“Quadruple Witching Day” concluded successfully last Friday, with the SPX remaining near all-time highs and Nvidia taking a breather after becoming the world’s most valuable company.
As midsummer approaches, the stock market continues to climb the wall of worry, and the market's attention will gradually turn to politics. Thursday's US presidential debate took place early, and the market odds have been heavily tilted towards former President Trump after the court ruling, but both candidates are likely to continue the unsustainable US fiscal expansion policy, with the US Congressional Budget Office (CBO) raising the deficit to more than 7% of GDP in 2024 and expecting it to remain above this level for the foreseeable future.
The French election will take place on June 29/30, with a second round on July 6/7. Le Pen’s National Rally remains firmly in the lead, and the far-right coalition is expected to win an absolute majority. Markets have already cast a vote of no confidence in French assets, with the spread between French government bonds and German government bonds widening to the highest level since 2012.
At the same time, foreign exchange-related tensions have also begun to intensify. As China's economic growth continues to be sluggish, the offshore yuan exchange rate has fallen to its lowest level this year, and risk reversals also indicate that the market is bracing for further weakness.
The yen is also under pressure, with USD/JPY approaching 160 and the market expects that the Japanese Ministry of Finance will only have about $200-300 billion in intervention funds left, while Bank of Japan officials are still hesitant on raising interest rates. The market expects USD/JPY to move towards 165 before the next wave of intervention measures by the Bank of Japan.
While the Nikkei remains near cycle highs, cracks are beginning to show elsewhere. Japan’s largest agricultural bank, Norinchukin (“Nochu”), has become the latest victim of the Fed’s prolonged rate hikes. With a $357 billion (¥56 trillion) balance sheet, the bank, known on Wall Street as Japan’s “CLO whale,” could see losses of more than $9.5 billion (¥1.5 trillion) this fiscal year, three times higher than previously expected, due to losses from its massive CLOs.
On the economic front, we are seeing more signs that the US economy is finally slowing, with growth surprise indicators also falling to their lowest levels since 2022, and the rest of the world joining the US in falling into negative territory.
In addition, American consumers are finally showing some early signs of capitulation, with credit card delinquencies rising to their highest level since 2012 as savings from the pandemic are completely depleted. On the job market, despite good overall growth data, data shows that the number of employees with multiple "full-time" jobs has hit a new high, which can be interpreted as excessive labor demand or individuals needing multiple incomes to maintain the rising cost of living. We prefer the latter.
High living costs, a slowing job market and expensive mortgage rates are causing year-over-year declines in U.S. home prices, after earlier price increases were largely due to a lack of supply as sellers were unable to roll over low-rate mortgages to new homes. Will U.S. residential real estate follow the rest of the world and become the next sector to deteriorate?
The stock market closed last Friday, and the major indexes still performed strongly. Brokerages reported that Friday's PCE will be the most important data release of the week as the major indexes remained firm and short covering continued throughout the week. Narrow market breadth and a shrinking leading group remain concerns for the stock market, but have not yet translated into substantial weakness, short sellers continue to be eliminated, and the market's short interest in SPX, Nasdaq and "Magnificent-7" is at multi-year lows.
The only asset class to suffer last week was crypto, with the majors (BTC/ETH) down 3% and altcoins seeing a massive sell-off, with many prominent tokens down 10-15% in a week and down nearly 70% from recent highs, while the massive net outflows from the BTC ETF certainly didn’t help.
One difference in this cycle is that the rebound in major currencies is unlikely to lead to a positive spillover effect for altcoins/NFTs, but crypto native users were particularly hard hit last week due to various airdrop "conspiracies" in well-known DeFi projects. Many native users have been working hard on airdrops in the past year as new "alphas", but the actual rewards of projects such as zkSync, Layer Zero, Eigenlayer were significantly lower than expected, shaking user confidence and even sparking many discussions about the end of the airdrop "era". With NFT, memecoin and Ethereum L1 fees continuing to fall, will the native ecosystem usher in another huge change? It is indeed a very interesting year.
