Summary of Key Points
In the second half of 2026, the global economy will no longer be driven by economic data but rather by political maneuvers (especially Trump's policies for the midterms). The economies of China and the United States are showing a "K-shaped divergence"—where sectors such as AI, high-end manufacturing, and export chains are thriving, while real estate, traditional consumption, and low-end manufacturing are under pressure. Trump has introduced three key policy tools to win the elections: trade negotiations with China, manipulation of Middle East oil prices, and a change in the leadership of the Federal Reserve. The relationship between the G2 countries may move towards "coexistence," with a possible high-level meeting in September. The pricing of major assets will need to be adjusted according to political considerations, as the export structure is shifting from traditional labor-intensive industries to new sectors (new energy vehicles, photovoltaics, lithium batteries), and AI hardware.
Why the Second Half of the Year Is a "Political Market?"
In the past, markets focused on economic data (such as employment and inflation). Now, attention is shifted to political decisions—especially those made by Trump for the midterms in November. There are three main reasons for this:
1. Election pressure: Trump's approval ratings have dropped to around 35%, and without control of Congress, he cannot implement his policies. Therefore, all economic decisions are aimed at winning votes.
2. Intense policy intervention: The Federal Reserve chairman has been replaced within half a year, tariffs on China have been adjusted, and the situation in the Middle East has been manipulated, each of which directly affects the market (for example, lower tariffs have made Chinese goods cheaper, boosting U.S. stocks).
3. Historical pattern: Presidents tend to concentrate their policy efforts during election years, and 2026 is no exception.
In simple terms: Votes are more important than economic data, and political decisions determine asset prices.
Trump's "Election Toolkit": Three Key Strategies
To appease core voters in the Midwest and the Rust Belt, Trump has implemented three practical policies:
1. Trade Negotiations with China: Using Tariffs to Win Votes
U.S. tariffs on China are still high, but Trump wants to reduce them under the condition that China agrees to four things:
- Buy more U.S. soybeans and corn (benefiting farmers);
- Control the distribution of fentanyl (a concern for blue-collar voters);
- Relax restrictions on rare earth exports (essential for the U.S. AI industry);
- Purchase U.S. bonds (to finance government spending).
The potential benefits include a 1-2 percentage point reduction in inflation, which would alleviate voter concerns about rising prices, and farmers selling more agricultural products, thus supporting the Republican Party. An agreement could be reached before September to show progress before the election.
2. "Controllable Disturbances" in the Middle East: Manipulating Oil Prices to Maintain Inflation
Trump aims to keep oil prices within a comfortable range of $95-100 per barrel:
- Too high, and inflation soars, causing public backlash;
- Too low, and U.S. shale oil producers lose profits, displeasing energy-state voters.
His approach is to use military support for Gulf countries (e.g., Saudi Arabia) in exchange for oil sold in dollars and protection fees. If negotiations with Iran fail, he may trigger small conflicts to drive up prices; if they succeed, prices will fall. The goal is to prevent oil prices from exceeding $110.
3. Changing the Leadership of the Federal Reserve: Walsh to "Protect" the Election
The new Fed chairman, chosen by Trump, has the following tasks:
- Avoid raising interest rates before the election (to prevent a economic collapse) and not cut them easily (to avoid inflation);
- Maintain stable interest rates to keep U.S. stocks from falling (which pleases voters).
Interest rates are expected to remain around 4.25%-4.5% in the second half of the year, with a possible symbolic reduction to appease voters.
The "K-Shaped Divergence" Among China, the US, Europe, and Japan
The "K-shaped divergence" refers to two distinct economic trajectories: one growing and the other declining:
China:
- Positive aspects: Exports (especially in new sectors and AI hardware) are growing by 11.9%, and industrial production by 6.1%;
- Negative aspects: Consumer demand is only up 2.4%, real estate investment has declined by 12%, and inflation is nearly non-existent (deflation).
In the second half of the year, China will rely on exports and government spending (on equipment upgrades and urban renewal) to support its economy, with GDP expected to grow by about 4.7%.
The US:
- Positive aspects: AI investment is driving fixed asset investment by 3.3 percentage points, and tech companies (e.g., NVIDIA) have orders through 2027;
- Negative aspects: Real income has decreased, the savings rate is at its lowest since 2007, and people are relying on credit cards and mortgages; default rates are rising.
AI companies have borrowed heavily to purchase equipment. If U.S. bond interest rates rise too much, tech stocks could decline significantly.
Europe and Japan:
- Europe: Energy costs are 30% higher than in the US, and manufacturing has been weak for 18 months, with GDP growing by only 0.9%;
- Japan: AI hardware exports (to NVIDIA) and corporate reforms (share buybacks) have boosted the Nikkei index, but the government may intervene if the yen depreciates too much (around 160).
The G2 Relationship: Possible "Big News" in September
China's diplomacy was active in the first half of the year, with many foreign leaders visiting. The underlying goal is to shift from competition to coexistence with the US. After Trump's visit to China in May, it is highly likely that a Chinese leader will return in September:
- Diplomatic convention: Such visits are common;
- Electionary needs: Trump needs to show "diplomatic achievements" before the election (e.g., tariff reductions and price stability);
- Possible agreement topics: Tariff cuts, drug control cooperation, and rare earth exports.
If an agreement is reached, Chinese assets (A-shares and Hong Kong stocks) are likely to rise significantly, as their valuations are already low and any good news would drive a rebound.
How to Invest in Major Assets
Stocks:
- U.S. stocks: Expected to grow by 5%-8% for the year. Be cautious with tech stocks (high leverage) in Q3. Consider buying AI hardware, energy stocks (buy when prices are below $70 and sell above $85), and agriculture (due to potential price increases from El Niño).
- A-shares: Expected to grow by 8%-12% for the year, with a focus on fintech, AI applications, and high dividend stocks. Prices could rise by 15%-20% if an agreement is reached in September.
- Hong Kong stocks: Expect volatility; buy high-dividend state-owned companies (energy, telecommunications) and undervalued tech stocks, avoiding real estate.
Bonds:
- U.S. bonds: Buy short-term bonds (within 2 years) for a fixed 4.5% interest rate; long-term bonds offer limited returns.
- Chinese bonds: Volatile but suitable as a bottom-of-the-park investment.
Currencies:
- USD: Expected to fluctuate between $97-103;
- RMB: Between 6.7-7.0; may rise to 7 if an agreement is reached.
- Yen: Between 155-165; the government may intervene if the yen depreciates too much.
Commodities:
- Gold: Volatile; avoid short-term speculation.
- Copper: Can be used as a substitute for gold in long-term investments.
Crypto Assets:
- Regulatory differences between China and the US: China is stricter, while the U.S. is moving towards regulation;
- Bitcoin: Prices may bottom out in July-August and rebound in September, but pricing power remains with compliant U.S. exchanges.
Final Reminder
The key factor in the second half of 2026 is political logic. Investments should follow Trump's election agenda. Don't let short-term market fluctuations distract you; after all, the market is always a reflection of human behavior.
(Note: All forward-looking statements in this article are based on the author's model and do not constitute investment advice.)