Duet Protocol Global Market Recap and Outlook — 20230814

Duet Protocol
14 min readAug 14, 2023

Despite the initial market surge at the start of the week, factors such as downgrades in credit ratings of several US banks, a sharp decline in China’s financial data, better-than-expected UK GDP, and higher-than-expected inflation indicators led to the S&P 500, Nasdaq, and Russell 2000 indexes falling for the second consecutive week by Friday’s close. However, the decline was slower than the previous week, with the Nasdaq 100 experiencing its first two-week decline since last December. The Dow Jones plunged significantly on Tuesday but rebounded, ending the week on a positive note. Even though both macro and micro data are favourable, the market seems unimpressed as it has already digested these expectations.

The current market focus is on whether the momentum of major tech stocks, if further eroded, will drag the overall market down, or if other stocks will step in to counterbalance the downturn.

In terms of sectors, in the first half of this year, overbought tech giants showed particular weakness, while oversold energy stocks rebounded strongly. The S&P 500 energy sector has risen by about 10% since the third quarter. As of last Friday, global oil prices have recorded a seven-week consecutive rise, marking the longest streak since 2022, with WTI at $83 per barrel and Brent at $86.5 per barrel.

Concerning the hype around AI possibly reenacting the internet bubble of the late 1990s, analysts are divided:

Analysts who are positive about this rebound argue that this is clearly different from the bubble era. AI-related companies are at the technological forefront that will reshape society in the coming years. Although the valuation of tech stocks is a concern, AI is propelling the tech industry into a “1995 moment,” where future growth will be unprecedented since the 1990s.

Skeptical analysts believe the current market fervor is rife with speculation and false hope, warning that the tech stock surge is merely a bubble. The boom and bust cycles of tech stocks in the past suggest that selecting a few companies that may eventually dominate a specific industry is much more challenging than imagined.

In general, the market has already absorbed a lot of good news, including better inflation trends, the possibility of the Fed pausing interest rate hikes, and the economy continuing to grow above trend. The market’s current adjustment seems healthy, allowing it to digest recent gains and prepare for potential future growth.

Historical data indicates that since 1950, the S&P 500 index has risen more than 15% on 35 occasions. On average, there’s at least one pullback within six months of such a rally. These pullbacks range from -2.5% to -19%, averaging -8.2%, with a median of -7.6%. Currently, the S&P 500 has declined only about 3% since its recent high on July 31.

In other markets, with the depreciation of the yen, Japanese stocks surged by 1.47%. European stock markets fluctuated, with the UK and German stock markets slightly up, Stoxx50 down by 0.3%. The Chinese stock market was the worst performer, affected by the sharp decline in social financing data. A50 plummeted by 4%, the Golden Dragon Index fell by 6.55%, and the CSI 300 dropped by 2.9%.

Bond market

The yields on US Treasury bonds of various maturities have roughly returned to the levels before the US non-farm employment report was released last Friday. The 10-year US bond yield has risen about 12 basis points this week, increasing for the third consecutive week. The 2-year US bond yield, which is more sensitive to interest rate prospects, has risen about 13 basis points this week, offsetting the decline of 11 basis points from the previous week and marking the second rise in the past five weeks.

The yield on the US 30-year Treasury Inflation-Protected Securities (TIPS) is nearing the 2% mark. If broken, it would be the first time since 2011, and many bond investors are eagerly awaiting. The upward pressure faced by TIPS and long-term nominal US bond yields reflects market uncertainty about the inflation path, even though this week’s inflation indicators and inflation expectations derived from surveys have both declined.

Forex market

The US dollar index is at 102.80, up about 0.8% from last week, increasing for four consecutive weeks. Among non-US currencies, the yen performed poorly, declining against the US dollar for five consecutive days. At one point on Friday, it approached the 145.00 threshold, a level not seen since the Japanese government intervened in the foreign exchange market last September. The offshore yuan traded at 7.2601 against the US dollar, down 722 points from last week and declining for two consecutive weeks.

Cryptocurrencies surged midweek in anticipation of a possible ETF approval but were eventually restrained by a strong US dollar and rising US bond yields, narrowing their gains. BTC made its second attempt in August to break the 30,000 mark but failed, maintaining above the 29,000 mark. Given the slight pessimism in traditional markets, the performance has been relatively robust in recent weeks.

Spot gold fell 1.49% for the week to $1913 per ounce, marking its largest weekly decline since June 23 and declining for the third consecutive week, with drops exceeding 1% in the last two weeks.

Inflation Expectations

On Thursday, the U.S. July consumer price index inflation rate was 3.2%, slightly below market expectations. Core inflation excluding energy and food rose 0.2% this month, unchanged from June. The core CPI’s consecutive 0.2% month-over-month increases are a positive sign that pricing pressures are easing, a development that could lead the Fed to consider pausing rate hikes, but the energy price rebound shows inflation slowdown is not smooth sailing.

In this data, prices of commodities like used cars (-1.3%) and household appliances (-0.4%) continued to decline. Airfares (-8.1%) declined sharply for the second consecutive month. Coupled with lower prices for services like hotels (-0.5%) and car rentals (-0.3%), this played an important role in curbing core inflation.

However, July fuel (+3.0%), gasoline (+0.2%), and natural gas services (+2.0%) were all rising, and global oil prices have continued to rise since August, potentially indicating that August energy prices will rise further month-over-month, posing upside risks to energy inflation.

Since late June, oil prices have risen steadily due to production cuts by countries including Saudi Arabia and Russia. Morgan Stanley currently forecasts oil prices could reach $90 a barrel by September, as physical market supply and demand are tightening rapidly.

Driven by rising service prices, Friday’s U.S. July PPI year-over-year growth exceeded expectations, rising 70 basis points to 0.8%. The core PPI excluding volatile food and energy rose 2.4% year-over-year in July, faster than expected rather than slowing as anticipated. Both PPI and core PPI monthly growth slightly exceeded expectations.

U.S. PPI shows stubbornly high inflation, offsetting the brief optimism from the CPI data. After the release, the U.S. dollar index erased losses and jumped, U.S. Treasury prices plunged and yields rose, with benchmark 10-year and more rate-sensitive 2-year yields hitting new weekly highs. U.S. stocks and cryptocurrencies fell.

August University of Michigan 1-year inflation expectations unexpectedly fell to 3.3%, tying the lowest in over two years. Long-term inflation expectations also declined slightly. The overall consumer sentiment index fell slightly from July this month.

The El Niño phenomenon has been confirmed, with the EU even believing it will be more severe next year. India has already started restricting rice exports, causing Asian rice prices to soar. Supply-side pressures are now spreading from energy to food.

Q2 Earnings Season

S&P 500 Q2 earnings fell 4% year-over-year, below the 9% decline expected at the start of the earnings season in early July. Revenues and profit margins both rose. 54% of S&P 500 companies exceeded consensus EPS estimates by at least one standard deviation. Companies beating EPS expectations outperformed the S&P 500 by an average of over 0.8% the day after reporting.

Moody’s Downgrades Ratings

On Monday, Moody’s downgraded the credit ratings of 10 smaller U.S. banks and noted several larger banks are under review. The moves by the rating agency reflect ongoing challenges for the industry, including rising borrowing costs and declining profitability.

Tale of Two Trends in Treasury Auctions

The 10-year Treasury note auction on Wednesday saw yields hit a seven-month high, with indirect bidders taking 72.2% of sales, the highest since January. Fears of faltering demand amid heavy issuance were belied this week. Strong demand followed Tuesday’s well-bid 3-year note sale, while Wednesday’s 10-year note auction drew unusually robust interest, with voracious foreign buying.

On Thursday, the U.S. Treasury completed the auction of $23 billion of 30-year bonds at the highest yields since July 2011. The bid-to-cover ratio was 2.42, the lowest since April. The results were somewhat unexpected as the market had anticipated the auction could be easily completed. But the long bond sale faced challenges.

China’s Challenges

China’s July exports fell 14.5% year-over-year, the steepest decline since February 2020. Imports fell 12.5% over the same period. The sharper contraction in trade data released Tuesday compounded evidence of weakening in the economy, on top of the previous negative price prints. China’s economy slipped into deflationary territory for the first time since the pandemic.

New yuan loans and aggregate financing in China plunged in July, hitting near 14-year lows. July aggregate financing was RMB 5,282 billion, expected RMB 11,000 billion, previous RMB 42,200 billion. July M2 money supply grew 10.7% year-over-year, expected 11%, previous 11.3%. New RMB loans in July were RMB 3,459 billion, expected RMB 8,000 billion, previous RMB 30,500 billion. Thinner credit growth mainly reflects:

1. Corporate loans up RMB 499 billion year-over-year, due to front-loaded June lending exhausting some demand.

2. Medium and long-term household loans up RMB 2,158 billion less year-over-year, mainly due to weaker mortgage issuance and more repayments. Short-term household loans up RMB 1,066 billion less, showing sluggish recovery in credit card and consumer lending.

However, the Politburo meeting in late July recognized economic difficulties and vowed larger macro policy support in H2, to expand domestic demand, boost confidence, and prevent risks. Investors expect Chinese regulators to ease across monetary, fiscal, property, and capital markets policies.

Alibaba FY2024 Q1 Earnings

On August 10, Alibaba released fiscal 2024 first-quarter earnings (ended June 30). As the first report after reorganization into six business units, these figures not only describe quarterly performance but also gauge the restructuring’s effectiveness.

Alibaba reported total revenue of RMB 234.156 billion, up 14% year-over-year from RMB 205.555 billion last year. Net income was RMB 33 billion, up 63% from RMB 20.298 billion last year. The data underscores the vitality of China’s e-commerce sector.

Notably, international commerce saw the fastest revenue growth this quarter, up 41% year-over-year. International retail commerce revenue surged 60% and orders grew about 25% year-over-year. For Jiang Fan, who took over global e-commerce three years ago after leaving Tmall, the figures validate his capabilities again.

Additionally, Alibaba Cloud grew revenue and profits this quarter. The report showed revenue up 4% year-over-year to RMB 25.123 billion and adjusted EBITA up 106% year-over-year. (Adjusted EBITA more accurately reflects operating profitability by excluding non-operating costs like interest, taxes, depreciation and amortization. High adjusted EBITA typically indicates strong profitability.) The much faster EBITA growth versus revenue may relate to cost cuts, efficiency gains or shifting profit structures.

Sliding Consumer Confidence

After hitting a peak in July, U.S. consumer confidence dipped slightly in mid-August but remained relatively high compared to last year. The University of Michigan’s preliminary August reading fell to 71.2 from 71.6 in July, noting consumers “viewed the overall economy as virtually unchanged from the month before.”

UK Q2 GDP Beats Expectations

UK Q2 GDP grew 0.4%, beating expectations of just 0.2%. Strong household and government spending buoyed growth, giving the Bank of England more room to hike rates, sparking wild market swings on Friday. After the data, UK gilts plunged, UK equities came under pressure, and GBP briefly spiked over 100 bps against the dollar. Before this, there were doubts about whether the BoE could complete its tightening cycle, but stronger data boosted confidence, fully reflected in FX and rates markets, while stocks largely ignored it.

Falling Correlations

Correlations between cryptos and stock indices have fallen to lows, while internal equity correlations have also dropped to troughs. Diverging impacts of tech/innovation and uncertain global economic and trade trends are key drivers.

Positioning Changes

According to Deutsche Bank, overall equity positioning continued falling over the past 3 weeks, now at 2-month lows. This mainly reflects a sharp drop in subjective investor positioning, reversing over half its rally from late May to mid-July, now close to neutral.

Systematic strategy positioning has been slowly rising since mid-June, with a small decline last week. Key factors influencing equity positioning are macro surprises, earnings season, and rate volatility. Macro expectations have steadily improved with stronger growth and weaker inflation data, limiting further positive surprises.

Q2 earnings season was strong, with companies outperforming expectations. But markets edged down slightly post-earnings, with outperformance muted for beats.

From an industry perspective, positions in technology, communication services, and non-staple consumer goods declined slightly this week, yet remain at historically high levels. Positions in consumer staples rose significantly this week and are now approaching peak levels. Positions in industrials are also on the rise, currently entering the over-allocated range. Energy positions have gradually risen to neutral levels.

From a fund perspective, fund inflows continue to slow down. Emerging markets and Japan attracted strong inflows, while the U.S., Europe, and global funds saw outflows. By sector, technology and healthcare saw sizeable inflows. There were minor inflows into energy, telecommunications, and industrials, whereas there were noticeable redemptions in finance, real estate, and raw materials.

Bond fund inflows continued to slow. Government bonds and investment-grade corporate bonds attracted inflows, while high-yield bonds and emerging market bonds saw outflows. Money market fund inflows remained roughly on par with last week, marking the fourth week of inflows.

In terms of futures positions, net long positions in equity futures increased for two consecutive weeks, mainly due to the increase in net long positions in the S&P 500, offsetting the declines in the NASDAQ 100 and the Russell 2000. Net long positions in emerging markets also declined. On the bond side, the overall net short position was reduced, mainly due to the decrease in the 5-year net short position. In the forex futures realm, the net short position in the U.S. dollar continued to decrease, primarily due to reductions in the net long positions for the euro and pound sterling.

Investor Sentiment:

Goldman Sachs’ investor position sentiment data continued to drop from 0.8 to 0.7.

Bank of America’s Bull-Bear sentiment indicator remained unchanged from the previous week.

AAII Investor Sentiment Survey:
Bearish: 21.32 ➝ 25.50
Neutral: 29.70 ➝ 29.80
Bullish: 48.98 ➝ 44.70

CNN Fear and Greed Index (L): Ranged between 69.46 and 66.14.

Cryptocurrency Market
— — —

Top gainers in market cap top 100 cryptos over the past week:

RUNE price surged nearly 50% over the past week, hitting its highest level since April. This may be due to the release of a new swap about a week ago. As far as I know, Thorchain is the only on-chain tool that allows users to exchange native BTC and native ETH.

Additionally, TON is worth noting. Telegram crypto bots have strong momentum in the market. According to a new report from Binance Research, daily cryptocurrency trading volumes of Telegram bots hit an all-time high of $10 million in July.

Top losers in market cap top 100 cryptos over the past week

On-chain stablecoins (not counting the +$1 billion DAI added to Makerdao’s DS this week) saw net outflows for the 8th consecutive week (-$246 million). This was notably lower than the -$973 million outflows the previous week:

Exchange-based stablecoins saw net outflows for the 2nd consecutive week (-$12 million). This was substantially lower than the -$476 million outflows the previous week:

Market Commentary Highlights
— — —

Wudaokou Macro Note:

Why We Thirst for AI, Room Temperature Superconductors — The Essence is Innovation Cycle vs. Debt Cycle Race to the Limits

In recent years, global thirst for technological breakthroughs like the metaverse and artificial intelligence has reached fever pitch. The fundamental reason is we are nearing the end of the computer/internet innovation cycle, urgently needing to kick off a new cycle, while facing the critical moment of a prolonged debt cycle crisis.

This computer/internet innovation cycle nears its end.

Global debt/GDP exceeds 335%. The world desperately seeks sprouts of the next innovation cycle. The next decade may be the most critical period.

A new innovation cycle can bring firms supersized profit margins, residents supersized income growth, and investors supersized returns. Meanwhile, the debt cycle essentially entails profit margins, income growth, investment returns racing the cost of capital.

Thus, in early and mid-cycle innovation, all sectors enjoy outsized returns exceeding capital costs, enabling virtuous debt expansion fueling accelerated innovation. However, late-cycle, the pie stops growing. Declining investment returns, diminishing marginal capital productivity, slowing income expectations, coupled with mounting debt, drive asset bubbles and inequality as capital chases returns, culminating in debt crises.

[“Bond King” Gross Says Treasuries Should Adjust into Place]

Pimco co-founder Bill Gross said it’s wrong to go long stocks and bonds now, as both markets are “overvalued.” He sees fair value for 10-year yields around 4.5%, versus current ~4.16%. Gross said U.S. inflation may stick persistently around 3%. Historically, 10-year yields exceed Fed policy rates by ~135 bps. Thus, even if the Fed cuts rates to ~3%, current 10-year yields look too low by history.

The End.

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