Summary:

• With leading US hyperscalers releasing their Q2 earnings reports, market concerns over their financing needs in Q3 have eased. In our view, this does not mean these firms are unwilling to ramp up AI capex. Instead, they intend to delay additional financing until market sentiment and liquidity conditions improve.

• Nevertheless, Q2 earnings releases revealed a further deterioration in free cash flow for the hyperscales. The combined free cash flow of five leading hyperscales was negative US$100 billion in Q2, compared with negative US$50 billion in Q1. Collectively, these five companies hold US$218.3 billion in net cash balances, yet this cash is unevenly distributed among them. As such, they may not need additional financing for the remainder of Q3. However, they will likely still need to raise fresh capital in Q4 to sustain their AI capex.

• In late July, the governments of the US and Japan carried out a rare, coordinated intervention in the yen exchange rate, triggering a sharp appreciation of the Japanese yen. Nevertheless, the two nations may have different motives behind this yen intervention.

• The A-share market has virtually erased all its year-to-date gains. We believe the current level presents a favorable opportunity to add A-share positions again.

• We maintain a neutral view on US equities. Financing and corporate bond issuance pressures for US stocks will be lower in Q3. Nevertheless, we expect this headwind to resurface around Q4. Should US capital markets fail to absorb a new round of larger-scale financing, market expectations for revenue growth in the semiconductor hardware sector will be revised downward. Regardless of how the market rebalances, we believe the room for upside in US stock indices is fairly limited at current levels.

• We hold the view that the recent lows of the A-share market are likely to be this year’s low, and we advise investors to buy on recent dips. Slower earnings growth expectations for the semiconductor sector, combined with yen appreciation triggering capital outflows from Asia-Pacific equity markets, have weighed on Japanese and South Korean stocks. By contrast, Hong Kong stocks, which had been persistently shorted by international capital, have benefited from short covering, staging an early rebound. Meanwhile, the joint yen intervention by the Fed and BoJ is moderately supportive for base metals and precious metals. Commodities that suffered steep declines earlier stand poised for a corrective rebound in Q3.

Previous Views:

We expect the US capital markets to face severe liquidity pressures from June through July. Such headwinds will also weigh on Asia-Pacific equity markets and A-shares, particularly semiconductor and technology stocks. US Treasury bonds, precious metals, digital currencies and other major commodities will also face capital outflow pressure.

Views in August:

I. Has the Financing Pressure from AI Capex in the US Stock Market Fully Eased?

As leading US hyperscalers released their Q2 financial reports, market concerns about their Q3 fundraising activities have eased, fueling a marked rebound in their share prices. The five largest US hyperscales — Alphabet, Microsoft, Amazon, Meta, and Oracle — have all stated they have no plans to raise equity capital in Q3. Meanwhile, aside from Google, which completed a new $25 billion corporate bond offering on August 7, the remaining companies indicated that they would not raise additional funds through corporate bond issuances this quarter. Overall, this has alleviated fears in the US stock market that these firms would ramp up fundraising activity to support capex during Q3. This shift is also reflected in credit default swap (CDS) spreads on the corporate debt of these cloud providers, as well as SpaceX, which recently carried out large-scale bond issuance ; these spreads have retreated from their late July highs (Figure 1).

On 2026 AI capex, among the five major US hyperscalers, Microsoft and Oracle said they will maintain their previous guidance. Amazon raised its forecast from $200 billion to $220 billion; Alphabet raised its guidance range from $180–190 billion to $195–205 billion; Meta raised the lower bound from $125 billion to $130 billion while maintaining the upper cap of $145 billion. Overall, the upward revisions to AI capex guidance have been relatively modest. In our view, this is largely due to market concerns about financing pressure. All these hyperscalers carried out massive bond issuances or equity fundraising in the first half of the year, which at one point triggered sharp declines in their share prices. Meanwhile, spreads on their corporate bonds widened rapidly, leaving investors who bought their long-term corporate bonds with substantial investment losses.

Nevertheless, Q2 earnings releases from the five hyperscalers indicated a further deterioration in free cash flow. Combined operating cash inflows for the five firms totaled $186.4 billion in Q2, up nearly 40% from $134.6 billion in Q2 2025. Their aggregate net cash outflow from investing activities, however, reached$282 billion, a staggering 220% jump from $129.2 billion recorded in Q2 2025. In Q2 alone, net investing cash outflows exceeded operating cash inflows by over US$100 billion (Figure 2), versus a shortfall of $50 billion in Q1 2026. In short, the free cash flow at the leading US hyperscalers is deteriorating at an accelerating pace. At the end of Q2, combined cash balances across the five companies totaled $218.3 billion (Figure 3), though the distribution is highly uneven.

Accordingly, we believe US hyperscales can sustain the pace of capex growth for the remainder of Q3 without additional refinancing. Several of these firms, however, will likely need to issue additional bonds or even conduct equity in Q4 to maintain the pace of AI capex.

II. The Impact of U.S. and Japanese Interventions on the Yen Exchange Rate

Since late July, the Fed and the Bank of Japan have jointly intervened in the Japanese yen forex market to prop up the yen, triggering a sustained and sharp rebound in the currency. What makes this move extraordinary is that coordinated exchange rate intervention by two major central banks is rare. Nevertheless, we believe the US and Japan acted with different motivations.

From Japan’s perspective, its incentive to intervene in the yen is straightforward: to ease imported inflation by lifting the yen. This intervention serves as a supplementary monetary policy tool alongside the BoJ’s interest rate hikes, aimed at curbing inflation. If the BoJ raises interest rates again, yields on Japanese government bonds (JGBs) would climb further. Given that JGBs total 240% of Japan’s GDP, rising JGB yields would send the Japanese government’s interest expenses soaring and exacerbate its fiscal deterioration. Japan’s cabinet is currently locked in deep disputes over fiscal plans including consumption tax cuts. The government is highly reluctant to see debt servicing costs surge amid interest rate hikes at this stage.

For the US, the initiative to bolster the yen extends far beyond simply aiding Japan. We identify several key motivations behind Washington’s move. First, the US aims to stabilize US Treasury yields. The BoJ holds US$1.2 trillion worth of US Treasury bonds. If the BoJ intervened unilaterally, it would need to sell Treasuries to obtain US dollars, then sell those dollars in the forex market to purchase yen. Such sales would further train the US Treasury market, already under downward pressure amid a massive surge in bond supply scenario the US administration is determined to avoid. By publicly committing to assist the BoJ lift the yen, the US effectively eliminates the need for Japan to unload US Treasury debt. For instance, US Treasury Secretary Bessent stated that the BoJ could secure US dollar funding directly from the Fed through the FIMA repo facility. More crucially, the joint announcement of yen intervention by the US and Japanese governments sends a powerful signal to currency market expectations. As a result, the two central banks may not even need to deploy substantial capital to drive the yen higher. Before that, speculative short positions in the yen had hit a record high. Within one week of the announcement, these positions plummeted from 265,000 contracts to 193,000 contracts (Figure 4).

Fed data corroborates this view: the outstanding balance of the FIMA repo facility remained unchanged in the preceding week, indicating that the BoJ either did not borrow US dollars from the Fed, or had already repaid any amounts borrowed, leaving the net balance at zero. The US Treasury also clarified that the Fed carried out this round of joint yen intervention primarily by selling euros acquired via currency swaps and purchasing yen. This operation leaves the Fed’s overall balance sheet unchanged. In essence, the Fed wields far greater sway over forex market expectations than the BoJ. Even without committing a single US dollar of its own reserves, the joint announcement alone delivered a stronger market effect than any unilateral move by the BoJ could have achieved, while safeguarding the US Treasury market from tangible downside pressures.

Second, a stronger yen facilitates the return flow of global liquidity into the US. As a key funding currency for carry trades, the yen has long served as a major source of liquidity across Asian financial markets. Put simply, many investment funds borrow yen to leverage purchases of Asian risk assets such as equities and high-yield bonds. Sustained yen depreciation widens profit for this carry trade strategy. However, sharp yen appreciation inflicts substantial short-term losses on highly leveraged hedge funds, forcing investors to liquidate holdings and repay yen-denominated borrowings. A rally in the yen delivers a sizable blow to such capital flows, triggering a reversal whereby liquidity flows back toward US capital markets. This reversal favors those markets, which, as outlined earlier, still face substantial pent-up financing demand.

To sum up, the US administration’s initiative to help lift the yen exchange rate by no means stemmed from the so-called US-Japan "friendship" claimed by President Trump; instead, it was driven by its own strategic goals and interests.

III. The A-Share Market Has Entered a Favorable Buying Zone.

In our previous reports, we noted that the A-share market might undergo corrections after a slump in overseas technology and semiconductor stocks, a scenario that has now materialized. The Shanghai Composite Index dipped below 3,800 points at its trough; the CSI 300 Index fell below its year opening level; and the ChiNext Index, formerly the strongest performer, nearly erased all the gains accumulated in Q2.

First, broad-based ETFs backed by large institutional investors and state-backed capital have swung back to net subscriptions. We estimate these broad-based ETFs have recorded total net redemptions exceeding RMB 2 trillion since the start of this year. This trend reflects the securities regulators’ intention to curb excessively rapid share-price gains in the first half of the year, however, it does not mean the authorities intend for the A-share market to close the year in negative territory. These signs, including the shift from net redemptions to net subscriptions for state-backed broad-based ETFs, and the official statements on the equity market, show that the official policy stance toward A-shares has shifted from curbing rapid rallies to stabilizing markets and rebuilding investor confidence.

Second, the deleveraging cycle sweeping the A-share market has largely concluded. Amid the steep market downturn in July, margin balances contracted sharply, with nearly all the RMB 500 billion balances accumulated since the start of this year wiped out, pulling the total margin back down to levels seen at the start of the year (Figure 5). We believe the market’s rapid deleveraging has ended, and the market is set to enter a period of gradual stabilization and recovery.

Lastly, on China’s domestic economic fundamentals, this year’s fiscal spending is highly likely to be backloaded. The total annual budget deficit, plus issuance quotas for special government bonds and local government bonds, are roughly unchanged from last year. However, actual fiscal implementation in the first half of the year fell short of expectations, with spending markedly slower than last year, especially in Q2. The broad fiscal deficit registered at merely RMB 2 trillion in Q2, down RMB 940 billion, compared with the same quarter last year (Figure 6). We attribute this slowdown primarily to local leadership transitions across regions: facing the transition, local officials adopted a far more prudent and conservative stance on fiscal outlays and infrastructure investment. Nevertheless, with leadership transitions advancing in the second half of the year and central government directives urging faster project implementation and higher fiscal spending growth, we expect fiscal expenditure growth to pick up notably in the latter half of the year, particularly in the fourth quarter.

Considering the above factors, we believe the ongoing correction in A-share indices is nearing its end.

IV. Market Strategy

Our outlook on US equities remains neutral. After an earlier decline, US stocks have largely recouped their losses recently, driven by improved market sentiment and the return of global liquidity from the Asia-Pacific region into US capital markets. Although financing pressures should stay contained through Q3, the underlying cash-flow strain from surging AI capex remains unresolved and is likely to reassert itself once Q4 arrives. Should US capital markets fail to absorb a new, larger round of financing, market expectations for semiconductor hardware revenue growth will be revised downward.

As noted above, the recent lows of the A-share market are likely to mark this year’s trough, and we advise investors to buy on dips. Japanese and South Korean stocks have been weighed down by lower earnings growth expectations for the semiconductor sector and by yen appreciation, which is triggering capital outflows from Asia-Pacific equity markets. By contrast, Hong Kong stocks, which international capital has persistently shorted have benefited from short covering and rebounded ahead of regional peers. The coordinated yen intervention by the Fed and the BoJ, meanwhile, provides a modest underpinning for base and precious metals, and we expect commodities that sold off sharply earlier this year to stage a technical recovery over the coming quarter in Q3.