Geopolitics or Technology, which has a greater weight | International Financial Observation (3.28—4.3)

Ask AI · How will the CHIPS Act affect growth in the AI industry?

Key takeaway: In the short term (such as 1—4 weeks), geopolitics is the dominant variable—it determines whether the market can “go up.” In the long term (such as 5—10 years), technology is the decisive force—it determines what the market “will rise” and “for how long.” Beyond these two major lines, there are four other key factors—monetary policy, macro fundamentals, global liquidity, and regulatory oversight—which together form the basic framework shaping how international financial markets operate. If geopolitics and all four other key factors can be coordinated to deliver a positive push to technological development rather than working against each other—so much the better! This is a test for humankind, especially for international political figures wielding great power.

Market Review Last Week: Geopolitics Led Volatility; Technology Determined the Structure

Last week (3.28—4.3): International financial markets showed dramatic divergence—“panic-led selloff followed by a violent rebound.” Geopolitical conflicts, the tech industry, and the four key variables alternately took the lead, clearly demonstrating differences in their weights and the logic of their effects.

3.28—3.30: Geopolitical storm + regulatory shock led markets to engage in broad-based risk aversion: the Middle East conflict suddenly escalated, tensions between the US and Iran intensified, expectations that shipping through the Strait of Hormuz would be disrupted warmed up, and on top of that, the US passed the “Chip Security Act” on March 26. This triggered widespread fear of stagflation and a selloff driven by regulatory pressure in tech stocks, pushing the market into an extreme risk-avoidance mode:

Stocks fell across the board, with technology leading the decline: on March 28, the Nasdaq fell 2.15%, the S&P 500 dropped 1.67%, and the Dow fell 1.73%; on March 30, the Nasdaq fell another 0.73%, the Philadelphia Semiconductor Index plunged 4.23%, and the average decline of the “Magnificent Seven” in tech was nearly 4%. The fear index VIX surged to 31.05, the highest level since April last year.

Commodities surged: WTI crude jumped from $99.6 per barrel to $105 per barrel, up 5.4%; Brent crude rose from $102 per barrel to $108 per barrel, up 5.9%; COMEX gold rose to $4,492.5 per ounce, setting a historical high.

Bond and FX markets tightened: the yield on the 10-year US Treasury rose from 4.32% to 4.43%; the US dollar index held above the 100 level; global capital flowed toward safe-haven assets such as the US dollar and gold.

3.31—4.3: Easing geopolitics expectations + tech rebound: the Middle East conflict did not further deteriorate. Expectations that the situation would ease gained traction, and with bullish news for the AI industry coming out one after another, risk appetite recovered quickly—making technology the absolute driver of the rebound:

Violent stock rebound: on March 31, the Nasdaq surged 3.83%, the S&P 500 rose 2.91%, and the Dow gained 2.49%; on April 1, the Nasdaq rose another 1.16%. For the week, the Nasdaq’s cumulative gain exceeded 4%.

Technology led the rally: Meta, Google, and NVIDIA all posted weekly gains of more than 5%; the semiconductor index gained more than 6% for the week. AI compute and data-center-related names rebounded meaningfully, and capital concentrated back into higher-growth tech sectors.

High-level commodity consolidation: oil prices retreated from around $105 per barrel to near $101 per barrel; gold dipped slightly from $4,762 per ounce. As geopolitics eased, the heat in safe-haven assets cooled.

Historical Perspective: Geopolitics Is a Short-Term Disruption; Technology Is the Long-Term Main Line

Looking over longer historical cycles, the impact of geopolitical conflicts and technological revolutions on financial markets follows a clear pattern of differences—“short term vs long term” and “disruption vs determination.”

Geopolitical Conflicts: Fierce Short-Term Shocks, No Change to Long-Term Trends.

Historically, many Middle East geopolitical conflicts have triggered sharp short-term market swings, but the shocks are time-limited and cannot reverse long-term trends:

The Fourth Arab-Israeli War in 1973 and the Iranian Revolution in 1979 triggered two oil crises—oil prices surged, global stagflation hit, and stock markets adjusted sharply;

The 1990 Gulf War and the 2003 Iraq War similarly brought oil-price “pulse-like” increases and steep market drops. But after each conflict ended, markets gradually repaired themselves. The technology growth main line ultimately passed through the disruptions and delivered a long-term upward trajectory. Geopolitical conflicts affect short-term (1—6 months) market volatility, risk premia, and capital flows, but do not change the 5—10 year economic growth model, industrial structure, and asset pricing trend.

Technological Revolution: Remolding the Market at the Foundation and Creating Long-Term Value.

From the internet revolution to mobile internet, and now the current AI wave, technology has always been the long-term decisive force in global financial markets:

In the internet era, the Nasdaq index rose more than 10-fold over a decade, with tech stocks reshaping the global valuation framework;

In the mobile internet and cloud computing era, leading players such as FAANG drove a decade-long bull market in US stocks;

In the current AI revolution, it continues to deepen. Goldman Sachs predicts that AI will significantly boost global productivity, becoming the core engine driving both the economy and the market. Technological revolutions reshape productivity, industrial structure, and the financial ecosystem. They determine long-term economic growth rates, the earnings “center of gravity,” and asset returns. Their impact is ongoing, cumulative, and irreversible.

The Core Difference: Geopolitics Controls “Volatility,” While Technology Controls “Growth.”

The impact of geopolitical and technological factors on financial markets differs fundamentally in the mechanism, time dimension, and scope of influence:

Geopolitical conflicts: negative disruption and risk transfer—by disrupting energy supply and raising risk premia, they trigger volatility across the whole market. They do not create new value; they only amplify volatility.

Technology factors: positive creation and efficiency improvement—by increasing enterprise profitability and potential growth rates through technological innovation and industrial upgrades, they fundamentally raise the market value “center of gravity.”

Time dimension: geopolitics causes short-term, pulse-like effects that come fast and fade fast; technology produces long-term, trend-based effects that permeate gradually and are not reversible.

Impact range: geopolitics causes broad, systemic market volatility; technology leads to structural differentiation across sectors, determining market style and the relative strength of different tracks.

Four Key Variables: Monetary Policy, Macroeconomic Fundamentals, Global Liquidity, Regulatory Policy

Beyond the two major lines of geopolitics and technology, four factors—monetary policy, macro fundamentals, global liquidity, and regulatory policy—served as hard support during the market volatility from March 28 to April 3, backed by real data, official policies, and immediate market reactions. They demonstrate the core role of “pricing anchors, the base platform, the main valve, and rigid constraints,” with some periods’ weight exceeding that of geopolitics and technology.

(I) Monetary Policy: Determines the Valuation Denominator

Key takeaway: Last week’s market followed the “geopolitics drives oil prices → inflation rebounds → rate-cut expectations cool down → interest rates rise → tech sells its valuation” policy transmission chain exactly. The logic was clearly validated by data and policy signals.

1. Fed policy stance: a shift toward a hawkish tilt, locking in “higher for longer.”

The March 19 FOMC decision (policy floor): maintained the target range for the federal funds rate at 5.25%—5.50% without change (the second consecutive time holding steady); the dot plot shifted sharply hawkish. The expected number of rate cuts in 2026 fell from 3 to 1 (25bp). The first expected rate cut was pushed back from June to after September. Of the 19 policymakers, 7 argued for no rate cuts in 2026. The forecast for 2026 core PCE was raised from 2.5% to 2.7% (above the 2% target), explicitly incorporating the risk that the Middle East conflict could raise inflation. Powell’s remarks emphasized “higher for longer,” ruling out potential near-term rate hikes.

2. Violent swings in the rates market: the “barometer” for tech-stock valuations.

10-year Treasury yield: March 28 was 4.32%, March 30 surged to 4.43% (+11bp), and April 2 fell back to 4.12%. Over the week, the volatility reached 31bp, and tech-stock valuations simultaneously behaved like a roller coaster.

2-year Treasury yield (sensitive to policy): March 28 was 4.50%, March 30 rose to 4.62%, and April 2 fell back to 4.58%. The yield curve for the 2-year and 10-year briefly inverted again (-7bp). The market faced both “stagflation + recession” risks at the same time.

3. Last week’s market reaction: policy > geopolitics > technology.

From March 28 to March 30, rising rates directly drove the Nasdaq down 2.15% and 0.73%, and the Philadelphia Semiconductor Index fell 4.23%. From March 31 to April 2, a modest decline in rates combined with easing geopolitics caused the Nasdaq to rebound 3.83% and 1.16%. The way tech stocks rose and fell essentially mirrored rate volatility. Geopolitics affected the market indirectly through the “inflation—policy—rates” channel, making monetary policy the direct driver of market volatility last week.

(II) Macroeconomic Fundamentals: The “Phantom Menace” of Stagflation—Growth and Inflation

Key takeaway: The economy is the market’s “chassis,” determining corporate earnings and policy room. Major data released last week clearly showed a stagflation combination of “slowing growth, inflation picking up, and employment remaining relatively strong.” This directly shut the Fed’s rate-cut window and became a market constraint more persistent than geopolitics. US data and logic were as follows:

1. Inflation data: oil-price pass-through + firms raising prices; inflation rebounds beyond expectations

March PMI inflation indicator (released March 29): US Composite PMI 51.4 (lowest in 11 months). Input-price and output-price growth accelerated. Corporate sales prices recorded their fastest increase since June 2022. S&P Global clearly flagged the risk: “slowing growth + inflation picking up = stagflation risk.”

Oil-price pass-through effect: WTI crude rose 2.75% over the week. US gasoline prices rose 15% month-over-month in March, directly lifting CPI expectations and making input-driven inflation pressure more visibly persistent.

Fed inflation expectations raised: the March FOMC raised its 2026 core PCE forecast from 2.5% to 2.7%, confirming the persistence of inflation rebound and reinforcing concerns about rate cuts.

2. Growth and employment data: nonfarm payrolls beat expectations; wage—inflation spiral risk remains

March nonfarm payrolls (released April 3): added 303k jobs (vs. 200k expected). The prior figure was revised up to 272k. Unemployment rate held steady at 3.8%. Average hourly earnings year-over-year rose 4.1% (month-over-month +0.3%). Wage stickiness increased, and the risk of a wage—inflation spiral had not disappeared.

March PMI sub-sector data: manufacturing 50.9 (weak expansion), services 51.2 (lowest in 11 months), composite 51.4 (lowest in 11 months). Growth momentum slowed at the margin but did not slide into recession.

Consumption data: February retail sales month-over-month -0.4% (released April 1). Consumer momentum cooled at the margin, showing “strong employment, weak consumption, slow growth.”

3. Market logic: fundamentals > geopolitics—building the core constraint

Strong economy → no rate cuts → tech valuations pressured; high inflation → even fewer (or no) rate cuts → safe-haven demand heats up; stagflation expectations pushed the US stock-market volatility index VIX up to 31.05 (March 30), hitting a stage high. US economic resilience plus inflation rebound is the fundamental reason the Fed could not cut rates and why tech stocks swung violently last week. Both geopolitics and technology needed to operate on this underlying “chassis.”

(III) Global Liquidity: The “Main Valve” for Cross-Border Capital

Key takeaway: The strength or weakness of the dollar and how tight or loose global liquidity is dominate emerging-market stability, commodity pricing, and where capital flows among tech stocks. Last week showed a liquidity-tightening setup characterized by “the dollar tilted strong, pressure from Treasury supply, global capital returning to the US, and the Bank of Japan switching to drain.” This amplified volatility from geopolitics and policy.

1. US Dollar Index: holds above the 100 level; the global capital anchor is the dollar

March 28 US Dollar Index was 99.6; March 30 rose to 100.2; April 3 fell back to 99.85. Overall, it held above the 100 mark throughout the week. Safe-haven demand plus high-rate support kept the dollar strong.

Dollar strength dragged non-US currencies lower in parallel: EUR/USD fell from 1.155 to 1.159 (minor fluctuation but overall weak); USD/JPY rose from 151.5 to 158.8, and emerging-market currencies also faced pressure.

2. Treasury market liquidity: supply pressure + reduced holdings, passively lifting yields

US Treasury data: for FY 2026, the budget deficit is expected to be > $2.2 trillion. Net Treasury issuance in the second quarter exceeded $500 billion, keeping Treasury supply under continued pressure.

Weak demand for weekly auctions of 10-year Treasuries. Overseas buyers reduced their holdings of US Treasuries. Combined with the Fed’s continued balance-sheet reduction, global liquidity continued to be drained, pushing Treasury yields upward passively.

3. Global capital flows: mostly risk aversion; abrupt switching into and out of tech

Global equity mutual funds had a net outflow of $12.8 billion over the week, as money avoided risk assets. US technology funds saw a net outflow of $7.2 billion from March 28 to March 30, then a net inflow of $5.8 billion from March 31 to April 2. Capital flows rapidly switched with geopolitics and interest rates.

Money market funds had a net inflow of $45.6 billion over the week. Global funds concentrated into lower-risk safe-haven assets, and the features of tighter liquidity were evident.

4. External variable from the Bank of Japan: exiting YCC, intensifying global liquidity volatility

On March 28, the Bank of Japan exited Yield Curve Control (YCC). Interest rates were raised from -0.1% to 0.0%, ending the era of negative rates.

JPY carry-trade positions were concentrated and unwound. Funds flowed back to Japan, intensifying volatility in global bond markets. USD/JPY traded from 151.5 to 158.8 during the week, further amplifying the tightening effect of global financial-market liquidity.

Conclusion: The dollar was strong, Treasury supply was large, and the Bank of Japan shifted policy—triple liquidity tightening—combined with geopolitics and policy shocks. Together, these became important underlying drivers of last week’s “surge and plunge,” and global liquidity became the “main valve” for cross-border capital flows.

(IV) Regulatory Policy: The “Ceiling and Moat” for Tech Stocks

Key takeaway: Technology regulation, export controls, and industrial policy directly determine the growth boundaries and the valuation cap for tech stocks. Around March 28, the impact of the US “Chip Security Act” began to take effect officially. It imposed a rigid constraint on the AI/semiconductor sector, and its long-term impact exceeds short-term volatility from geopolitics.

1. The US “Chip Security Act”: the strictest regulation in history, suppressing AI/semiconductor valuations

Policy implementation: the US House of Representatives passed the “Chip Security Act” on March 26. On March 28, the market began to fully price in the policy impact, and the bill would be forcibly implemented within 180 days.

Core contents: all high-performance AI chips covered by the act (e.g., NVIDIA H200/BK, AMD MI300, etc.) must include location verification, anti-tampering features, and “security mechanisms” for abnormal reporting. The US Department of Commerce can remotely verify and restrict functionalities, and in extreme cases can remotely lock the chips. Transaction records must be retained across the entire chain for 5 years, with mandatory audit cooperation.

Market reaction (March 28—March 29): the Philadelphia Semiconductor Index plunged 4.23%. NVIDIA fell 5.1%, AMD fell 4.8%, and Broadcom fell 3.9%. The market worried that AI chip exports would be restricted, leading to slower global AI compute buildout, and ultimately to corporate earnings underperforming expectations. This directly suppressed tech-stock valuations and became the core policy factor behind the tech selloff this week.

2. Global financial regulation: strengthen risk constraints and standardize market operations

This week, the Fed and FDIC released announcements to strengthen regulatory oversight of leverage at large banks and hedge funds, limiting high-risk investment behavior and preventing systemic financial risks.

The EU “AI Act” took effect officially. High-risk AI applications (finance, healthcare, judicial systems, etc.) are subject to mandatory review, rolling out comprehensively beginning in April. It sets regulatory red lines for technology and affects the global AI industry’s development tempo.

Conclusion: Technology regulation has upgraded from a “compliance cost” to a “growth ceiling.” The US chip act directly suppresses long-term AI/semiconductor valuations. Its impact lasts for years, far exceeding the short-term pulse of the Middle East conflict, and it has become the core rigid constraint for the technology sector.

Proofread by: Wang Zunjun Zhang Ruonan

Layout editor: Bi Dandan