Market Overview
The Nasdaq and S&P indices fell sharply in the past week and fell below their respective 50-day moving averages, experiencing their worst week in more than a year. After the past three weeks of retreat, the US and Japanese stock markets have basically given up half of their gains. The performance of the S&P 500 and Nasdaq 100 this year has been lower than that of the CSI 300:
Last week, technology leaders were the biggest losers, with double-digit declines (even higher than Bitcoin). Nvidia fell 14.5%, breaking through the 50-day moving average and the key support level of $800, ARM fell 31%, AMD fell 22%, Broadcom fell 12%, AMD fell 11%, and Tesla fell 14%. In contrast, consumer goods and utilities sectors performed best, falling only 0.3%.
The accelerated decline of semiconductor, AI and other technology stocks this week began with the financial report of ASML, Europe's largest technology company by market value. ASML's total new orders in the first quarter were far below expectations, down 61% from the previous quarter. Previously, its order volume set a record in the fourth quarter of 2023. ASML explained that the decline in new orders was mainly due to a sharp drop in demand for the most advanced EUV lithography machines. The market believes that the performance announced by ASML may be a warning to technology giants that will announce financial reports in the future.
Chip and AI stocks were sold off after ASML and TSMC both released cautious comments on future demand. In addition, AI server maker SMCI collapsed on Friday after failing to release preliminary results, raising concerns about overall demand for AI.
The panic about NVDA seems to be a bit excessive. Its monopoly position is temporarily solid for two reasons. First, only NV link can assemble multiple chips into a large computing center. Second, CUDA developer resources are the richest in the world and cannot be surpassed for the time being.
This week, Fed officials made more hawkish remarks, and the 10-year Treasury yield rose to 4.62% and the 2-year yield rose to 4.988%. Despite the intensification of the conflict in the Middle East, the yield fell sharply in the middle of the week but soon rose back. Wall Street currently does not expect a rate cut in June, and September has become the consensus time. However, the good news is that the ECB and the BoE still expect to start cutting interest rates in the summer, which has not been postponed.
Industrial metals prices were hurt by Russian metals sanctions, with copper and aluminum hitting one-year highs. Crude oil retreated, erasing all gains for the month as Iran and Israel showed relative restraint.
The safe-haven demand is more evident in gold, which once broke through $2,410 on Friday and closed positively for four of the five trading days. The trend of cryptocurrencies in the past month has diverged from that of precious metals, and the correlation between bonds and precious metals has also broken, which has surprised many market participants. Deutsche Bank has therefore updated its model and introduced a "memory" factor, fitting that this year's gold price increase is "paying off the debt of the past decade":
More and more senior Fed officials mentioned "interest rate hikes":
New York Fed President Williams warned that if the data shows that the Fed needs to raise interest rates to achieve its goals, then the Fed will raise interest rates, and "raising interest rates" is not his expected baseline;
Atlanta Fed President Bostic also said he is open to raising interest rates if U.S. inflation rises;
Fed Chairman Jerome Powell acknowledged the lack of progress on inflation and that it might be appropriate to let higher interest rates work for longer, but rate hikes were not on the immediate horizon.
Data:
Retail sales in March beat expectations and earlier data was revised upward;
Business survey results were mixed;
Initial jobless claims remained low.
AI bubble bursts? First ASML, now TSMC lowers 2024 global chip outlook
Our conclusion is that it is too pessimistic.
Many news reports conveyed similar meanings. TSMC's stock price plummeted 12%, although TSMC's performance exceeded expectations (revenue increased by 13% year-on-year and net profit increased by 9%) and only released a few negative outlooks, mainly focusing on mobile phones and automotive chips (not to mention personal computers, which have been weak). The demand for AI chips was described as "never-ending."
TSMC's net profit margin is 40%, the highest level in the company's history, while the industry average is only 14%, indicating that TSMC has pricing power. However, demand for traditional servers is still relatively weak and accounts for the largest share of TSMC's revenue (46% of HPC). TSMC predicts that the revenue contribution of AI servers will more than double in 2024, accounting for 10% of total revenue in 2024, and will continue to grow to more than 20% in 2028.
Despite good performance in the first quarter, the subsequent press conference lowered the growth rate of the semiconductor industry, excluding memory, for the whole year of 2024 to 10% (previously expected to be over 10%), and lowered the growth rate of the foundry industry to 15% - 17% (previously expected to be 20%).
Against the backdrop of a weak recovery in the global semiconductor industry, the "chill" released by TSMC was quickly amplified, directly causing the collapse of chip industry stocks, including Samsung Electronics, MediaTek, ASE and other chip giants. Analysts said that the performance and expectations of semiconductor stocks in the first quarter of 2024 will be "even more mediocre" and "unable to reproduce the artificial intelligence performance of 2023."
Due to the US tax day (closed on April 15), global equity funds experienced outflows in the seven days ending April 17, with bond, stock and money market funds all affected. Tax day may lead to reduced market liquidity as investors may need to sell assets to pay taxes. It is important to note that as tax day passes, the market tends to return to a state driven by fundamental factors such as corporate earnings, economic growth and monetary policy.
Fund Flow and Positions
Investors sold a net $21.15 billion worth of U.S. stock funds, the most in a week since Dec. 21, 2022, and the third straight week of net outflows, LSEG data showed. Money market funds saw net outflows worth $118.1 billion, the largest weekly outflow since at least July 2020:
U.S. bond funds saw weekly outflows of $3.83 billion, the largest net sell-off since mid-December, mainly due to outflows from local government bonds. Medium- and short-term government bonds remain attractive:
U.S. stock investors sold the most sectors, including consumer discretionary (US$701 million), healthcare (US$651 million) and gold and precious metals funds (US$447 million), but bought financial sector funds with a net value of approximately US$281 million because longer or higher interest rates are good for financial institutions.
However, Goldman Sachs' clients have been net buyers for two consecutive weeks. Although short positions are increasing, long positions are growing even more:
Among them, long only funds are rapidly reducing their holdings, while long-short HFs are starting to go long:
The overall US stock SI is already at its highest level in at least 2 years:
China concept funds have seen net outflows for six consecutive weeks:
Cryptocurrency
Considering that the overall YTD cryptocurrency is still up more than 30%, especially BTC compared to the stock market and other cryptocurrencies, which only pulled back 8.8% in April, it can be seen that this market is still quite resilient. Previous analysis pointed out that BTC is like the 3x long NASDAQ100 index, which fell more than 15% in April. The altcoins pulled back more in April, and many well-known projects also fell by more than 40% at one point. However, as Iran and Israel perfunctorily counterattacked each other, the risk of amplifying the conflict was settled, and BTC survived the fourth halving safely, the market rebounded sharply late on Friday, and BTC's rebound on the 2nd was the largest in nearly a month:
April was the first monthly correction for BTC after it had risen for seven consecutive months. The seven monthly positive lines should be the longest consecutive positive lines since the advent of BTC, followed by the bull markets in 2013 and 2021, which rose for six consecutive months respectively. Therefore, it is not surprising that there was a correction of around 10% this month.
BTC spot ETFs had a small net outflow of $204 million last week. Bitwise's BITB saw its first net outflow since its listing, but IBIT, FBTC, EZBC, and BRRR have never seen any outflows, which is surprising. IBIT and FBTC are the main forces of capital inflows, with inflows of $15.4 billion and $8.1 billion respectively since their listing.
IBIT ETF currently has about 30 institutional investors, mainly funds and advisory institutions, and each institution holds a small percentage of shares. These institutions shown in the table only account for 0.2% of the total share of IBIT, and there is still a lot of room for growth.
Bitcoin successfully halved on Saturday, and RUNE rune casting was launched at the same time. Due to the wealth-creating effect of the previous Ordinals inscription project, the launch of this rune immediately led to an increase in network fees. The 2024 halving block has become the most expensive block mined in Bitcoin history (37.67 BTC). The median Bitcoin network transfer fee rose to US$92 on Saturday, and miners' income increased instead of decreasing.
Many analysts previously worried that if the price of BTC does not rise after the continuous halving, the computing power will stagnate and the network's security will not be able to carry greater value, causing the network to fall into a negative spiral of both price and computing power. However, judging from the activity of inscriptions, runes and various L2s, this possibility will be greatly reduced.
The negative impact is that high transaction fees may hinder the adoption of Bitcoin as a regular payment method, especially for small transactions, which goes against the original intention of Bitcoin to expand users. Another major consequence is the increase of "dust", with more than half (53.94%) of Bitcoin addresses holding less than 0.001 BTC. If fees continue to be above $60, these balances will actually become "dust".
Runes can be simply understood as a protocol for issuing native FTs on Bitcoin without off-chain data. Previously, inscriptions were engraved in the segregated witness data, while runes are engraved in OP_RETURN, which directly uses UTXO and has a very small on-chain footprint. In contrast, BRC-20 is based on ordinal theory, which is not a native component of Bitcoin. The token issuance mechanism of this protocol will also lead to a surge in the number of UTXOs and network congestion, and it can only issue NFTs with limited usage scenarios.
After the halving, Bitcoin’s inflation rate will drop by half to 0.8%, lower than gold’s 1.4%:
Electricity costs are the largest expense for miners, typically accounting for 75–85% of a miner’s total cash operating expenses. Electricity costs for US-listed miners average about $0.04/kWh. At this cost, VanEck estimates that the total cash costs for the top 10 listed miners after the halving are about $45,000/BTC. Despite the shrinking margins, they may still remain profitable. Historically, Bitcoin mining stocks have recovered strongly after halvings and outperformed spot prices in halving years. Miner stocks seemed to react in advance on Friday:
An interesting topic: Does reflexivity occur?
Because almost everyone knows that based on the history of the previous three times, Bitcoin will rise before halving and fall or consolidate sideways after halving.
Due to limited historical data, the same story was repeated in the first three times. In addition, the market was too small during the first halving in 2012 and CEX had just appeared, so the reference value is limited.
But in reality in financial markets, we don’t often see the same pattern happen repeatedly because professional investors tend to trade in advance.
So will this time be different from before?
In the history of the four halvings, this year is similar to 2016, with a sharp correction in the three weeks before the halving, reflecting that the market wanted to cash in on the positive news in advance, and the market continued to fall by more than 10% one month after the halving in 2016. In 2012 and 2020, the market rose a few weeks before and after the halving. Therefore, the pessimists represented by JPM believe that since there has been a sharp rise before, the positive news has been digested in advance. The foundation is not solid.
This week’s focus
This week, 43% of SPX constituent companies will release their earnings reports, with Microsoft, Meta Platforms, Google and Tesla being the main players. This week, GDP data for the first quarter, PCE for March, and manufacturing PMI values will be released.
A report from Bank of America reviewed the performance of the S&P 500 during major macro shocks/geopolitical events in history, pointing out that the average decline from peak to trough of the S&P 500 during these major events was 8%, but it rebounded by an average of 10.5% three months later. The average number of days it took for the market to reach the trough after the event was only 17 days, with a median of only 4 days. It seems that the correction time caused by the Israeli-Palestinian conflict has exceeded this level.
