Technology stocks staged a powerful rebound on Wednesday, clearing the gloom that had hung over the market. Since last Friday, we have repeatedly pointed out that blue-chip and safe-haven cyclical themes were underperforming expectations, and with sentiment shifts from investment banks like Goldman Sachs, active capital was likely to turn its attention to undervalued opportunities in tech growth. The broader picture has played out as anticipated, though Wednesday's rally was stronger than expected. In the short term this is encouraging, but investors should not view the situation through such a narrow lens.

How exactly are the two ETF camps competing? In reality, active market capital has little loyalty to any particular industry narrative. Their strategy is simply to cluster where momentum is most favorable at any given time. Currently, ETFs can be divided into two broad camps based on style: one dominated by financials, dividends and energy, the other by AI semiconductors and emerging tech concepts. Most of the time, capital must choose one path. Get the style call right, and 90% of the time you can ignore broader market bull or bear cycles, because there will always be a group of players looking for somewhere to cluster.

As the chart shows, since July, active capital has been steadily selling tech growth names led by the ChiNext and STAR boards, rotating instead into safe-haven and undervalued blue-chip directions such as financials and energy. Even during August's oversold bounce in tech themes, the trend in undervalued names was not shaken, and no clear style switch occurred. Entering late August, however, with interest rates, US Treasuries and Middle East issues all fermenting, global markets entered a new cycle of uncertainty. Financials and dividend names kept pressing higher, with hedge funds piling into financials and pushing the blue-chip camp to new highs.

Then, in early September, Goldman Sachs turned comprehensively bullish on optical modules — an event we viewed as significant, signaling that institutional money was beginning to eye undervalued positioning in tech growth. Subsequently, oil prices surged but energy stocks failed to follow, indicating risk-off sentiment was fading and active capital was distributing. Last week, US inflation data landed and reduced uncertainty, further lowering the value of safe-haven theme positioning — a key reason we remain constructive on tech growth.

One major uncertainty remains: the FOMC meeting. On Wednesday, capital moved ahead of the event to position for the outcome. Major indices closed with notably expanded volume, and the STAR 50 index generated strong market enthusiasm. On one hand, active capital had finished its initial positioning and stood to profit Wednesday, driving a wave of buying. Judging by the volume surge in the STAR 50 ETF, large funds may have been at work, but the logic is sound. Looking at ETF closing moves, semiconductor upstream names, optical module collectives and AI chip themes led gains, while speculative satellite plays were also active. Japan's photoresist price hikes and external assessments of domestic lithography progress added to the sentiment tailwinds. Construction machinery led declines after the US launched an investigation, which also weighed on overseas-expansion names broadly. Capital remains insufficient, so the market will inevitably chase sectors with strong momentum and high consensus. Hong Kong stocks remain dependent on foreign capital, and sentiment there has not yet recovered. As for agriculture and aquaculture, as we have analyzed, these are unlikely to rally alongside tech and remain a matter of trading dynamics.

On the other hand, capital is betting that after the rate decision lands, oversold names will see mean-reversion gains. The market assigns a 94% probability of a rate hike on Wednesday. The White House economic adviser has called a hike a mistake, signaling opposition to tightening. If the Fed holds rates unchanged, it would be the biggest "dovish surprise" in over 30 years. A single hike tonight is in line with expectations, two hikes would be slightly above, and no hike would create fresh uncertainty. If the outcome matches expectations, then banks, dividends and energy — the "old guard" — would see their allocation value fall further, and given they sit at elevated levels, that camp of ETFs faces significant pressure. Conversely, oversold tech growth would retain its momentum, and small-cap concepts would also benefit from quant style factors. But if an unexpected scenario emerges — a sharper pace of hikes, a more hawkish tone, or no hike at all — markets could get rattled and safety-seeking would resume.

That is why, this week, active capital has been betting on rising certainty. Oil prices and US Treasury yields can serve as barometers: if they clearly decline tomorrow morning, tech growth and small-caps still have room for mean-reversion gains; otherwise, the risk of giving back today's gains rises. Relatively speaking, tech growth names with higher error tolerance include the ChiNext 50, consumer electronics, growth and industrial mother machines, while small-cap concepts worth watching include the CSI 2000 and STAR 200. Additionally, if oil continues to fall, non-ferrous metals could also see a strong recovery — all are names to watch tomorrow morning.

Other items worth monitoring during trading include the following.

On the overseas macro front, the probability of a Fed rate hike has risen to 95%, with the market pricing a 25 basis point hike this week. The probability of a December hike has also climbed to 70%, as strong employment data reinforces tightening expectations. Warsh will host the press conference. Meanwhile, the 10-year US Treasury yield broke above 5%, a level not seen since 2007. Analysts believe the real pressure may surface 12 to 18 months from now, as high rates gradually expose fragilities in the financial system, transmitting to housing, commercial real estate and highly leveraged corporates. Watch US and European bond yields tomorrow morning.

On the institutional views front, Morgan Stanley forecasts that Chinese banks' net interest margins will stabilize earlier than expected and begin a moderate recovery from 2026, with ROE stabilizing around 9%. The firm prefers CCB and BOC. Financial asset yields are expected to recover 50 basis points over the next three years. CITIC Securities is bullish on the PCB cycle's sustainability, benefiting in the short term from AI iteration-driven volume growth and price hikes in traditional sectors, with strong earnings expected in 2H26, and medium-to-long-term gains from continued process and material upgrades. JPMorgan maintains its Overweight rating on CATL with a HK$725 target price, viewing its acquisition of a stake in Geely's battery plant as marking the start of consolidation in China's battery industry. Macro data has weakened financials' fundamental appeal.

On overseas tech, Jensen Huang stated that the AI industry does not need new laws, arguing safety and speed can coexist. Separately, the US is pressuring Mexico to restrict non-North American components in AI hardware to prevent Chinese firms from circumventing tariffs. AI hardware — spanning chips, servers and more — has already overtaken autos as Mexico's top export to the US this year. Risks remain for the industry longer-term, but until US capacity ramps up, there is still room for recovery.

On domestic tech, China's memory chip technology gap has narrowed sharply: NAND lags South Korea by just one year, DRAM by two years, and HBM by three years, with YMTC expected to jump to 400 layers by 2027. Japanese photoresist giants JSR, Tokyo Ohka and Shin-Etsu Chemical have announced global price hikes effective October 2026, with high-end ArF series up 15%-38% and HBM-dedicated immersion ArF up to 24% higher. DeepSeek released V4.1 Flash with native multimodality, 1 million token context and 384K output, surpassing V4 Pro in five of seven tests covering code and agent capabilities. Zhipu completed US$5 billion in refinancing for compute expansion, with call volumes surging 10-fold after GLM-5's release, followed by another US$4 billion refinancing in July. ByteDance secured a US$29.6 billion syndicated loan for operations including AI R&D; the company is valued at over US$400 billion, and employee restricted stock valuation was raised 5% to US$241.35 per share. Domestic semiconductors enjoy strong consensus on fundamentals.

In Hong Kong-listed internet names, the three major Hong Kong indices closed higher, with the Hang Seng up 0.5% and the Hang Seng Tech Index up 0.47%. Baidu and Alibaba rose, robotics concept stocks were broadly strong, and auto stocks gained across the board.

In energy storage and new energy, China Association of Automobile Manufacturers data showed NEV production and sales reached 10.668 million and 10.65 million units respectively in the first eight months. August NEV sales share hit a record 60.6%, while NEV exports rose 1.3-fold year-on-year to 526,000 units in August. CATL shares fell over 5%, breaking below 300 yuan to hit a low not seen since September 2025, amid concerns that automakers' de-CATL efforts are eroding orders. Some Li Auto models have shifted to EVE Energy, and some Xiaomi models no longer use CATL batteries. Battery-grade lithium carbonate midpoint price was reported at 128,600 yuan per tonne, down 2,750 yuan from the prior day. Zhengzhou Commodity Exchange rubber futures surged, with A-share rubber stocks hitting limit-up collectively.

In commodities, coal price gains were interrupted as port inventories climbed, with Hong Kong-listed coal stocks falling collectively. Qinhuangdao Port Q5500 thermal coal was quoted at 987 yuan per tonne, down 2 yuan from the previous day, while Bohai Rim port inventories rose to 23.786 million tonnes. In tungsten, tight supply combined with recovering demand suggests the balanced tightness can persist; A-share tungsten stocks were active, with Xianglu Tungsten and China Tungsten and Hightech leading gains — both up over 100% year-to-date. Lab-grown diamond stocks rose collectively, with analysts pointing to 2026 as the first year of industrialization for diamond semiconductor heat dissipation, as AI computing's cooling demand becomes a rigid necessity.

In commercial aerospace, Orienspace's Gravity-1 Yao-3 carrier rocket successfully launched from the East China Sea, sending eight Qianfan constellation satellites and one EUHT technology test satellite into preset orbits, setting a new national record for single maritime launch payload weight and orbital altitude. The Gravity-2 reusable large liquid rocket is being accelerated in development, with a target first flight in Q4 2026 and a low Earth orbit capacity of 21.5 tonnes — more than three times that of Gravity-1. Jianyuan Technology completed a B++ financing round, accumulating over 2.3 billion yuan in six months, making it a domestic commercial aerospace unicorn. Its Yuanxing-1 Y1 and Y2 vehicles are fully assembled and have passed over 30 key ground tests ahead of first flight, with a target for first-flight readiness by year-end and recovery verification.

In consumption, Beijing's January-August total retail sales of consumer goods reached 847.92 billion yuan, down 2.1% year-on-year; excluding autos, the decline was just 0.1%. Grain and oil food, clothing, footwear and daily necessities retail sales grew 4.3%, 1.8% and 1.1% respectively. Mooncake sales ahead of the Mid-Autumn Festival nearly halved, with high-end gift boxes struggling — sales at major outlets fell 45.17% year-on-year between August 14 and September 13. As the Mid-Autumn and National Day holidays approach, domestic travel bookings are heating up: Qunar platform searches for related keywords rose 167% month-on-month, and weekly bookings for National Day flights and hotels increased 56%. Trip.com Group's second-quarter revenue grew 6% year-on-year but posted a net loss of approximately 2.5 billion yuan, highlighting earnings pressure.

In high-end manufacturing, the US launched anti-dumping and countervailing duty investigations into Chinese linear hydraulic cylinders. A-share construction machinery stocks tumbled, with SANY Heavy Industry approaching limit-down, Sunward down over 8%, and LiuGong, Hangcha Group and XCMG all down over 7%. Separately, 44 steelmakers including Baowu and Ansteel issued a joint initiative to control production and reduce inventory, condemning overproduction and committing to maintaining full-year targets while adhering to the principles of self-disciplined production control.

Most active capital has already positioned for tonight's "bad news out of the way" scenario — and tomorrow morning, the two ETF camps will show their hand.