An unusually quiet first half of the year has come to an end, and a quick review of the first half of the year shows that the SPX, Nasdaq, Nikkei and gold prices have outperformed, while on the other hand, the Japanese yen, Japanese government bonds, the euro and most recently French government bonds (OATs) have lagged due to the continued zero interest rate policy of the Bank of Japan and Macron's political adventure of early elections.
Not to be outdone, the U.S. dollar also remains near its highest level in the past 30 years, as AI continues to drive capital inflows, strong economic conditions and high benchmark interest rates. This year, the outstanding performance of the U.S. capital market continues to exceed the expectations of most skeptics.
As capital continues to flow out of China, India has maintained its lead among emerging markets, with Indian markets up 30% (in US dollar terms) over the past 1.5 years, while Chinese stocks have fallen about 15%, a 45% performance gap between the two.
In the second half of the year, the US election will be the focus, and the market performance may still exceed expectations, although it may be different from the style of the first half of the year. We have long believed that the main axis of this election is about unsustainable US fiscal policy, which is reflected in the bond market, bringing higher yields and a steeper yield curve. However, in general, US customers believe that tariff policy is more important and that a stronger US dollar is a better choice. Although we basically agree with this view, we are not sure how much upside there is. After all, the US dollar index is only a few percentage points lower than its peak in the past 30 years.
Some clear themes that will emerge in the second half of the year:
U.S. economic momentum slows, although overall growth remains healthy
US recessions are rarer than unicorns
Inflationary pressures are moderating toward the Fed's target, but not enough to support rapid rate cuts in the short term
Although there has been some rotation/correction in the US market, AI continues to drive overall sentiment
With the Fed passive and the economy on autopilot, the focus will turn to politics, with the US election, fiscal spending, new tariff policies and Treasury supply dominating the investment narrative
Judging from economic data, the US economy has slowed down from its highs in the past two years, the economic surprise index has fallen to a multi-year low, and high-frequency consumer data showed a sharp drop in savings during the epidemic and a worrying increase in consumer debt.
However, even at a lower level overall, economic activity is still relatively active compared to previous cycles, with non-farm payrolls expected to be around 190,000 this week, unemployment expected to be 4%, and average hourly earnings still having a chance to show a positive growth of 0.4%. At the current rate, the 3-month average job growth is still 249,000, while the pre-pandemic average in 2010–2019 was only 181,000.
On the inflation front, price pressures appear to be finally easing after several disappointments. PCE rose 0.08% in May, below market expectations, and “super core” PCE rose just 0.1%, helping to crystallize the Fed’s plans for a possible rate cut in September.
In terms of politics, President Biden's performance in the first presidential debate was not as good as expected, raising concerns about his age and health. On the other hand, former President Trump's performance was relatively stable (by his standards), and his post-debate response was quick and Significantly, the gap in Trump's odds against Biden's victory widened from +10 points before the debate to +22 points. Head-to-head matches aside, Biden's margin of victory (35%) is now 7% lower than the Democrats' margin of victory (42%), while Trump and the Republicans' margin of victory is now well over 50%.
A landslide victory for Trump could have far-reaching implications for U.S.-China tariff policy, fiscal spending and extensions of tax breaks, monetary policy and the independence of the Federal Reserve, and perhaps even cryptocurrency frameworks.
Meanwhile, the first round of voting in the French election went to victory as expected by Le Pen’s National Rally, with the far-right party winning 34% of the vote, putting it on track for a majority.
This holiday-shortened week of just 3.5 trading days has a slew of data releases on Wednesday, including ADP, jobless claims, the ISM services index and the FOMC, and Friday is expected to be very busy with the release of nonfarm payrolls immediately after the holiday on Thursday.
On the cryptocurrency front, a very disappointing quarter ended last Friday, with BTC falling 13% in the second quarter. Slowing capital inflows, a lack of substantial mainstream technological innovation, falling demand indicators, and supply-side concerns have all exacerbated the cryptocurrency's woes, with BTC failing to break out of the 60–70k range.
Ethereum has also been disappointing, with expectations for ETF approval failing to generate excitement about the mainnet, and concerns about L2 offloads and fee reductions/supply increases (L1 fees fell to an all-time low last week), as the community continues to question the Ethereum Foundation over long-term structural issues.
Will the ETF approval expected in Q3 and the lawsuit victory against the SEC (regarding staking) change the fortunes of ETH? Will Trump’s victory solve the problem of mainstream application in the industry? Only time will tell us the answer…
