent years, gold’s positive correlation with US stocks has increased significantly, reducing its effectiveness as a hedge during stock declines. Second, short-term macro headwinds—strengthening dollar index and US Treasury yields—directly suppress gold priced in dollars. Third, and most overlooked: gold already experienced a fierce rally at the start of the year, with volatility reaching historic highs. When conflict broke out, the bullish factors had already been priced in, and the market chose to take profits.

Historical review shows this is not an isolated case. Whether it’s the Iraq War, Iran-Iraq conflicts, or Russia-Ukraine war, gold prices tend to dip in the short term after conflicts erupt—post-Iraq War, declines reached up to 15%. The underlying logic is consistent: war triggers a decline in risk appetite and liquidity shocks, and high-volatility assets like gold are not immune to selling. The real gold rally usually occurs 3 to 12 months after the conflict.

Currently, gold’s safe-haven attribute has been overextended by speculative pricing, and the dollar has re-emerged as a safe asset. For leveraged, crowded trades, this stage calls for caution and respect, not chasing. Teacher Xiang Shuaizhi sharply commented in early March that above 4300, gold no longer offers good value.