LD Capital 30/10 Weekly Report: A-shares Stand Up; Positive Progress in China-U.S. Relations; Ground Offensive Commences; Weekly Turning Point Events
Stock markets in developed countries experienced a brief rally last week before declining, with the U.S. stock market particularly seeing significant losses. The Chinese stock market finally rebounded, marking its largest increase in three months. Key events impacting the markets included China’s breakthrough beyond its fiscal budget red lines (a long-anticipated central levering by the market), robust U.S. third-quarter GDP growth reports, moderate PCE inflation figures, still-high 10-year Treasury yields, and the interpretation of major tech stocks’ earnings reports (especially Google and META) as ‘not good enough’. Furthermore, a dovish ECB meeting and Israel’s commencement of ground operations influenced market sentiments.
Cryptocurrency assets, along with gold, continued to surge despite the absence of new developments in ETFs, corroborating our earlier perspective that this bull market is not solely driven by ETF optimism, but also by the demand for alternative asset diversification as uncertainty accumulates — a factor that would remain unaffected even if ETFs did not materialize.
U.S. long-term bond yields notably decreased, with the 30-year yield falling by 15 basis points and the 10-year yield failing to hold above 5%, dropping 13 basis points to just under 4.9%. The 2-year yield fell 8 basis points to the 5% threshold.
Divergence in U.S. Stocks
With the earnings season more than halfway through, the majority of this period has seen the stock market in decline, with any company not meeting earnings expectations facing severe punishment. Based on the performance on the first day of earnings release, companies that fell short of expectations lagged the S&P 500 by an average of 5.7% — the worst performance in a year and the second-worst since Bloomberg started tracking the data in 2017.
Last week, we received four substantial earnings reports from big tech companies: Google, Microsoft, Amazon, and META. The results from the first three companies, all of which have public cloud services, were mixed. Microsoft and Amazon’s reports showed that their cloud businesses are either accelerating or at least maintaining stability. On the other hand, Google fell short of expectations, with its cloud growth and profit margins negatively impacted by customer optimization and prior investments. This week, Amazon and Microsoft saw their stock prices increase by 2–3%, while Google’s stock price fell by over 10%, highlighting the ongoing importance of fundamentals in today’s market.
Previously, the performance of the top seven tech stocks masked the underlying weakness in the market. Now, the valuations of the vast majority of stocks within the S&P 500 (493 out of 500) are no longer a concern, trading at 16 times earnings, which is slightly below the 10-year median. Of course, the top seven stocks in the index still trade at very high earnings multiples, pulling the entire index’s price-to-earnings ratio up to 18 times, which is high by historical standards. Therefore, for investors with strong stock-picking skills, valuations currently do not seem to be a disadvantage for most stocks, aside from big tech.
Since the start of this earnings season, even though there have been more companies exceeding expectations than not, profit forecasts have been continuously revised downwards. Combined with declining consumer confidence and expected spending slowdowns, the fundamentals do not inspire optimism.
A higher-than-average number of companies warning of profit declines indicates weakening sales/demand, a deteriorating macro environment, and inflationary pressures, with the proportion of companies raising their EPS guidance for the next year hitting the lowest since 2020.”
On the other hand, in an environment where bond market prices are declining, it means that high-quality collateral will also face devaluation. When bond mark-to-market valuations suffer significant losses, institutions holding bonds will be compelled to sell off stocks to control risk. Therefore, rising interest rates put pressure on stock indices by forcing institutions to deleverage and sell off stocks. This is the second transmission mechanism we often see where rising interest rates impact the stock market.
Goldman Sachs expects adverse factors to persist, “but we would view a further significant downgrade of growth prospects as a buying opportunity”… The absolute cost of buying a 3-month call option with a 105% strike price is currently 1.4%, which is very attractive in terms of pricing, and as long as the SPX recovers Friday’s losses, it would cover the cost. Goldman Sachs still maintains an end-of-year SPX target of 4500 points versus the current 4137 points.
However, Morgan Stanley holds a different view, predicting a year-end level of only 3900. MS Michael Wilson believes that the market has high expectations for corporate Q4 earnings, and while market breadth usually leads prices, the current breadth remains narrow (not more stocks are participating in the rally), and there are no signs of a rebound.
Joyful GDP and Declining Yields
Last week also saw U.S. GDP growth reach a speed of +4.9% for the third quarter, the fastest pace since the peak in the fourth quarter of 2021. Even after all the rate hikes implemented by the Federal Reserve and the subsequent rise in bond yields, the U.S. economy is still moving forward at a strong post-pandemic pace.
But it’s important to note that 4.9% is an inflation-adjusted figure, with a price index of 3.5%, meaning the nominal GDP growth was 8.4%, which is quite high (the exact opposite of China).
Looking ahead, economists predict that growth will slow significantly to 0.8% in the fourth quarter. This GDP data is being interpreted as good news for the U.S. economy that has run its course, with even some pullback in U.S. bond yields, contrary to the market reaction that should have occurred previously.
Currently, U.S. GDP and the 10-year Treasury yield are almost the same, a combination of 5%+5% which is quite rare for the U.S. economy: the last time this occurred was in the first quarter of 2006, before the risks of the subprime crisis surfaced; the time before that was in the second quarter of 2000, on the eve of the bursting of the internet bubble, so the market’s concerns are understandable. However, as there is a strong expectation of slowing economic momentum, there is a demand for a pullback in secondary market rates, which will tug against narratives of excessive U.S. borrowing, government turmoil, and geopolitical conflicts. The worst-case scenario is a resonance of both sides, challenging the safety of U.S. Treasuries.
This week’s inflation data was largely in line with expectations. Core commodity inflation has actually turned negative, supporting the argument for “transitory inflation.” There is even discussion that “deflation might be a bigger problem than inflation.” Their evidence includes, for example, housing rent data responses lagging behind, and wages not spiraling up along with prices, suggesting that the causes of inflation are one-off; additionally, even in the face of very expansionary fiscal policy, inflation has dropped rapidly this year, indicating that fiscal policy has a minimal impact on prices, and there is a risk of the Fed being overly restrictive.
In any case, given the currently released economic data which is generally robust, if the trend can be maintained, the recession expectations might be diminished in Q4
Credit Spreads May Need to Accelerate
As can be seen from the chart below, the white line indicates Bloomberg’s statistics for the yield on high-yield corporate bonds in the U.S. at 9.3%, corresponding to the blue line of the U.S. 10-year yield at 4.9%, with a spread of 4.4% shown by the green line.
This is a considerable distance from the peak spread of about 6.1% in October 2022 and has hardly widened during the recent two-month bond bear market. Unless the market now perceives a higher risk in government bonds relative to junk bonds, yields on high-yield bonds should continue to be priced higher.
This suggests that credit tightening on the corporate side does not seem to be fully reflected yet. Typically, the wider the credit spread, the higher the profitability required of enterprises, or else the price-to-earnings ratio should decrease.
Republican Unity
New House Speaker Mike Johnson has been elected, temporarily overcoming major internal conflicts within the Republican Party. An ally of Trump, his election has thrilled the Trump faction. Bannon directly tweeted his praise, hailing him as an important thought leader and planner among Republicans who opposed the certification of Biden’s election.
Mike has indicated support for a temporary spending bill to avoid a government shutdown on November 7th and has indeed actively negotiated with Biden after his election. As a result, the market has lowered its expectations of a shutdown. However, it is expected that the conflict between the two parties over the official fiscal spending plan will be even more intense, certainly more so than during the relatively moderate tenure of McCarthy.
Israel Officially Begins Ground Operations
At the end of last week, after the news of Israel officially starting ground “invasions” into Gaza, U.S. bond yields and stocks fell, while gold and oil prices rose. However, by the second day of ground operations, Sunday’s opening of the Middle Eastern markets showed almost no signs of panic.
Middle Eastern stock markets believe there is a low likelihood of a broader regional war. On the second day after Israel began its ground invasion of Gaza, the Middle Eastern markets showed almost no signs of panic upon opening on Sunday. Israel’s TA-35 index rose 1.3% at the close in Tel Aviv, marking its first gain in three trading days. Since the declaration of war by Israel following Hamas’ infiltration on October 7th, the index has fallen by 11%.
Hamas declared a unilateral ceasefire midweek, which briefly pleased the markets. This time, Hamas’ military action is different, with not only improved equipment but also strategy, including focusing on quality rather than quantity, temporarily paralyzing the Iron Dome defense system, treating hostages well, and proactive publicity, among others.
Currently, the market believes the likelihood of the conflict between Israel and Hamas escalating into a broader Middle Eastern war remains small. This is because all other participants in the region have clear motives to avoid a wider conflict. This includes Hezbollah, which, although it has launched missiles into Israeli-controlled territory, has so far been relatively restrained.
On the other hand, the prices of gold and oil continue to rise/maintain high levels. On Friday, when Israel intensified ground operations, oil prices rose by 3.2%, trading over $85 per barrel, although still below the highest point since the outbreak of the conflict (just over $90). Gold prices rose by 1% on Friday, breaking through the $2000 mark.
Despite the fact that global supplies have not yet been truly affected, the crude oil market’s main concerns about future trends are as follows:
1. U.S. sanctions on Iranian crude oil exports (however, since the majority of Iran’s oil exports go to China, the impact may be limited).
2. Disruptions in the Strait of Hormuz, through which oil tankers transport nearly 17 million barrels of crude oil daily. In 1984, Iran and Iraq frequently attacked each other’s oil ships, and more recently, Iran has intensified its actions in seizing vessels and harassing merchant ships.
Positive Progress in Sino-American Relations
The U.S. Department of Transportation announced that from November 9th, the number of weekly round-trip flights operated by Chinese airlines between China and the U.S. will increase from 24 pairs to 35 pairs. In 2019, there were more than 300 weekly flights between China and the U.S.
Hours before the increase in flights, Chinese Foreign Minister Wang Yi concluded two days of talks in Washington with Secretary of State Blinken and National Security Advisor Sullivan and met with President Biden.
According to two U.S. officials familiar with the plans, U.S. President Biden and Chinese President Xi Jinping are expected to meet next month at the APEC summit in San Francisco.
Also last week, President Xi Jinping unexpectedly met with California Governor Gavin Newsom, who is currently visiting China, with stops in Shenzhen and Beijing. Although Newsom is only the leader of one U.S. state, China seems to treat him as a representative of the U.S. government, and Western media interpret this as a signal of China’s willingness to show friendliness to the West.
In addition, last week, China also signed a multibillion-dollar intent agreement to purchase U.S. agricultural products (mainly soybeans), marking the first such bulk agreement between China and the U.S. since 2017.
According to Reuters, the U.S. Soybean Export Council said on Tuesday (October 24th) that a delegation of Chinese bulk commodity importers signed a multibillion-dollar procurement agreement for agricultural products, mainly soybeans, at the U.S.-China Sustainable Agricultural Trade Forum held in Iowa on Monday (October 23rd).
Capital Flows and Positions
Last week, the comprehensive position of U.S. stocks slightly decreased to the historical 33rd percentile, discretionary investors’ holdings rose slightly to the 37–41st percentile, while systematic strategy holdings significantly decreased to even lower positions, from the 36th to the 31st percentile.
CTA strategy positions fell to a historically bearish 9th percentile:
Equity funds saw outflows for the third consecutive week, primarily from European and global funds; bond funds experienced inflows for the third consecutive week, mainly into government bonds; money market funds turned to moderate inflows ($29 billion), which seems to indicate that the record outflow the previous week was a one-time factor-driven event.
Futures Market Sees U.S. Stocks Hold Steady in Net Longs:
Massive Unwinding of U.S. Treasury Shorts, Especially in 30-Year Bonds:
Especially for the 30-year Treasury bonds, they may be affected by Ackman’s call to action:
Dollar Keeps Mild Net Short Status:
Gold Net Longs Surge, Largest Since March:
Crude and Gasoline Longs Stable, Natural Gas Moves to Net Short:
Sentiment Indicators
The Merrill Lynch Bull & Bear indicator continues to decline from 1.9 to 1.5, entering the buy zone:
The Goldman Sachs Institutional Positioning Sentiment Indicator has retreated to neutral:
The exposure index of the National Association of Active Investment Managers (NAAIM), representing the average exposure to the U.S. stock market reported by the members of the association, plummeted last week (from 67% to 25%), reaching its lowest level since October of last year.
The AAII Investor Sentiment Survey shows an increase in bearish sentiment (from 35% to 43%), the highest level since May this year:
The CNN Fear & Greed Index has fallen back into the extreme fear zone:
Institutional Perspectives
Bank of America’s strategy: Buy Boomers, Sell Millennials
High interest rates are paying off for the older generation who have savings, while squeezing the younger generation who do not. Therefore, it’s suggested to invest in stocks favored by the older generation. Avoid companies reliant on the purchasing power of cash-strapped millennials.
Benefiting sectors include healthcare, entertainment, insurance, and other industries where the elderly spend more. Home improvement stocks might also perform well, given that the baby boomer generation is living longer than previous ones and is increasingly reluctant to sell homes with low mortgage rates.
Regarding the millennial generation, Bank of America notes that industries such as apparel and e-commerce retail are likely to be more significantly impacted.
Morgan Stanley: Late-Cycle Investment Strategy
We are currently in the late stages of the economic cycle (where indicators like GDP growth and corporate profit growth are nearing their peak and starting to slow down; monetary policy is relatively tight; asset volatility is increasing). Historically, this has provided favorable performance support for businesses in three key areas: (1) traditional defensive stocks (healthcare, consumer staples, and utilities), (2) selective growth opportunities (particularly lower-volatility growth stocks and those that can navigate cyclical risks, such as AI), (3) late-cycle cyclical stocks (industrials and energy).
The report lists the following areas and individual stock ideas:
(1) Healthcare sector: Large insurers like Humana and UnitedHealth, as well as major equipment companies like Thermo Fisher, which have solid performance and robust cash flow.
(2) Consumer Staples: Essential consumer stocks like Costco and Colgate, which are unaffected by economic cycles and consumer downturns.
(3) Utilities sector: Stocks such as CenterPoint Energy, supported by capacity gaps and environmental policies.
(4) Low-volatility growth: Well-known tech stocks such as Microsoft and Apple, as well as stocks believed to benefit from the AI trend according to research firms.
(5) Late-cycle cyclical sector: Industrial goods such as Howmet, as well as energy stocks like Marathon Oil and Valero Energy.
In terms of market performance, the counterattack of defensive targets has already begun, according to GS:
Aside from energy, the sectors mentioned by MS currently also have relatively low position levels, especially utilities, according to DB.
This Week’s Focus
The Quarterly Treasury Auction Plan is a Key Point
The most important event this week occurs at 8:30 AM New York time on November 1st, when the Treasury Department will announce its bond sale plans for the coming months. In early August, following the Treasury’s announcement to increase the size of its quarterly debt sales for the first time in over two years, long-term market yields rose. Treasury Secretary Yellen publicly denied the view that the need to finance the ever-expanding deficit was pushing yields higher, a stance that might struggle to find consensus in the market. Moreover, there is a widespread expectation that this week’s Treasury auction plan may reflect an overall increase; if realized, this is likely to stimulate a rise in market yields.
Bank of Japan to Announce Interest Rate Decision
On October 31st, attention will focus on whether the Bank of Japan will spring another “surprise”. A cancellation of yield curve control could bearishly impact government bonds and is the last unresolved issue among the major sources of global liquidity (the U.S., Europe, and Japan). Given that the benchmark Japanese government bond yield is currently nearing 0.9%, the highest in ten years, the Bank of Japan may either further widen the limits of yield fluctuation or abolish YCC altogether. Maintaining YCC could force the Bank of Japan to intensify its bond purchases and expand its already sizable balance sheet. If domestic Japanese market yields become more competitive, Japanese investors might begin to withdraw overseas investments, potentially causing significant repercussions for the global financial markets. Last week, Nikkei reported that the BOJ might raise its inflation target for FY2024 and that the upcoming monetary policy meeting might adjust YCC again.
October FOMC
On the afternoon of the 1st, the Federal Reserve’s FOMC is expected to announce its decision to keep interest rates steady at 5.5%. Following Fed Chairman Powell’s recent indication that rising long-term yields have reduced the “marginal” necessity for further tightening of policy, the market might bet on this meeting signaling an end to Fed rate hikes. For instance, the interest rate futures market currently anticipates only a 19% probability of further hikes this year, down from 20% a week ago and 31% a month ago.
There will be no new economic forecasts released this time, and the statement is unlikely to differ much from September’s, so the focus will be on the press conference. Powell is expected to reiterate that the tightening of financial conditions (higher market rates) is a reason for keeping monetary policy unchanged (a message doves prefer), meaning Powell is unlikely to signal marginally higher adjustments. However, it will be important to monitor whether Powell softens his stance on the duration, questioning whether the restrictive policy period conveyed in September’s dot plot might end before the close of next year.
Lower-than-Expected Nonfarm Payrolls
The nonfarm payroll data on November 3rd is expected to slow down to 168,000, less than half of September’s 336,000, mainly due to a slowdown in temporary hiring in leisure and hospitality, as well as the impact of strikes by U.S. auto workers.
More Earnings Reports
Apple, Novo Nordisk, Eli Lilly, AMD, Pfizer, Qualcomm, and possibly Berkshire Hathaway.
LD Capital
As a global blockchain investment firm, we have built a portfolio of over 250 investments since 2016, spanning across various sectors, including infrastructure, DeFi, GameFi, AI, and the Ethereum ecosystem. We focus on investing in projects with disruptive innovations, actively taking on the role of primary investors, and providing comprehensive post-investment services to these projects. We employ a combination of direct investment from our own funds and a distributed fund model to cover all-stages of investment.
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Trend Research division specializes in crypto hedge funds focusing on secondary areas within the crypto market. Our team members come from top platforms and institutions like Binance and CITIC. We excel in macroeconomics, industry trends, and project data analysis, with trend, hedge, and liquidity funds.
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