Market confidence is buoyed with the implementation of the latest share reduction regulations, and a positive outlook is expected for the long-term market. The A-share market experienced fluctuations this week, initially affected by positive real estate policies, with the Shanghai Composite Index continuing its rising trend from last week, climbing close to 3175 points. However, the market subsequently fell under the influence of a series of variables, including unmet expectations for a Fed rate cut, pressure on the yuan, and geopolitical conflicts, with the Shanghai Composite retreating to around 3000 points.

Comprehensive data show that uncertainty in the external environment has led to a wait-and-see attitude among off-market capital, with market sentiment showing a certain degree of fragility. In terms of industry performance, coal, utilities, and agriculture, forestry, fisheries, and animal husbandry performed relatively well, while light manufacturing, real estate, and conglomerates saw declines.

Looking at the reasons behind this week's A-share market correction, from within the A-shares themselves, the market is in a period of digestion and adjustment after experiencing rapid growth. Due to the lack of substantial positive news, the market still sees capital stock games, leading to the index oscillating and consolidating between 3000-3200 points. There is a structural situation between various sectors, but it is difficult to form a continuous upward trend.

Regarding the external environment, geopolitical events during the week caused some concern in the market and had a short-term negative impact. The divergence from expectations for a Fed rate cut was the main source of market pressure this week. With several indicators of the American economy weakening, expectations for a rate cut increased. However, the minutes from the Federal Reserve's meetings showed a more hawkish stance, dampening the market's optimism for a rate cut. Federal Reserve officials believe that the current policy rate is in a reasonable range and they focus on balancing inflation and the job market, indicating that they are willing to tighten monetary policy if inflation persists.

Although the recent meeting minutes brought some unrest to the capital market, we must understand that the May interest rate meeting was held at the beginning of the month, amid an economic environment with high and repeated inflation in the first quarter. With the continuous release of economic data in the middle of the month, we saw both inflation and other key economic indicators had fallen. The unexpected decline in U.S. nonfarm employment data particularly indicated a relaxation in the job market.

A significant change in this meeting's minutes is that the Federal Reserve has expanded the basis for data reference in future monetary policy decisions from a single inflation indicator to a balance between inflation and the job market. Therefore, continuous relaxation of the job market has to some extent reduced the possibility of the Federal Reserve further raising interest rates in the future. Although the market's expectations for a Federal Reserve rate cut within the year have indeed eased somewhat after the minutes were released, the extent was not as strong as the market's violent reaction.

According to Fed Watch data, the probability of no rate cut in July has risen from 74.6% to 80.1%; the probability of a 25 basis point cut or holding steady in September is 50.9% and 38.5%, respectively, which has changed from previous data. China International Capital Corporation's view on the relationship between the Federal Reserve's future monetary policy and capital market volatility can offer us some insights. They argue that the degree of easing or tightening of the financial environment has a certain level of reflexivity; a tight financial environment is likely to lead to demand and prices below expectations within 1-3 months and vice versa.

The reflexivity effect means that the weakness of the US economic data since May has heightened expectations for a rate cut, thereby prompting a further decline in long-term and short-term interest rates, and propelling a positive performance in US stocks. CICC's financial conditions forecast model suggests that the current downward trend in interest rates and the record highs of US stocks have eased financial conditions by about 45 basis points compared to the beginning of the year. This may support an improvement in economic data over the next few months to a certain extent. However, if the data becomes too strong, it could affect the likelihood of a rate cut in the third quarter, creating a repeat of the scenario seen at the beginning of the year. This will limit the scope for an increase in risk appetite and exert sustained pressure on the capital markets.

In other words, the higher the market expectations for a rate cut, the more relaxed the financial environment will naturally become under the influence of reflexivity. This, in turn, will promote better economic data, essentially postponing the timing of the rate cut and increasing volatility in the capital markets. As a result, the Federal Reserve, in order to curb inflation, is trying to buy time for maneuvering, thus maintaining the non-reduction posture for a longer period. This entails rates and asset prices swinging during this process, and despite increased volatility, the overall magnitude is limited.

This series of evidence shows that reflexivity in financial conditions and changes in rate cut expectations have exacerbated the uncertainty and volatility of the capital markets. Market trends may thus experience fluctuations. However, the prolonged period of high interest rates is unsustainable; the specific time frame will depend on whether economic recession and financial risk occur first, and how the Federal Reserve controls the timing of the rate cuts.

While global capital markets remain sensitive to policy changes by the Federal Reserve, the A-share market has welcomed a new policy: the China Securities Regulatory Commission has issued the "Interim Measures for the Administration of Shareholder Share Reduction of Listed Companies" and its supporting rules, marking the introduction of the strictest new regulations on share reduction in history.

In the newly formulated "Interim Measures," there are 31 provisions that outline three key features:

Firstly, the measures strictly regulate the share reduction behavior of major shareholders. It clearly defines that under specific circumstances, such as a break below the issue price, a net asset value break, or an unmet dividend expectation, controlling shareholders and actual controllers are prohibited from reducing their shareholdings through centralized bidding transactions or block trades. There is an increased obligation for major shareholders to disclose prior to reducing their holdings through block trades, and it is required that persons acting in concert with major shareholders follow the same restrictions on reduction.

Secondly, the measures block the illegal "detours" for major shareholders to reduce their holdings. The provisions state that the transferee in a stock agreement transfer must be locked in for six months. After a share split due to divorce, company dissolution, or restructuring, the related parties should continue to follow the restrictions on reduction collectively. For different situations such as judicial enforcement, breaches of stock pledges, financing and securities loans, the appropriate share reduction requirements are clarified. At the same time, major shareholders are prohibited from selling short or participating in derivatives trading with their own company's stocks as the underlying, and prohibited activities such as transferring restricted shares through securities lending and related shareholder short-selling are banned.

Thirdly, the measures further refine the penalty clauses for violations. In case of illegal share reduction, violators may be required to repurchase and surrender the price difference obtained from the violation to the listed company, and details are provided regarding what specific situations will trigger penalties. In addition, the responsibilities of the listed company and its board secretary are strengthened.

Before establishing regulatory rules, that is, in August of last year, regulatory authorities had already begun to standardize the reduction of holdings by controlling shareholders and actual controllers to enhance market confidence and stability. With the support of policies, the scale of reduction by significant shareholders of listed companies has substantially reduced this year. According to data, from 2020 to May 2024, the scale of reduction was 707.2 billion yuan, 611.1 billion yuan, 495 billion yuan, 399.7 billion yuan, and 40.9 billion yuan respectively. Under the influence of the reduction policy, this year's reduction scale has dropped drastically, nearly by 78%, which significantly maintained the stability of market funds.

In the short term, the introduction of new regulations is expected to activate investors' confidence and have a positive impact on the trend of the A-share market. Similar to the market's reaction after the announcement of real estate policies last week, favorable policies have the opportunity to boost the market and lead to a rebound in A-shares from their low point. However, whether the market can continue to warm up still depends on the attitude and inflow willingness of funds outside the market. From a long-term perspective, stricter reduction restrictions, by standardizing the behavior of major shareholders' reductions, may fill institutional voids in the market, effectively limiting the reduction activities of major shareholders, reducing the negative impact of capital outflows, thus reshaping the A-share investment environment, ensuring the rights of small and medium investors, and boosting investor confidence to advance the domestic capital market towards high-quality development.

In other market dynamics, the Federal Reserve's policy fluctuations have impacted copper prices. This week, driven by the rising expectations of the Fed's interest rate cuts, copper prices along with other commodities have experienced a significant slide. Since mid-February this year, as a result of the continued supply and demand shortage, the price of LME copper has increased by over 26%, while the increase in COMEX copper has approached 30%. Hence, the uncertainty of the Federal Reserve's monetary policy has become crucial in whether it will alter the upward trend in copper prices. Historical review indicates that in the high-interest-rate environment before rate cuts, due to decreased demand or reduced risk appetite, copper prices tend to be at risk of falling. And when the economy is in recession, the decline in copper prices is often greater than during financial risk periods.

The impact of interest rate cuts on copper prices depends on the severity of the economic recession and the restraining strength of the recession on the demand side of copper. In a scenario where the US economy achieves a soft landing or does not experience a downturn, even if the interest rate is cut due to financial risk, the overall suppressive effect on copper demand will be relatively limited. Consequently, copper prices may ultimately experience a slight decrease or increase.

In a scenario of a hard-landing US economy, the global manufacturing sector may enter a downward cycle, causing significant suppression of copper demand expectations, altering the supply-demand balance for copper, and leading to a steep fall in copper prices. Observing the current state of the US economy, whether from domestic resilience or external environmental changes, indicates that the risk of a hard landing for the US economy is minimal.

Compared to historical copper cycles, this rise in copper prices is beyond expectations, mainly due to demand growth driven by the global manufacturing recovery and increased copper demand triggered by new energy expansion. In addition, sustained tension on the supply side has also promoted the price increase. According to data from CICC, in 2024, the amount of copper used in global photovoltaics, wind power, and new energy vehicles is expected to account for 13% of total demand, with significant continued driving effect on copper demand.

From the supply side, affected by environmental protection concepts, lower capital expenditure, and geological factors, the operation and supply of copper mines remain tight. This shortage continues to affect copper smelters, leading to insufficient production of refined copper, which in turn is reflected in copper price fluctuations. It is expected that by 2024, there will be a deficit of about 140,000 tons in the global copper supply-demand balance, and even if copper prices rise, the trend for increased capital expenditures in copper mining is not clear.

Therefore, given the unlikely possibility of supply disturbances and unexpected changes on the demand side, despite the potential short-term negative impact of the Federal Reserve's monetary policy adjustments on copper prices, from a medium-to-long-term perspective, it is very likely that copper prices will maintain an upward trend until the issues on the supply side are resolved and a new balance in copper supply and demand is achieved.