U.S. stocks hit 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:
However, by the end of March, European and American stock markets had risen for five consecutive months for the first time in ten years. The S&P rose by more than 10% for two consecutive quarters. The Nasdaq lagged slightly in the first quarter of this year, but also rose by more than 9%, mainly due to the performance of some large technology companies other than chips. 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 sold continuously in the last three trading days before the end of the quarter, accounting for about 75% of the total net selling amount of single stocks in the United States last week. It currently accounts for 29.1% of the total net exposure to US stocks, which is lower than the peak of 32.5% in mid-February and the levels of the past 1 year and 5 years.
It can be seen that the rebalance of large funds at the end of the quarter has a significant impact (generally selling stocks that have risen and making up for losses, and the actual rebalance transactions are usually scheduled from the end of March to the beginning of April). Stocks that have risen significantly in the previous period are facing selling pressure. According to Goldman Sachs's calculations, pension funds may sell an estimated $32 billion in stocks to rebalance their positions. In theory, the end-of-quarter rebalance should see a lot of demand for Bitcoin ETFs (because it was only listed in January, the funds intended to be allocated have not had time to join the investment portfolio). Next week may be a week of strong inflows.
Gold surged 3.12% last week, setting a new record high again, showing the market's demand for diversified allocation and the expectations of central banks. During the same period, WTI crude oil prices rose 3% to $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%, suggesting that inflation stickiness will exist, which theoretically puts pressure on interest-free 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 tech giants such as Apple, Amazon, Google, and Microsoft. These seven companies have annual revenues of up to $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 and Internet industries have historically been the most lightly regulated industries. This may be because they are relatively new industries and regulatory rules are not yet sound, or it may be because the government intends to give these industries more freedom to encourage innovation. However, as the influence of technology giants grows, this regulatory environment may change.
The following chart shows the extent to which the U.S. federal government regulates various industries, 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 domestic products. The biggest impacts are Intel and AMD. In addition, the Chinese government's procurement guidance also stated that Microsoft's window system and foreign database software will also be marginalized and replaced by domestic products. In order to counter the US 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 could have a significant impact on the profits of the chip companies involved. In 2023, China was Intel's largest market, accounting for 27% of revenue, while AMD's was 15%.
Chinese version of QE?
Last Friday, the market heard that the People's Bank of China might purchase government bonds to expand its balance sheet (China's version of QE), which once affected the stock market, commodity market, and bond market. 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 purchase and sale of government bonds in the central bank's open market operations." This is a five-year high-level financial meeting, but the relevant speech content did not appear in the official draft at the time. It was not until China published an excerpt in the "Selected Works of Xi Jinping on Financial Work" publicly published in March that it was reported by the South China Morning Post. This content attracted the attention of financial market traders. Partly influenced by the optimistic sentiment that China's monetary stimulus may be increased, the Chinese and Hong Kong stock markets rose, the RMB exchange rate and the bond market also strengthened for a time, and gave up the gains in the late trading.
Because various analyses came out soon, it is generally believed that China is unlikely to implement Fed-style quantitative easing. Compared with the total amount of credit, the recent policy still emphasizes the structure and effectiveness of credit expansion. The "People's Bank Law" clearly stipulates that the central bank shall not buy treasury bonds in the primary market in order to prevent the government departments from directly increasing leverage and increasing the risk of fiscal overdraft. Secondary market operations are feasible, but one of the ways for the central bank to buy bonds from the secondary market is pledge repurchase, not direct purchase, because it is easy to cause price and expectation fluctuations. Another is that the central bank will generally start QE after there is no room for interest rate cuts, and it is not at this point now.
It is an international practice that central banks use government bonds as a way to inject base money, but the purchase of government bonds by central banks does not equal QE. QE refers to planned, long-term, and large-scale bond purchases. Currently, government bonds account for 61% (US$4.62 trillion), 58% (EUR4 trillion), and 78% (JPY602 trillion) of the central banks' balance sheets, respectively.
Over the years, the central bank of my country has injected liquidity into the market, generally by providing commercial banks with re-loans 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 the PBOC increased its holdings of government bonds was in 2007, and it was directed to provide capital to China Investment Corporation.
We believe that it is too early for China to start QE. The PBOC still has a lot of ammunition left, so it is not in a hurry to use unconventional means. Central Bank Governor Pan Gongsheng and other major leaders have released information in March that China has room for interest rate cuts and reserve requirement ratio cuts (there has already been an unconventional interest rate cut of 50 BP in February 2024). However, the PBOC is fully capable of trying to buy 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. In addition, if this news is instructed by the central government to test the market reaction, it is not a bad thing to mobilize the market's positive sentiment. It can be understood as a positive for A-shares, Chinese bonds, gold, and Bitcoin, but expectations do not need to be too high.
Lack of fiscal discipline is a good thing
In 2023, the U.S. Treasury issued a total of $23 trillion in bonds, the same as the peak during the COVID period, despite the recovery of the economy. This number will only continue to grow in the future. No one thinks that the US government can tighten spending. It is now expected that 27 trillion will be issued 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 market expectations that the Federal Reserve will cut interest rates or introduce other easing measures in the coming months. From this point of view, it is good for stocks, commodities, digital currencies and gold.
The U.S. government has paid $1.1 trillion in interest over the past year, twice as much as before the COVID-19 pandemic. The continued rise in government spending and debt has given 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. The Fed needs to cut interest rates by 150 basis points to keep interest payments roughly flat.
US GDP is expected to rebound quarter by quarter
According to Goldman Sachs' forecast, US 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's dovish rate hike
The Bank of Japan ended its eight-year negative interest rate policy on March 19 and canceled its purchases of Japanese stock ETFs and REITs, but will continue to purchase government bonds, and several officials said they will continue to maintain a loose monetary environment.
Because abandoning YCC and raising interest rates slightly are different from abandoning QE. As long as the purchase of government bonds continues, the liquidity of the Japanese yen will continue to increase, and the status of major central banks issuing fiat currencies to global assets will not change much.
Therefore, the yen has recently returned to weakness, falling to its lowest level in a year. And the stable macro risk environment is expected to continue to be unfavorable to the yen. Yen financing is rushing overseas, but transactions will continue. At present, even if the interest rate increases by another 25bp, it is not enough to trigger a large-scale capital outflow.
Although a break through the 152 mark may trigger intervention by the Japanese Ministry of Finance, it may not change the general trend, and the foreign exchange market will then see greater volatility.
Global central banks shift
Recently, the global central banks have made major headlines. 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 have raised interest rates, which is actually a dovish signal.
First, as the first central bank in a developed country to start cutting interest rates, the Swiss National Bank’s move was initially interpreted as a milestone event. Subsequent market reports focused on the dovish signal of the Swiss National Bank’s sudden move and its guiding role for the Federal Reserve and the European Central Bank. Articles in major newspapers also focused on discussing which central bank might cut interest rates next, but then everyone turned their attention to Switzerland’s inflation and exchange rate issues. There was indeed a need to cut interest rates, and the market’s euphoria declined.
European Central Bank President Christine Lagarde said officials did not guarantee future actions after the high probability rate cut in June. In other words, it is also a reminder to the market not to think that the rate cut will continue after it starts.
The Fed actually wants to cut interest rates, but recent data does not provide a good entry point. Powell said at the March press conference that we usually see stronger inflation 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 point is that he mentioned that the US economy is performing strongly and there is no need to rush to cut interest rates. If inflation does not go down, the Fed can maintain interest rates for a longer period of time. This triggered a correction of more than 3% on Friday night.
However, he did not mention the possibility of returning to raising interest rates in his speech. In addition, if the job market unexpectedly weakens, the Fed will respond in a timely manner (the subtext is that as long as employment is loose and prices do not reach the target, interest rates will be cut). Overall, Friday's speech was slightly hawkish, but not very hard, and it is unlikely to affect expectations of a rate cut in June, and the correction is expected to be limited.
US stock MEME boom
The "meme stock" craze is on the rise again. Both Reddit and DJT have risen sharply due to the enthusiasm of retail investors. The 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 were hot on 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, its U.S. stock price surged another 14% overnight to $66.22, with a market value of approximately $8 billion. It is the most discussed stock on WallStreetBets and ranks among the top 15 stocks in terms of trading volume on Interactive Brokers.
According to financial documents, DJT has 9 million registered users and its revenue in the first three quarters of last year was only US$3.4 million, while its losses reached US$49 million. It is clear that the increase was not driven by fundamentals.
Reddit is the fourth most traded company on Interactive Brokers. The company went public on the New York Stock Exchange last Thursday with an issue price of $34, and then rose to a high of $70 that day. It has now fallen back to $49.3, but is still 45% higher than the issue price.
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 $845 million for the week, almost offsetting the net outflow of $890 million the week before. FBTC became the second spot Bitcoin ETF to break the $10 billion asset management mark after BlackRock's IBIT first reached the $10 billion asset management mark on March 1. Currently, IBIT holds 250,000 BTC and FBTC holds 143,000.
The number of bitcoins stored on exchanges has dropped significantly by 8% to 2.326 million since May 2023, indicating tight supply, partly 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, the lowest level in five years. This movement away from exchanges is traditionally seen as a bullish indicator, indicating that people prefer to hold rather than sell:
Unconsciously, the long rate of BTC perpetual contracts has almost recovered to its historical high. The current annualized conversion is about 80%, and the low point on March 22 was only 11%:
Notable Cryptocurrency News
- BlackRock’s new tokenized fund brings TradFi and crypto closer ( Coindesk )
- BlackRock will still pursue a 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 holding on tightly
- Major Cryptocurrency 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 staking-based income fund for qualified investors
Options market optimistic about US election
By analyzing the pricing of the S&P 500 index options market, we assess investors' expectations for the US presidential election in November 2024. Overall, the current options market's attention to the election has increased compared to previous election years, but it is still at a normal level.
The expected volatility implied by SPX index options on election day is about plus or minus 3.3%. In the past 60 years, the SPX has only fluctuated more than 3.3% on election day once.
Investors appear to be anticipating that the election results will be positive for the stock market, with SPX call options trading higher relative to put options in recent days:
liquidity
Sentiment Indicators
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