Weekly Report on 8.14: A Week of Many Events, Lacking More Marginal Positives

While the market rose at the beginning of the week, influenced by factors such as the downgrade of credit ratings of several U.S. banks, a significant drop in China’s financial data, the U.K.’s GDP exceeding expectations, and forward-looking inflation indicators exceeding expectations, by Friday’s close, the S&P 500 index, NASDAQ, and Russell 2000 index declined for the second consecutive week. The NASDAQ 100 recorded its first consecutive two-week decline since December of the previous year. The Dow saw a sharp drop on Tuesday but rebounded, ending the week on a positive note. Currently, the market is aggressively adjusting long-term interest rates upwards. Even though macro and micro data is quite good, the market isn’t buying in as these expectations have already been priced in.

The market’s focus now is whether a further decline in large tech stocks will drag the overall market lower, or if other stocks will step in to stem the tide.

In the first half of this year, overbought tech stocks were particularly weak, while oversold energy stocks rebounded strongly. The S&P 500’s energy sector has risen by about 10% since the third quarter. As of last Friday, international oil prices recorded seven consecutive weeks of gains, marking the longest streak since 2022. WTI crude was at $83/barrel and Brent was at $86.5/barrel.

Regarding the hype around AI, echoing the internet bubble of the late 1990s, analysts from various institutions can be summarized into two camps:

Those optimistic about the current rebound believe that it’s different from the bubble period, as AI-related companies are on the cutting edge of technology that will change society in the coming years. Although the valuation of tech stocks is a concern, AI is driving the tech industry into a “1995 moment,” with future growth unlike anything seen since the 1990s.

Skeptical analysts feel that the current market frenzy is filled with speculation and false hopes. They warn that the rise in tech stocks is merely a bubble. The previous booms and busts in tech stocks show that in the long run, it’s much harder than imagined to pick the few companies that might dominate a particular industry.

In general, the market has already digested much of the good news, including better inflation trends, the possibility of the Fed pausing rate hikes, and the continued economic growth above trend. The market’s adjustment seems healthy, allowing it to absorb recent gains and prepare for potential highs.

Historical data shows that since 1950, the S&P 500 index has had 35 surges of over 15%. On average, there’s at least one pullback within six months of these surges. These pullbacks range from -2.5% to -19%, with an average of -8.2% and a median of -7.6%. Currently, the S&P 500 index has only declined about 3% from its recent high on July 31st.

In other markets, with the devaluation of the yen, Japanese stocks surged 1.47%. European stock markets were flat, with the German and British stock markets closing slightly higher. The Stoxx50 fell 0.3%. Influenced by the sharp decline in China’s social financing data, the Chinese stock market performed worst. The A50 plummeted 4%, the Dragon Index fell 6.55%, and the CSI 300 declined 2.9%.

Bond Market:

U.S. Treasury yields for various durations have generally returned to levels seen before last Friday’s U.S. non-farm payroll report. The 10-year U.S. Treasury yield rose about 12 basis points this week, rising for the third consecutive week. The more rate-sensitive 2-year U.S. Treasury yield rose about 13 basis points this week, offsetting the 11 basis point drop from the previous week, marking its second rise in the past five weeks.

The U.S. 30-year inflation-protected bond (TIPS) yield is approaching the 2% threshold. If it breaks this level, it will be the first time since 2011, and countless bond investors are eagerly waiting. The upward pressure faced by TIPS and long-term nominal U.S. Treasury yields reflects the market’s high uncertainty about the inflation path, even though the inflation indicators and survey-derived inflation expectations released this week have declined.

Foreign Exchange Market:

The U.S. dollar index is at 102.80, up about 0.8% last week, rising for four consecutive weeks. Among non-U.S. currencies, the yen performed poorly, falling against the U.S. dollar for five consecutive days. On Friday, it once reached the threshold of 145.00, which is the level at which the Japanese government intervened in the foreign exchange market last September. The offshore RMB to U.S. dollar rate was 7.2601, a cumulative decline of 722 points over the last week, falling for two consecutive weeks.

Digital currencies soared mid-week in anticipation of possible ETF approvals, but ultimately, their gains were curbed by a strong U.S. dollar and rising U.S. Treasury yields. Bitcoin attempted to break the 30,000 threshold for the second time in August but failed. Still, it generally remained above the 29,000 mark. Given the slight pessimism in traditional markets, its performance has been relatively resilient in the past two weeks.

Spot gold fell 1.49% to $1913 per ounce for the week, recording its largest weekly decline since June 23rd. It has fallen for three consecutive weeks, with a decline of more than 1% in the past two weeks.

Highlight Events Recap

Inflation Expectations

On Thursday, the U.S. Consumer Price Index for July was 3.2%, slightly below market expectations. Excluding energy and food, core inflation rose 0.2% this month, unchanged from June. A consecutive monthly increase of 0.2% in the core CPI is a positive sign, suggesting easing price pressures. This development might lead the Federal Reserve to consider pausing rate hikes. However, the rebound in energy prices shows that slowing inflation isn’t smooth sailing.

In the latest data, prices for used cars (-1.3%) and furniture and household appliances (-0.4%) continued to decline. Airfare prices (-8.1%) significantly decreased for the second consecutive month, combined with the decline in prices for services like hotels (-0.5%) and car rentals (-0.3%), these played a vital role in curbing core inflation.

However, in July, the prices of fuel oil (+3.0%), gasoline (+0.2%), and natural gas services (+2.0%) all rose. With global oil prices continuing to climb since the beginning of August, it is anticipated that energy prices will further increase in August on a month-on-month basis, presenting an upward risk of energy inflation.

Since late June, oil prices have been on the rise due to production cuts by countries like Saudi Arabia and Russia. J.P. Morgan currently predicts that by September, oil prices could reach 90 US dollars, as the spot market’s supply and demand are rapidly tightening.

Driven by the rise in service industry prices, the US Producer Price Index (PPI) for July, announced on Friday, unexpectedly adjusted up by 70 basis points year-on-year to 0.8%. Excluding the more volatile food and energy indicators, the core PPI for July did not slow down as expected but instead slightly accelerated to 2.4%. Both the PPI and core PPI’s month-on-month growth rates were slightly higher than anticipated.

The US PPI reflects the persistence of high inflation, offsetting the temporary optimism brought by the CPI data. After the data release, the US dollar index rebounded, erasing its decline and jumping up. The prices of US Treasury bonds plummeted, and their yields surged. Both the benchmark ten-year and the more interest-rate-sensitive two-year US bond yields hit a one-week high, while US stocks and cryptocurrencies declined.

The University of Michigan’s one-year short-term inflation expectation for August unexpectedly dropped to 3.3%, matching its lowest in over two years. The long-term inflation expectation also showed a decline. Overall consumer confidence index for the month saw a slight decline compared to July.

The El Niño phenomenon has been confirmed. The EU even believes it will be more severe next year. India has already started to limit rice exports, leading to a surge in Asian rice prices. Now, supply-side pressures are not only in energy but have also spread to food.

Q2 Financial Report Season

The S&P 500’s Q2 profits year-on-year decreased by 4%, lower than the 9% decline expected at the beginning of the earnings season in early July. Both revenue and profit margins increased. 54% of S&P 500 companies exceeded the consensus EPS estimate by at least one standard deviation. Companies that beat the EPS estimates outperformed in the S&P 500 by an average of 0.8% the day after reporting.

Moody’s Downgrade

On Monday, Moody’s downgraded the credit ratings of 10 small and medium-sized U.S. banks and noted that several larger banks are under review. This action by the rating agency reflects challenges still faced by the banking industry, including rising loan costs and declining profitability.

U.S. Bond Auctions — Mixed Outcomes:

Last Wednesday’s $38 billion ten-year U.S. Treasury note auction had a yield hitting a seven-month high, with foreign indirect buyers accounting for 72.2%, a six-month high, significantly higher than the previous auction’s 67.7%. This week’s surge in U.S. debt issuance was a surprise, and buyers were not deterred. After the strong demand for the $42 billion three-year U.S. bonds issued on Tuesday, Wednesday’s ten-year U.S. bond issuance saw unusually strong demand this year, with an impressive buying power from overseas.

On Thursday, the U.S. Department of the Treasury completed a $23 billion 30-year bond auction, with the yield hitting its highest since July 2011. The bid-to-cover ratio was 2.42, the lowest since April this year. The results of this 30-year U.S. bond auction were somewhat unexpected. The market had initially anticipated that Thursday’s auction would be completed smoothly, but the long-term U.S. bond auction faced challenges.

China’s Challenges:

China’s exports in July year-on-year decreased by 14.5%, the largest decline since February 2020; imports decreased by 12.5% during the same period. The decline in import and export data released on Tuesday has intensified the weakening of the country’s economic predicament. Coupled with the previously announced negative price changes, China’s economy, for the first time since the pandemic, has fallen into deflation.

In July, China’s RMB new loans and the increase in social financing plummeted, hitting a nearly 14-year low. July’s total social financing was 528.2 billion yuan, expected to be 1.1 trillion yuan, and the previous value was 4.22 trillion yuan. The year-on-year increase of 10.7% in July’s M2 money supply was expected to be 11%, with the previous value being 11.30%. The small increase in credit is mainly due to:

1. Corporate loans increased year-on-year by 49.9 billion yuan, mainly because of the advance release of corporate loans in June under the “stable growth” policy orientation, which overdrew some demand.

2. The year-on-year increase of 215.8 billion yuan in long-term loans to residents was mainly affected by the weakening of mortgage loans and higher repayments. The year-on-year increase of 106.6 billion yuan in short-term loans to residents reflects that the recovery of credit cards and consumer loans was relatively slow.

However, the Central Politburo meeting held at the end of July recognized the economic predicament. The meeting stated that the current economic operation is facing new difficulties and challenges. In the second half of the year, efforts should be made to strengthen macro-policy adjustments, expand domestic demand, boost confidence, and prevent risks. Investors expect that subsequent Chinese regulations will exert efforts in monetary, fiscal, real estate, and even capital market policies.

Alibaba’s Q1 FY2024 Financial Report

On August 10, Alibaba released its financial report for the first quarter of the fiscal year 2024 (ending June 30). As the first financial report after the six major business splits, this data not only explains Alibaba’s quarterly operations but also examines the results of its organizational restructuring.

Alibaba’s total revenue was 234.156 billion yuan, achieving a 14% growth compared to the same period last year’s 205.55 billion yuan. Net profit was 33 billion yuan, a 63% growth compared to the previous year’s 20.298 billion yuan. Such data shows the market once again the vitality of the Chinese e-commerce industry.

Of note, the international digital business grew the fastest this quarter, with quarterly revenue increasing year-on-year by 41%. Its international retail business revenue grew rapidly by 60%, and orders grew by about 25%. For Jiang Fan, who took over the overseas e-commerce business three years ago after leaving Tmall, the current operating data once again verifies his capability.

Moreover, Alibaba Cloud’s revenue and profits both grew this quarter. The financial report showed a year-on-year growth of 4% to 25.123 billion yuan, with the adjusted EBITA year-on-year growth of 106%. (Adjusted EBITA more accurately reflects the company’s daily operational profitability, as it excludes the impact of non-operational expenses such as interest, taxes

It’s worth mentioning that the International digital business saw the fastest revenue growth this quarter, with a year-on-year increase of 41%. International retail business revenue skyrocketed by 60%, with orders up about 25% year-on-year. For Jiang Fan, who took charge of overseas e-commerce operations after leaving the Tmall division three years ago, these operational data once again validate his capabilities.

Additionally, Alibaba Cloud’s revenue and profits both grew this quarter. Financial reports show a year-on-year revenue increase of 4% to 251.23 billion yuan, and the adjusted EBITA surged by 106%. (Adjusted EBITA more accurately reflects a company’s regular operational profitability as it excludes the effects of interest, taxes, depreciation, and amortization. A high adjusted EBITA typically indicates strong profitability.) EBITA growth outpaced revenue growth, possibly due to cost reduction, increased production efficiency, or changes in the company’s profit structure.

Consumer Confidence Slips

Consumer confidence in the U.S. declined slightly in mid-August after reaching a high in July but remains higher than the same period last year. A survey published by the University of Michigan on Friday showed that the consumer confidence index dropped from 71.6 in July to 71.2 in August, indicating that consumers see “virtually no substantive difference from the previous month”.

UK Q2 GDP Exceeds Expectations:

The UK’s GDP rose by 0.4% in the second quarter, surpassing the forecasted 0.2%. Strong household and government consumption provided greater room for the Bank of England to raise interest rates, leading to significant market fluctuations on Friday. Following this data release, UK bonds plummeted, the stock index was under pressure, and the GBP briefly surged against the USD by 100 basis points. Before this, there were doubts about the Bank of England completing its current interest rate hike cycle, but strong economic data restored market confidence.

Correlation Decline:

The correlation between cryptocurrencies and stock indices hit a low, as did intra-stock correlations. Technological advancements and global economic and trade uncertainties are the primary underlying reasons.

Capital Position Changes

According to Deutsche Bank’s standards, the overall stock position has continued to drop over the past three weeks, now at a two-month low. This is mainly due to a sharp decline in subjective investor positions.

The systematic strategy position has been slowly rising since mid-June and experienced a slight decline last week. The key factors affecting stock positions are surprises in macroeconomic data, earnings season, and interest rate fluctuations. Macroeconomic expectations have been steadily improving, with growth data trending upwards and inflation data trending downwards. It is now more challenging to obtain further positive data surprises.

The earnings performance for the second quarter was strong, with companies outperforming expectations. However, the overall market declined slightly after the earnings season, and companies that exceeded expectations did not stand out significantly.

From an industry perspective, positions in technology, communication services, and non-daily consumables declined slightly this week but remain at historical highs. The position for daily consumables surged this week and is now nearing its peak. Industrial product positions are also on the rise, currently entering an over-allocated range. Energy positions have gradually increased to neutral levels.

From a fund perspective, fund inflows continue to slow down. Emerging markets and Japan have seen strong inflows, but there were outflows from the U.S., Europe, and global funds. By industry, technology and healthcare attracted large-scale inflows. Energy, telecommunications, and industry also witnessed modest inflows, while finance, real estate, and raw materials experienced more noticeable redemptions.

Inflows into bond funds continue to slow. Government bonds and investment-grade corporate bonds attracted inflows, while high-yield bonds and emerging market bonds experienced outflows. Money market fund inflows remained roughly flat compared to last week, marking the fourth consecutive week of inflows.

From a futures position perspective, net long positions in stock index futures have increased for two consecutive weeks, mainly due to the increase in S&P 500 net longs surpassing the reduction in NASDAQ 100 and Russell 2000. Emerging market net long positions also declined. In terms of bonds, the overall net short positions have decreased, primarily because of the reduction in 5-year net shorts. Regarding currency futures, the U.S. dollar net short positions continue to decline, mainly due to the reduction in both the Euro and British Pound net long positions.

Investor Sentiment

Goldman’s investor sentiment data dropped from 0.8 to 0.7:

The Bank of America’s Bull/Bear sentiment indicator remained steady:

The AAII investor survey reported

Bearish: 21.32 ➝ 25.50,

Neutral: 29.70 ➝ 29.80,

Bullish: 48.98 ➝ 44.70.

Cryptocurrency Market:

The top 100 cryptocurrencies by market cap saw RUNE’s price surge nearly 50% over the week, marking its highest level since April. This might be due to the launch of a new swap feature about a week ago. To my knowledge, Thorchain is the only on-chain tool allowing users to swap native BTC with native ETH. Another noteworthy mention is TON, the Telegram cryptocurrency bot, which has been performing robustly in the market. According to a new report by Binance Research, the daily crypto trading volume of the Telegram bot reached a historic high of 10 million USD in July.

Top 100 Cryptocurrencies by Market Cap Weekly Decline List

On-chain stablecoins (excluding the newly added DAI from Makerdao to DS Finance, which increased by $1 billion in a week) have seen a net outflow for the eighth consecutive week (-$246 million), a significant decrease from the previous week’s -$973 million.

Stablecoins within exchanges experienced a net outflow for the second consecutive week (-$12 million), a significant decrease from the previous week’s -$476 million.

Market Commentary Excerpt

Wudaokou Macroeconomic Notes Official Account: “Why are we so eager for AI and room-temperature superconductivity? Essentially, it’s a race between the limits of the innovation cycle and the debt cycle.”

In the past two years, the global fervor for technological breakthroughs, such as the metaverse and artificial intelligence, has reached a fever pitch. The underlying reason for this is that we are nearing the end of the computer/internet innovation cycle and are in desperate need to kick-start a new one, all while facing the pivotal moment of a long-term debt cycle crisis.

This round of the computer/internet innovation cycle is nearing its end. With the global debt/GDP ratio surpassing 335%, the world market is eagerly seeking the seeds of the next innovation cycle. The next decade could be the most crucial period.

A new innovation cycle can bring businesses super-normal profit margins, offer citizens high income growth rates, and provide investors with high returns on investment. The debt cycle, in essence, is a game between profit margins, income growth rates, return on investment, and the cost of borrowing. Therefore, during the early and middle stages of the innovation cycle, all sectors can obtain super-normal returns that surpass the cost of borrowing. This allows the debt cycle to inflate in a healthy manner and promotes the rapid explosion of the innovation cycle. However, in the later stages of the innovation cycle, as the entire production and demand no longer grow, investment returns gradually decrease, the marginal efficiency of capital decreases, and income expectations decline. With the continuous growth of debt, capital may chase investment returns, causing asset bubbles, exacerbating wealth disparity, and triggering a debt crisis.

“Bond King” believes US bonds are still not adjusted properly

Pimco co-founder Bill Gross stated that being bullish on US stocks and bonds now is a mistake, as both markets are “overvalued”. He believes that the fair value of the 10-year Treasury yield should be around 4.5%, while it currently stands at about 4.16%. Bill Gross mentioned that US inflation might persistently hover around 3%. He noted that historically, the 10-year US Treasury yield has been about 135 basis points higher than the Federal Reserve’s policy rate. Therefore, even if the Fed lowers the rate to around 3%, historically speaking, the current 10-year US Treasury yield is still too low.

LD Capital is a leading crypto fund who is active in primary and secondary markets, whose sub-funds include dedicated eco fund, FoF, hedge fund and Meta Fund.

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