LD Capital Weekly Macro Report (11.06): U.S. stocks and crypto "junk riots" resonate, and stampede covers are in progress

The S&P 500 rose for five consecutive sessions last week and posted its best weekly gain since November 2022 (+5.9%), while the Nasdaq rose 6.5% last week, its best weekly gain of the year. On the graph, it is expected to break the correction channel of the past 3 months. The backdrop of market participants’ reaction to a combination of dovish economic data (employment, inflation, manufacturing) and policy friendliness (FOMC+BOJ dovish and weaker-than-expected Treasury bond issuance) is reminiscent of the Goldilock time. Judging by the positioning and sentiment data, such a rally is more like a short-covering situation, and the high volatility situation will continue.

The 10-year Treasury yield posted its biggest weekly drop since March:

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Small-cap stocks represented the Russell 2000’s strongest weekly rally since January 2021:

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This has led to lower bond yields, while last week’s corporate results were generally positive. The real estate and consumer discretionary sectors, which have been suppressed by high interest rates for a long time, rebounded sharply to lead the rise of U.S. stocks, and the technology and telecommunications sectors also rose sharply, both exceeding 6%; The laggards were in energy, healthcare, and consumer staples.

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The decline in market yields led to the biggest drop in the financial environment index since November last year:

GS’s Financial Climate Index

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The panic has subsided significantly, and the VIX has fallen sharply:

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The U.S. dollar index recovered to its lowest level since September 20

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Notably, small-cap stocks rose 7.5% for the week, their best weekly gain since February 2021, while “unprofitable tech stocks” jumped 15% for the week, their best weekly gain since November 2022, and Cathie Wood’s ARKK had its best week on record, rising nearly 19%:

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This astonishing rally seems to have more to do with the release of sentiment, which echoes the cryptocurrency market, as a riskier unprofitable technology concept asset, Altcoin rose 6.2% last week compared to BTC+ETH, which is up only 2.1%, and the difference between the two weekly gains hit the highest level in three months.

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HISTORICALLY SINCE 2017, THERE HAVE BEEN SIGNIFICANT BEATS IN ALTCOIN AT THE BEGINNING OF THE LAST THREE BULL RUNS, SUCH AS AUGUST 2017, JUNE 2020, AUGUST 2021. THE DIFFERENCE IN SUCH WEEKLY VARIATIONS LAST WEEK WAS ONLY THE HISTORICAL 18TH PERCENTILE, SUGGESTING THAT ALTCOIN’S AGITATION IS FAR FROM EXAGGERATED IF THIS DOES TURN OUT TO BE A GENERAL BULL MARKET FOR CRYPTO.

Bitcoin has topped all major asset classes this year, both in terms of nominal rate of return and risk-reward ratio:

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Historically, we believe that the allocation value of BTC as an alternative asset is largely supported by the inflation shadow, with the 5-year and 10-year breakeven rate commonly referenced in the secondary market as the inflation expectation indicator, the big bull and bear markets of BTC always correspond to the rise and fall of inflation expectations. **

If the Fed policy rate peaks at this, will it lead to a cooling of inflation expectations (20bp in the last two weeks in 5yr and 10bp in 10yr), and if Godiloc does not continue thereafter, then the demand for alternative allocations may also weaken. There is also a good scenario where the Fed policy rate has peaked, but inflation expectations have risen sharply as real economic growth continues to improve, although at least for the time being, expectations for a cooling economy in Q4 and Q1 are still strong (excluding the support of restocking and one-time consumption in Q3). So it’s a bit contradictory to bet that lower interest rates will happen at the same time as rising alternative assets. **

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AAPL’s Q3 revenue and EPS exceeded expectations, but there were also a number of indicators that fell short of expectations, especially the weak sales in Greater China, the stock price fell 3.4% at one point but finally recovered, rising 4.5% for the week

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Israel’s land incursions this week did not trigger a rapid escalation (i.e., further involvement by Allah or Iran). Crude oil prices tumbled by $5 despite the passage of a bill by the US House of Representatives to expand sanctions on Iranian oil.

The dove FOMC

There was little new in the statement, but there was a hint of a dovish wait-and-see attitude to see if stronger economic activity would hinder progress towards the inflation target. On top of that, Chairman Powell downplayed the recent rise in inflation expectations, again mentioning that although the growth is above potential, it is not enough to raise rates again, and acknowledging that the recent tightening of financial conditions has effectively replaced a rate hike. This is also what the market likes to see. However, the Fed’s stance has not changed since July, but the tightening of financial conditions in the United States is equivalent to an interest rate hike of about 75 basis points, which will weigh on growth, which could be reflected as soon as the fourth quarter, and will not change much due to a correction in short-term market interest rates.

Judging from the September dot plot, there is another rate hike this year, and since the Fed has always liked to surprise the market, if Powell is confident enough in the recent economic data, he should make it clear or at least hint at the press conference how to act at the next meeting. The result is still an emphasis on data-driven, and reiterating that long-term interest rate increases will replace interest rate hikes, and the market has reason to believe that the current rate hike cycle is over, and inflation expectations may not stop.

The scale of U.S. government financing in Q4 declined

The U.S. Treasury lowered its net borrowing target for the fourth quarter to $776 billion vs. $852 billion expected, and 58% of it is short-term bonds, which eased the market’s anxiety about long-term bond yields. Q3: The U.S. Treasury issued $1.01 trillion in debt. The official statement attributed the decline in borrowing demand to higher incomes. In addition, the quarterly refinancing auction conducted this week also fell by 2 billion less than expected, to 102 billion.

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Such news caused the market to seem overjoyed, with both 30yr and 10yr falling by nearly 40bp, which may have been overshoot given that supply pressures are still there. Good news from the bond market is unlikely to last long.

Bank of Japan + new government stimulus

The Bank of Japan (BOJ) has once again loosened its grip on the yield curve, but in an extremely ambiguous way, as rumored in the market, simply because the BOJ can now allow the 10-year JGB yield to be above 1%, but it will not go too far. This sent the yen tumbling to 151.7 and Japanese stocks jumping 7%. It seems that the BOJ is determined to abandon the exchange rate to protect the debt. However, some analysts believe that this is just a verbal ambiguity, and in essence, BOJ’s cancellation of the JGB 10yr volatility hard limit is equivalent to the cancellation of YCC. So we’re seeing Japanese bond yields rising, but the stock market and USDJPY are also rising, and the market’s understanding of this is actually differentiated. But overall, it is certainly not appropriate to bet on a further pullback in Japanese yields at this time, and it may be a very good time to go long on the yen.

In addition, the news from the fiscal department on Friday was ignored by many, and the Japanese cabinet approved a 17 trillion yen ($110 billion) economic stimulus package, which mainly includes tax rebates, energy price subsidies, incentives for companies to increase wages, encourage domestic investment in semiconductors, and promote population growth, and other measures of up to 3.1% of GDP, if local government spending and state-backed loans are included, The size of the plan totals 21.8 trillion yen, which is a whopping 4% of GDP.

Japan has the highest debt-to-GDP ratio in the world (262%).

Following the Chinese government, Japan’s central government’s leverage increase will export more cash from the East to the market, and the central bank’s balance sheet reduction may be hedged.

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Labor costs and employment figures both fell

Productivity grew at an annualized rate of 4.7% in the third quarter, following a 3.6% increase in the previous quarter. Unit labor costs fell 0.8% after rising 3.2% in the second quarter. This is the first decline since the end of 2022. It was a surprise that the market was expected to rise by 0.7%. In addition, the number of new non-farm payrolls in the United States slowed to 150,000 in October more than expected to 150,000 versus 180,000, while the unemployment rate rose to 3.9%, the highest since January 2022. Even if you don’t take into account the more than 30,000 jobs that came from the UAW strike, this figure is poor.

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In addition, not surprisingly, the employment figures in August and September were sharply downgraded, and the data for the first nine months of this year were revised down from the preliminary value for eight months, and the data continued to be unreliable, which made all economists and traders who rely on data feel painful:

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Stock market performance in an election year

With just one year to go before the overall U.S. election, U.S. politics will enter a more complicated year, with stock market returns often below average in election years. Since 1932, the S&P 500 has returned an average of 7% in the 12 months leading up to the election, compared to 9% in non-election years. Historically, the stock market has been weaker in the run-up to elections, with the S&P 500 averaging just 4% in the 12 months leading up to 10 presidential elections from 1984 to the present.

While earnings typically grow in election years, stock market valuations are typically flat:

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Stock market volatility is often above average. Since 1984, the average real volatility in the year before the election has been 18%, compared to 16% in non-election years.

The economic policy uncertainty index usually rises before the election.

After a presidential election, the stock market usually rebounds strongly as the uncertainty dissipates. The policy uncertainty index typically declines in the weeks following the election as investors gain more clarity about the policy implications of the election outcome. The median from 1984 to date shows that the S&P 500 is up 5.0% in the eight weeks from Election Day to the end of the year, compared to 2.6% in the same period of the election.

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Hartnett, chief officer at Bank of America Merrill Lynch, thinks next year’s panic will be truly compelling: "So much anger, so much hatred, and yet so low unemployment; Can you imagine a chaotic society if the unemployment rate reached 5%? That’s why the policy panic will appear at the beginning of '24. ”

Positions

Goldman Sachs Prime data: Hedge funds actively net bought U.S. equities after the FOMC meeting, the largest 5-day net buying since December 2021 (the 99th percentile in the last 5 years). Short cover and buy long are both obvious.

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SPX Gamma saw its largest one-day increase on record on Thursday, suggesting that the market is in a hurry to increase its portfolio’s exposure:

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The open interest in the CME’s BTC-margined futures contracts hit a new all-time high last week, even though the BTC price was only 53% of its all-time peak:

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Positions in U.S. equities fell slightly last week, despite the market’s rally (many of which are suspected to be the result of lags), with the 33rd percentile of composite equity positions falling to 31, the 41–38th percentile for subjective investors, and the 31–29th percentile for systemic investors:

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Equity funds (-$3.4 billion) saw outflows for the fourth week in a row, led by redemptions by emerging market equity funds (data as of Wednesday) and bond funds ($2.2 billion) attracted inflows for the fourth consecutive week. Inflows into money market funds ($64.2 billion) accelerated, particularly in the United States ($66.2 billion)

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CFTC futures data (as of Tuesday) showed a decline in net long positions in U.S. equities, a decrease in net long positions in the S&P 500 and Nasdaq 100, and a fourth consecutive week of net short losses in the Russell 2000. The net short position in the US dollar decreased. Net long oil positions declined slightly. Net long positions in gold increased.

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Short re-accumulation in bonds (but market yields only started to fall sharply on Wednesday):

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CME Bitcoin speculative net short decreased slightly, the green line in the chart below, except for last week, and the previous three weeks of speculative net short have been on the rise, despite the sharp rise in BTC price:

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Emotions

Goldman Sachs’ internal risk appetite indicator jumped, with monetary policy expectations and global growth expectations both rising, similar to the backdrop seen in the early summer:

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The Bank of America Bull & Bear Index indicator fell to 1.4 last week, its lowest level since November '22, sending a reverse “buy” signal for the third consecutive week. Historically, the stock market has risen by an average of 6% in the 12 weeks following its trigger.

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There was a rare sharp divergence between the AAII sentiment survey and the market, and the bearish ratio rose to the highest level of the year at 43.18–50.28%:

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CNN’s Fear and Greed Index rebounds above 40, still below neutral:

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This week’s outlook

Since last week’s call that the U.S. stock market needs to rebound based on positioning and sentiment data, the market has seen an aggressive short cover in line with the shift in fundamentals and policy expectations, and the hype has preceded an overshoot in the bid, which is expected to continue for some time, at least not expected to reverse this week (no major events). However, judging from the overshoot in the interest rate market and the general trend of economic slowdown, the ceiling of this round of rebound is not high.