Duet Protocol Global Capital Market Weekly Recap & Outlook — 20230522

Duet Protocol
14 min readMay 22, 2023

Hi Dueters,

Welcome to this week’s Duet Protocol Global Capital Market Recap & Outlook. We hope you enjoyed the Twitter Spaces and will try your trading skills at Duet Pro.

Here are some of the key points and trends in this week’s market talk:

Improving Market sentiment: Many institutions say market sentiment is improving and investor confidence is gradually recovering. The bull-bear indicator and other sentiment indicators show sentiment levels gradually climbing.
Recovery in equity positioning: Some banks and institutions noted that equity positioning has returned to neutral levels, returning to previous levels. This indicates that investors have increased confidence in the stock market.
Positions in systematic strategies and subjective investors rise: Positions in systematic strategies continue to rise and have exceeded neutral levels. At the same time, positioning by subjective investors also rose, rebounding from one-year lows.
Overvaluation of Big Tech stocks: Some agencies note that big tech stocks like Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla are trading at high P/E ratios of about 30, compared with about 17 for the rest of the S&P 500. That has sparked discussion about whether the stocks are overvalued.
Flattening of inflows: Some observers have noted that the trend in equity inflows has flattened, similar to those seen in 2007, 2015 and 2018. That could mean money is looking for more stable investment opportunities or waiting for further developments in the market.

Weekly Market Recap

Last week, there was initial uncertainty in the market regarding debt ceiling negotiations. However, as the week progressed and with reassurances from McCarthy that the two parties were likely to reach an agreement over the weekend, market concerns eased, and risk appetite significantly improved. Equity assets initially experienced a dip but later rebounded, while gold and cryptocurrencies first up and then down.

Now, due to the lack of new concepts in the cryptocurrency market, funds are no longer treating cryptocurrencies as substitutes for technology stocks. Instead, they are considering them as alternative hedge options against the flaws in the traditional financial system.

In the stock market, particularly in the large-cap technology sector, last week’s price movements indicated signs of panic buying from investors who FOMO on the next bull market.

All three major U.S. stock indices closed higher, with Nasdaq surging over 3%, S&P 500 rising 1.65%, and Dow Jones increasing by 0.38%. In terms of sectors, the technology sector saw a significant gain of 4.19%, followed by the communication sector, which rose by 3.06%. Technology stocks continued to lead the market, while utilities experienced a decline of 4.36% and real estate fell by 2.40%.

Net long positions for Nasdaq100 futures, held by asset managers and leveraged funds, reached their highest level since May 2022, showing a substantial increase. Net long positions for the S&P 500 were nearly unchanged, while the Russell 2000 index continued to have a net short position.

Last Friday, the volume of call options traded on the Nasdaq index reached its highest level in nearly 10 years since 2014. The ongoing surge in artificial intelligence continues to generate trend trading demand and “animal spirits” behavior in related market sectors.

The skew indicator (measurement of protection cost of up-down)for the S&P 500 experienced a significant decline late last week, suggesting a fade in market concerns about future declines.

In the options market, the pricing of the debt ceiling risk remains uncertain, and the June FOMC meeting (scheduled for June 14, 2023) now becomes the next major event to watch.

In terms of interest rates, the entire yield curve for government bonds shifted upward last week, resulting in a short-term dip and a long-term rise. The yield on 2-year government bonds rebounded to nearly 4.3% from below 4%, while the yield on 10-year government bonds increased from 3.44% to 3.68%. The one-month government bond yield declined from 5.7% to 5.5%. The extremely low spread premium indicates that the market still does not believe that a debt default will occur.

China’s A-shares, represented by the Shanghai Composite Index, saw a slight increase of 0.4%. Germany’s stock index surged by nearly 2%, reaching a new all-time high, while Japan’s stock market recorded a significant gain of 4.4%, reaching a new high since 1990.

The rare synchronization of optimism across global stock markets has been realized.

The U.S. Dollar Index (DXY) also rose by 0.48% to 103.20. Oil prices showed a slight rebound, with a 2.54% increase, closing the week at $71.82 per barrel. However, gold prices fell by 1.5% to $1979 per ounce.

In the cryptocurrency market, there was significant volatility last week. Bitcoin (BTC) experienced a slight decline of 0.58%, while Ethereum (ETH) saw a small increase of 0.21%.

The total market capitalization of cryptocurrencies dropped from $11.26 trillion to $11.19 trillion, representing a 0.6% decrease over the past seven days. Excluding Bitcoin, the total cryptocurrency market capitalization decreased from $604.3 billion to $600.1 billion, a 0.69% decline over the same period.

Among cryptocurrencies with a market capitalization of over $100 million, there was a global resonance with the concept of artificial intelligence (AI). The decentralized graphics rendering network token RNDR saw a significant increase of 37%, ranking first. This was followed by MASK with an 18% increase, AGIX with a 14% increase, and SNX with a 13% increase. On the other hand, TON, SUI, and SOL experienced larger declines of 8%, 6%, and 6%, respectively.

Total Stablecoins Market Cap shrink 0.41% to $129.47b, it was $137.56B at the beginning of the year.

Major Macro Events From Last Week

Multiple Federal Reserve officials made hawkish remarks, which temporarily raised expectations of interest rate hikes.

However, Federal Reserve Chair Jerome Powell clarified on Friday, indicating a potential pause in rate hikes, leading to a decline in market expectations.

The debt ceiling crisis negotiations faced twists and turns. House Speaker Macarthy and President Biden expressed that they would not allow a default, but the expected agreement over the weekend fell through, shattering hopes of a breakthrough before Monday’s market opening. Negotiations have now extended into this week. President Biden and Speaker Macarthy were set to continue their talks on Monday evening.

On Sunday, the G7 statement expressed support for Ukraine and urged China to give pressure on Russia to cease its military invasion. It also emphasized that China, when acting in accordance with international rules, would align with global interests. The G7 stated that it does not seek policies aimed at harming China or hindering its economic development, nor does it seek “decoupling nor turning inwards.” Additionally, President Biden mentioned that he expects an improvement in relations with China and the establishment of a hotline, following a dispute earlier this year that derailed bilateral relations. China strongly expressed dissatisfaction with the G7 statement, with the Chinese Embassy in the UK urging the G7 to abandon a Cold War mentality and stop interfering in other countries’ internal affairs.

Despite ongoing verbal disputes between the two sides, the positive gestures from the West represent a constructive development anyway. We see further gains in the Chinese stock market on Monday, indicating the market’s optimism regarding these positive developments.

Regarding individual stocks, Tesla held its shareholder meeting last week, with Elon Musk hinting at two new vehicles and an advertising campaign. Home Depot reported overall weak financial results, while Walmart’s earnings reflected continued consumer strength. Target’s earnings were in line with expectations, indicating the initial effectiveness of its business adjustments. Netflix surpassed 5 million subscribers for its ad-supported version, leading to a significant increase in its stock price. Meta announced an AI chip. The Japanese government reached an agreement with Micron to provide financial assistance for the production of next-generation memory chips.

Debt crisis progress and unexpected changes over the weekend, but Biden shows sincerity.

President Biden stated on Sunday, his willingness to cut a deal, he proposed reducing spending by over a trillion dollars. He added that the Republican proposal to cut $2 trillion in taxes would harm the economy… “It’s now time for them to change their extreme position because a lot of what they’ve proposed is frankly unacceptable.”he says.

On Saturday, McCarthy accused the White House of backtracking in the negotiations and told reporters that there would be no progress until President Biden returns from his trip. However, he also stated that Republicans have made compromises without providing specific details.

McCarthy told Fox News on Sunday, “He seems to prefer a default to reach an agreement.”

One of McCarthy’s top deputies, the Chair of the House Financial Services Committee, expressed a “pessimistic” outlook on the current state of negotiations and stated that there are currently no plans for further talks.

The White House Press Secretary stated on Sunday, “Last night, the Speaker’s team took a major step back with a series of extreme partisan demands that can never pass the Senate or the House.”

Treasury Secretary Janet Yellen emphasized the urgency of the situation over the weekend, stating in an interview with CNBC that the likelihood of the U.S. being able to pay all its bills before June 15th is “very low.”

The above comments indicate that the Republicans are still leveraging the debt negotiations to gain political capital for them. However, it is unlikely to lead the United States to default on its obligations, so the market is not pricing in significant risks in this regard.

Important events this week, will the economic data change market beliefs?

Monday:

Speeches by Federal Reserve officials James Bullard, Raphael Bostic, and Thomas Barkin.

Tuesday:

Manufacturing and services Purchasing Managers’ Index (PMI) data for Europe and the United States.

U.S. New Home Sales data.

Speech by Lorie Logan from the Dallas Federal Reserve.

Wednesday:

Release of the minutes from the Federal Reserve’s policy meeting held on May 2–3.

Thursday:

U.S. Initial Jobless Claims, GDP data.

Friday:

U.S. Consumer Income, Wholesale Inventories, Durable Goods, and University of Michigan Consumer Sentiment Index.

These important events and data releases throughout the week have the potential to impact market beliefs. Investors should closely monitor the data releases and speeches by central bank officials to gain insights into market trends and make necessary adjustments to their investment strategies.

Institutional Analysis

MS: Watch out for fake rebound

According to a report released by Morgan Stanley over the weekend, they believe this will be proven to be a false rebound, similar to what happened last summer, primarily due to the following reasons:

  1. Unattractive valuations, with the median forward price-to-earnings ratio of S&P 500 stocks at 18.3 times (within the top 15% of historical levels since the mid-1990s), and the prices of the top 10–20 stocks in terms of market capitalization being even more expensive.
  2. Market expectations for corporate earnings to accelerate, but Morgan Stanley has significantly downgraded their forecasts, with consensus estimates differing by as much as 20%.
  3. The stock market is currently pricing in rate cuts by the Federal Reserve before the end of the year, without expecting any substantial impact on economic growth. However, Morgan Stanley’s economists believe that the Fed will only cut rates if we enter a recession or if there is increased pressure on the banking system and/or significant deterioration in credit markets. Furthermore, the Fed is implicitly assuming that inflation will decline to at least 3% during rate cuts. While this is possible, it would also have a significant impact on economic growth.
  4. Another assumption is that the banking sector will not worsen and become systemic. While Morgan Stanley does not believe this is a situation like 2008–09, data shows that credit tightening has already begun.
  5. Despite consumers demonstrating considerable resilience in the face of various headwinds, our recent survey indicates a slowdown in discretionary spending intentions, even among high-end consumers.
  6. The raising of the debt ceiling could reduce market liquidity, and Morgan Stanley expects a significant increase in new government bond issuance in the six months following the debt ceiling hike.

MS: We suspect that the resolution of the debt ceiling could ironically become the catalyst for the end of this bear market rally as it leads to a liquidity squeeze. Just like the news of bank failures in March was initially seen as bad news but ultimately led to the injection of liquidity by the Federal Reserve and FDIC, turning into good news for the market. “Beware of false breakouts when the market leads with good news.”

Note: The information provided is based on the analysis and opinion of Morgan Stanley (MS).

Duet’s Comment

Currently, Wall Street is concerned about a liquidity crisis of 1 trillion of dollars after reaching an agreement on the debt ceiling. This is because the US Treasury will issue a large amount of debt to replenish its account balances, which will drain liquidity from the market. The money deposited into the Treasury General Account (TGA) will not be immediately used for circulation, effectively reducing the money available for lending or trading within the economy and tightening the financial environment. According to Bloomberg's estimates, by the end of the third quarter, approximately $1 trillion in government bonds will need to be issued, which will withdraw liquidity equivalent to a 25-basis-point interest rate hike.

The pricing of this matter is currently not much, but it is certain to happen.

So what should the Federal Reserve do in this situation? If they expand their balance sheet to accommodate the Treasury’s debt, it would disrupt their tapering plans and create optimistic market expectations, which would be no good for controlling inflation. On the other hand, if they don’t accept the massive liquidity withdrawal, it could potentially impact the already fragile lending markets. This would lead to a new round of market speculation. Given that Wall Street have started to recognize this issue, the impact may not be as severe. Personally, I believe the Fed will implement new policies to hedge against this situation, similar to their swift actions in March. The key lies in the timing of their actions and the difference in market expectations. However, since the Fed’s actions often require the occurrence of certain crisis facts, there is a possibility of policy lagging behind the market.

Recently, there has been a popular concept in the market called the “pain trade.” This trade occurs when the majority of market participants are confident in one direction, but an unexpected turn happens, resulting in most people losing money or feeling pressure due to being underinvested. In order to cut losses, they will make opposite moves, such as previously shorting the market but having to close their short positions when the market rises. This further drives up stock prices and creates a short-squeeze phenomenon. From the perspective of stock market holdings, statistics from mainstream institutions indicate that large funds are either neutral or underweight. From this perspective, the pain trade is expected to continue for some time until there is consensus on another risk event (although the recent performance of gold suggests it may not be favorable for cryptocurrencies like before).

Additionally, the economic cycle is cyclical, and the transition between expansion and slowdown is inevitable — it’s just a matter of time. I mean when people finally don’t have the patience to wait for a recession, it’s actually getting closer.

GS: Market FOMO, Risks on expected to continue…

Goldman Sachs analyst Rubner: Some buyers have remained cautious due to concerns about debt default and liquidity risks. However, if the market continues to remain optimistic, these buyers are expected to continue participating. In addition, mutual funds face increased pressure as they need to adjust their underweight positions in large-cap stocks relative to benchmarks and reduce their cash reserves. Global technology ETFs and mutual funds attracted $3.768 billion in inflows last week, marking the largest weekly inflow since December 15, 2021. At the same time, hedge funds have continued to increase their investments in large-cap tech stocks, with stocks like Microsoft, Apple, Google, Meta, and Amazon being favored with net buying over the past 8 trading days. The collective holdings of these stocks on the Prime trading book represent 15.5% of the overall net exposure to single stocks in the US, reaching the highest level since July 2021 and ranking in the 89th percentile over the past five years.

“If we see any positive developments over the weekend, I believe investors will continue to increase risk and extend the upper range to $4,300-$4,400… bearish sentiment continues to weaken. No one wants to be forced into the market and potentially become the new top, so currently, people are buying the highest-quality sustainable themes. The worst-case scenario would be a correction shortly after completing the repositioning.”

GS John Flood: After experiencing net selling for five consecutive weeks, the US stock market saw net buying for the past two weeks, indicating a potential turning point in market sentiment (S&P 500 and Nasdaq 100 reaching new highs for the year on Thursday, sparking FOMO buying).

Data from May 5th to May 18th shows that the nominal net buying in the US stock market is the largest since October 2022, ranking in the 94th percentile compared to the past five years.

Institutional statistics on market sentiment and positioning indicators

JPM: Hedge funds’ net leverage ratio reached its highest level since August 22nd last year.

GS “Sentiment & Positioning” indicators remain negative but continue to improve, reaching the least bearish level in the past 18 months:

GS: MAGMA (Microsoft, Apple, Alphabet, Meta, Amazon) now collectively accounts for 15.5% of the overall single-stock net exposure on the Prime book (up from 9.7% at the beginning of 2023), reaching the highest level since July 2021 and ranking in the 89th percentile compared to the past five years:

BofA’s bull/bear indicator has risen from 3.4 to 3.5, reaching the highest level since March 14th, indicating a gradual increase in sentiment. According to a survey of Bank of America fund managers, the biggest “pain trade” in the next 12 months would be the federal funds rate reaching 6%, rather than 3%. As for the Big 7 US Tech stocks, including Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla, they are considered overvalued with a price-to-earnings ratio of 30X, compared to the average P/E ratio of 17 for other companies in the S&P 500. Stock fund inflows have stabilized, resembling the patterns seen in 2007, 2015, and 2018.

DB:Overall stock positioning has returned to a neutral level, reaching pre-SVB (Sell-Off, Vola, Bullish) levels. Over the past seven weeks, positioning for systematic strategies has continued to rise and is now above the neutral level. Discretionary investors’ positioning has also increased, bouncing back from year-long lows. Their positioning is currently in the middle of the range of year-long underweight positions.

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