U.S. stocks had their best start to the year in five years in the first quarter
Last week, technology stocks were generally under pressure, digital currencies rebounded to a certain extent, and related stocks also performed positively:
But as of the end of March, European and American stock markets have risen for five consecutive months for the first time in ten years. The S&P has risen by more than 10% for two consecutive quarters. The Nasdaq lagged slightly behind in the first quarter of this year, but it also rose by more than 9%, mainly due to the The performance of some big technology companies was dragged down. Tesla fell nearly 30% in the first quarter, Nvidia rose 80%, and Apple fell 10%.
According to Goldman Sachs PB data, TMT stocks (information technology + communication services) were continuously net sold in the last three trading days before the end of the quarter, accounting for approximately 75% of the total net sales of single stocks in the United States last week. It currently accounts for 29.1% of the total net exposure to U.S. stocks, which is down from the peak of 32.5% in mid-February and the levels in the past one and five years.
It can be seen that the rebalance of large funds at the end of the quarter has a significant impact (generally selling those who have risen and covering those who have fallen, and the actual rebalancing transactions are usually arranged from the end of March to the beginning of April). Stocks with large gains in the early stage are facing selling pressure. According to Goldman Sachs’ calculations, Funds may sell an estimated $32 billion in shares to rebalance their positions. Theoretically, the end-of-quarter rebalancing should see a lot of demand for Bitcoin ETFs (because they were only listed in January, funds that intend to allocate have not had time to add them to the investment portfolio). Next week may be a week of strong inflows.
Gold rose 3.12% last week, setting a new all-time high again, showing the market's demand for diversified allocations and the expectations of various central banks. During the same period, the price of WTI crude oil rose by 3% to US$83.1, setting a new high since November last year. Since entering 2024, crude oil has risen every month and has rebounded by more than 10%, implying that inflationary stickiness will exist, which theoretically puts pressure on non-interest-bearing assets. But the current market focus is still on diversified allocation.
Tech giants face regulatory pressure
U.S. and EU regulators are launching a series of antitrust lawsuits and investigations against technology giants such as Apple, Amazon, Google, and Microsoft. These seven companies have annual revenues of up to US$2 trillion, making them an attractive target for financially strapped regulators and governments.
The seven largest technology companies by market capitalization account for 30% of the S&P 500 and have contributed 60% of the S&P 500's gains in the past 12 months. Investors like them because they have monopoly advantages in their respective fields and can maintain high profit margins.
The average tax rate of the seven major technology giants in the past year was only 15%, much lower than the 21% of other companies in the S&P 500. Tighter regulations and higher tax rates are likely to affect stock price expectations.
The technology Internet industry has historically been the most lightly regulated industry. This may be because they are relatively new industries and regulatory rules are not yet sound enough, or it may be because the government intends to give these industries more freedom to encourage innovation. But as the influence of technology giants increases, this regulatory environment may change.
The chart below shows the degree to which the U.S. federal government regulates various industries, as measured by the number of regulations:
Domestic substitution of science and technology
Gradually remove American chips from government computers and servers and replace them with domestically produced products. The biggest impact here is Intel and AMD. In addition, the Chinese government's procurement guidance also stated that Microsoft's window system will be marginalized and foreign database software will also be replaced with domestic products. In order to counter U.S. restrictions on chip exports to China, China has been trying to reduce its dependence on foreign companies by building a local semiconductor industry.
Yes, the new measures may have a significant impact on the profits of the chip companies involved. In 2023, China will be Intel's largest market, accounting for 27% of revenue, while AMD will account for 15%.
Chinese version of QE?
Last Friday, news spread in the market that the People's Bank of China may purchase government bonds to expand its balance sheet (China's version of QE), which once affected the stock market, commodities, and bond markets. The original report was that the South China Morning Post quoted Xi Jinping's speech at the Central Financial Work Conference on October 30 last year, saying, "We must enrich the monetary policy toolbox and gradually increase the buying and selling of government bonds in the central bank's open market operations." This is a high-level financial meeting held every five years. , but the relevant content of the speech did not appear in the official press release at the time, until China published an excerpt of "Excerpts of Xi Jinping's Discourse on Financial Work" published publicly in March and was reported by the South China Morning Post. This content attracted the attention of financial market traders. Partly affected by optimism that China's monetary stimulus may increase, China and Hong Kong stock markets rose, the RMB exchange rate and the bond market also strengthened for a time, before giving up gains in late trading.
Because various analyzes were soon released, it is generally believed that China is unlikely to implement Fed-style quantitative easing. Compared with the total amount of credit, recent policies still emphasize the structure and effectiveness of credit expansion. The "People's Bank of China Law" clearly stipulates that the central bank shall not purchase treasury bonds in the primary market in order to prevent government departments from directly increasing leverage and increasing the risk of fiscal overdrafts. Secondary market operations are feasible, but one of the previous ways for the central bank to purchase bonds from the secondary market was through pledged repurchase, rather than direct purchase, as it can easily lead to price and expected fluctuations. Another is that the central bank will generally start QE only after there is no room for interest rate cuts, but it has not reached this point yet.
It is an international practice for the central bank to use treasury bonds as a way to inject base currency, but the central bank's purchase of treasury bonds does not equal QE. QE refers to planned, long-term, large-scale bond purchases. The current ratio of national debt to the balance sheet of the central banks of the United States, Europe and Japan is 61% (4.62 trillion U.S. dollars), 58% (4 trillion euros), and 78% (602 trillion yen) respectively.
Over the years, my country's central bank has injected liquidity into the market, usually by re-lending to commercial banks and reducing the deposit reserve ratio of commercial banks. The central bank rarely directly purchases government bonds in the secondary market. Therefore, only 3.4% of the balance sheet of the Central Bank of China is government bonds. The last time PBOC increased its holdings of government bonds was in 2007, and it was to provide capital to China Investment Co., Ltd.
We believe that China’s QE is still too early, and the PBOC still has a lot of ammunition to fire, so it will not rush to use unconventional means. Central Bank Governor Pan Gongsheng and other major leaders have released multiple interest rate cuts and RRR cuts in March. Space information (there has been an unconventional interest rate cut of 50 BP in February 2024). However, PBOC is fully qualified to try to purchase some Chinese government bonds in the secondary market. Since the market had no expectations for this before, the marginal change from 0 to 1 cannot be ignored, and if this news is authorized by the central government, it will test the market reaction. Yes, it is not a bad thing to stimulate positive market sentiment. It can be understood as a benefit for A-shares, ChinaBond, gold, and Bitcoin, but expectations do not need to be too high.
Lack of fiscal discipline is a plus
The U.S. Treasury issued a total of $23 trillion in national debt for all of 2023, the same as the peak during the COVID-19 period, even as the economy recovers. This number will only continue to grow in the future. No one thinks that the U.S. government can tighten spending. It is now expected to issue 27 trillion in 2024, which is 60% larger than in 2019 and about 6 times that before the financial crisis. At the same time, the fiscal deficit last year was close to 2 trillion, and the U.S. debt rose by 1 trillion almost every 90 days. Just a few days ago, another $1.2 trillion budget was passed. In the words of Federal Reserve Chairman Powell, the United States is on an unsustainable fiscal path.
The issuance of huge debt will trigger fiscal concerns and further strengthen the market's confidence that the Federal Reserve will cut interest rates or introduce other easing measures in the coming months. From this point on, it is good for stocks, commodities, digital currencies and gold.
In the past year, the U.S. government’s interest payments have reached US$1.1 trillion, twice as much as before the COVID-19 epidemic. Government spending and debt continue to rise, giving the Federal Reserve an incentive to cut interest rates in order to control the rapid growth of interest costs. If the Fed keeps interest rates unchanged over the next 12 months, the U.S. government's annual interest payments will increase from $1.1 trillion to $1.6 trillion. It would take the Fed to cut interest rates by 150 basis points to keep interest expenses basically flat.
US GDP is expected to rebound quarter by quarter
According to Goldman Sachs’ forecast, U.S. GDP growth is expected to rebound quarter by quarter in 2024:
If the Fed cuts rates three times starting in June, as Goldman Sachs expects, it will be easing monetary policy as economic growth picks up. This is the opposite of what happened in 2022, when the Fed tightened policy against the backdrop of a slowing economy. So while the forward P/E ratio of 21 is historically high, the combination of an easing Fed and accelerating economic growth should still provide support for stocks.
Yen approaches 152 after BOJ dovish interest rate hike
The Bank of Japan ended eight years of negative interest rate policy on March 19 and canceled purchases of Japanese stock ETFs and REITS. However, it will continue to purchase government bonds, and several officials stated that they will continue to maintain a loose monetary environment.
Because giving up YCC and raising interest rates slightly is different from giving up QE. As long as the purchase of government bonds continues, the Japanese yen's liquidity will still increase, and the status of the major central bank as a major central bank in issuing additional legal currency to global assets will not change much.
Therefore, the yen has recently returned to weakness, falling to its lowest level in a year. Moreover, the stable macro risk environment is expected to continue to be unfavorable to the Japanese yen. Japanese yen financing is heading overseas, but transactions will continue. At present, even if the interest rate rises by another 25bp, it will not be enough to trigger a large-scale return of capital.
Although the exchange rate breaking through the 152 mark may trigger the intervention of the Japanese Ministry of Finance, it may not be able to change the general trend, and the foreign exchange market will see greater fluctuations by then.
A U-turn for Global Central Banks
Recently, the global central bank's major shift has made headlines in the media. However, due to different situations in each country, the fact that some have started to cut interest rates does not mean that we will see a continuous decline, and some interest rate hikes are actually dovish signals.
First of all, the Swiss National Bank was the first central bank in a developed country to start cutting interest rates. Its action was initially interpreted as a milestone event. Subsequent market reports mainly focused on the dovish signal of the Swiss National Bank's sudden action and its impact on the Federal Reserve and the European Central Bank. guiding role. Articles in major newspapers also focused on discussing who the next central bank might cut interest rates. But then everyone focused on Switzerland's inflation and exchange rate issues. It was indeed necessary to cut interest rates, and the market's joyful mood declined.
European Central Bank President Christine Lagarde said officials could not guarantee possible future actions after a rate cut in June is likely. In other words, it is also reminding the market not to think that interest rate cuts will continue after they begin.
The Fed actually wants to cut interest rates, but recent data doesn't provide a good starting point. Powell said at the press conference in March that we usually see inflation being stronger in the first half of the year and then not as strong in the second half of the year. We have to let the data tell us. I don't know if this is a small bump in the road or more.
The small bump he mentioned here refers to the inflation data in January and February which were a little hot (the data in March is also likely to be a little hot), which shows that he wants to cut interest rates, but he needs to wait for sufficient reasons. If the US economy is particularly strong compared to the global economy, the possibility of a rate cut is lower than that of Europe and the UK.
In his speech last Friday, Powell said that the PCE inflation rate just released was basically in line with the Fed's expectations. But in fact, this is a report that slightly exceeded market expectations, which shows that he does not want to over-interpret the price data now.
Of course, the key point is that he mentioned that the U.S. economy is performing strongly and there is no need to rush to cut interest rates at the moment. If inflation does not decline, the Fed can maintain interest rates for a longer period of time. This triggered a pullback of more than 3% late Friday.
However, he did not mention the possibility of returning to raising interest rates in his speech. In addition, if the job market weakens unexpectedly, the Fed will respond promptly (the subtext is that as long as employment is loose and prices do not reach the target, interest rates will be cut). Generally speaking, Friday's speech was slightly hawkish, but not very tough. It is unlikely to affect expectations for a June interest rate cut, and the correction is expected to be limited.
US stock MEME craze
The "meme stock" craze has revived. Both Reddit and DJT stocks have risen sharply due to the enthusiasm of retail investors. Stock price changes are mainly driven by market sentiment and capital flows, and have nothing to do with fundamentals.
This week, retail investors in the U.S. stock market are enthusiastic about Reddit and Trump’s social media company Trump Media & Technology Group Corp. (code DJT).
After DJT closed up more than 16% on its first day of listing, U.S. stocks rose another 14% to $66.22 overnight, with a market value of approximately $8 billion. It is the most discussed stock on WallStreetBets and ranks among the top 15 stocks by trading volume on Interactive Brokers. stock.
According to financial documents, DJT has 9 million registered users. Its revenue in the first three quarters of last year was only US$3.4 million, while its losses reached US$49 million. Obviously, the increase was not driven by fundamentals.
Reddit is the company with the fourth largest trading volume on Interactive Brokers. The company was listed on the New York Stock Exchange last Thursday with an issue price of US$34. It then rose to a maximum of US$70 that day. It has now fallen back to US$49.3 but is still lower than the issue price. 45% higher.
Reddit has never made a profit in its nearly 20 years of existence. In 2023, the company's revenue was US$808 million, an increase of approximately 21% year-on-year, and its net loss narrowed from US$158.6 million in 2022 to US$90.8 million.
Cryptocurrency rebound
Cryptocurrency search popularity, social media popularity
Bitcoin spot ETFs resumed net inflows, with a net inflow of US$845 million for the week, almost offsetting the net outflow of US$890 million in the previous week. FBTC became the second spot Bitcoin ETF to break 10 billion after BlackRock's IBIT reached the $10 billion asset management mark for the first time on March 1. IBIT currently holds 250,000 BTC and FBTC holds 143,000.
The number of Bitcoins deposited on exchanges has dropped significantly by 8% to 2.326 million since May 2023, indicating tight supply, in part due to Bitcoin spot ETFs moving BTC to custodial cold wallets for long-term storage. According to Glassnode statistics, the total amount of BTC held by exchanges has shrunk to about 12% of the total BTC circulation, reaching the lowest level in five years. This kind of movement away from exchanges is traditionally seen as a bullish indicator, suggesting that people are more interested in holding than selling:
Unknowingly, the long rate of the BTC perpetual contract has almost returned to its historical high. The current annualized rate is about 80%, and the low on March 22 was only 11%:
Notable Cryptocurrency News
BlackRock’s new tokenization fund brings TradFi and crypto closer (Coindesk)
BlackRock will still pursue spot Ether ETF if Ethereum is designated as a security ( The Defiant )
Fidelity submits S-1 application to the US SEC for staking spot ETH EFT
WIF is now the third largest meme coin, and whales are clinging to it
Major Crypto Exchange KuCoin Faces US Criminal Charges ( The Defiant )
SEC faces lawsuit seeking to exempt airdrops from securities classification (The Defiant)
Fetch.ai, SingularityNET, and Ocean Protocol Tokens Surge on Proposed Merger (The Block)
Grayscale launches pledge-based income fund for qualified investors
Options market optimistic about U.S. election
Assess investor expectations for the November 2024 U.S. presidential election by analyzing pricing in the S&P 500 options market. Overall, the current options market's attention to the general election has increased compared with previous election years, but it is still at a normal level.
The expected volatility on election day implied by SPX index options is about plus or minus 3.3%. In the past 60 years, the SPX has moved more than 3.3% on Election Day only once.
Investors seem to expect that the election results will be positive for the stock market, and the price level of SPX call options relative to put options has further increased recently:
liquidity
sentiment indicator
