Duet Protocol Global Market Recap and Outlook — 20230911
Signs of a cooling labor market have dashed last week’s optimism about potential actions by the Federal Reserve. The U.S. 10-year Treasury yield hovered near 4.26%, and the stock market declined. Apple’s market capitalization evaporated by about $200 billion in two days due to China restricting its government employees from using iPhones. Additionally, concerns about protectionism weighed on chip suppliers’ stock prices on Friday.
Tech stocks were in the spotlight. If Mate60pro has indeed fully integrated its supply chain as some reports suggest, it will have a significant impact on the market. Sales of the Mate60 series could lead to production cuts by Qualcomm and TSMC, not to mention many other supporting enterprises.
Apple’s issues were undoubtedly the biggest risk faced by the U.S. stock market last week, posing a huge challenge to the U.S. market, which is dependent on a handful of tech stocks.
Beyond Apple, Qualcomm Inc., the world’s largest smartphone chip supplier, experienced its most significant stock price decline in a month (-8.30%). TSMC also fell by 4.75%. Additionally, unresolved issues include tensions with the U.S. Auto Workers Union (UAW) and the looming government shutdown.
However, Intel bucked the trend, rising by 6.3%. The market now believes that the more intense the chip battle between China and the U.S., the more advantageous it is for Intel. Escalating geopolitical tensions in Asia might compel more companies to consider Intel as a domestic alternative to TSMC, especially since Intel has been aggressively advancing its chip manufacturing plants in recent years, standing as the only U.S. chip manufacturer that can compete with TSMC in terms of scale and capability. Intel CEO Pat Gelsinger announced in late August that the company had received a substantial advance payment for its wafer fab ecosystem, specifically for its advanced 1.8nm process factory set to go online by the end of 2024. The chips produced in this factory could potentially match or even surpass TSMC.
In sector movements, energy was the only industry that closed higher, while industrials and raw materials suffered the most significant declines.
U.S. 10-year and 30-year Treasury yields were flat, while the 2-year yield rose from 4.88% to 4.99%. BofA’s Cabana believes that, given the recent robust U.S. data, the Fed hasn’t yet raised rates to a level that could curb an overheating economy. He predicts the 10-year yield could rise, possibly reaching a peak of 4.75%. Companies that relied on cheap funds post-pandemic might refinance at higher rates in the next one or two years, complicating matters. In Europe, hawkish comments from ECB officials led to increased bets on further rate hikes this week, causing German bond yields to rise significantly from 2.53% to 2.61%.
The U.S. yield curve inverted further last week, mainly due to a more substantial rise in short-term rates. A robust bull market can only emerge once this inversion disappears, which would require long rates to rise and short rates to drop. This would reflect 1) economic growth driving corporate profits and 2) the end of the Fed’s rate hike cycle.
Despite the sharp rise in U.S. bond yields putting pressure on U.S. stocks, the consensus is that the U.S. is on track for a “soft landing.” For instance, Goldman Sachs recently adjusted its recession probability over the next 12 months from 25% to 15%.
Betting long on the dollar remained the unwavering market sentiment, depressing the prices of copper, precious metals, and cryptocurrencies. With the Yuan dropping to its lowest level since 2007, concerns mount over China’s slowing economy and its ripple effect on industrial metal demand.
Despite the drop in gold prices, data released by the PBOC last week showed an addition of about 29 tons in reserves for August. As China and other countries diversify their currencies away from the U.S. dollar, this marked the 10th consecutive month of gold purchases by the Chinese central bank.
Oil prices surged after Saudi Arabia announced an extension of its 1 million barrels per day production cut until the end of December, with WTI crude nearing $88 last week, a high not seen since last October.
In the near term, two significant risks loom over the U.S. market. Firstly, the U.S. Auto Workers Union (UAW) has started voting. If no new labor agreement is reached by next Thursday, a massive strike could erupt. Currently, only GM has made a significant proposal, which UAW has dismissed as insulting, hinting at unfruitful negotiations and a high likelihood of a strike. Secondly, the temporary bill keeping the government operational will expire on September 30th, increasing the risk of a government shutdown. However, GS’s Philips believes the actual chances of a shutdown are low, and if it occurs, the market impact would be minimal. But the UAW issue is pressing. If 150,000 workers strike, it’s estimated that economic losses could reach up to $5.6 billion in just ten days.
Furthermore, in the coming weeks, meetings by the European Central Bank, the Federal Reserve, and the Bank of England are expected, and market volatility is likely to intensify.
Focus: US Dollar Index Hits New Highs
The recent spotlight is on the US Dollar Index (DXY), which has refreshed its highest level since March and recorded an 8-week consecutive rise — the longest since 2005. This is despite the Federal Reserve pausing its rate hikes. Technical analysts believe such an overbought condition might not be sustainable and a correction is imminent.
Tim from Deutsche Bank noted that the strength of the USD shows a strong negative correlation with global stock indices, as high as -96%. Typically, the USD tends to strengthen when non-US stock markets perform poorly.
Key Economic Events:
● US consumer credit growth for July was below expectations. The actual increase was $104 billion against an expected $160 billion. Credit card spending increased by $96 billion, while other consumer loans added $8 billion. The June consumer credit was revised down from an initial $174 billion to $140 billion.
● Japanese wages saw a significant drop in July. Although nominal wages continued to grow year-on-year, real wages, after adjusting for inflation, decreased from -1.6% in June to -2.5% in July — a decline for the 16th consecutive month. Nominal wage growth slowed to 1.3% in July, less than the 2.3% in June and a near 30-year high of 2.9% in May. The Bank of Japan has emphasized that sustainable wage growth is a prerequisite for deciding whether and how to end ultra-loose monetary stimulus, making these figures unfavorable for the Japanese yen.
● Japan’s Q2 GDP was sharply revised down from an initial 6% to 4.8%. This was mainly due to significant downward revisions in capital expenditures, which contributed 0.7 percentage points. Other areas, such as consumption and exports, also saw downward revisions, contributing 0.3 and 0.2 percentage points, respectively.
● With the yen’s persistent depreciation trend unchanged, Kanda, the person in charge of Japan’s foreign exchange affairs, warned that the yen’s exchange rate fluctuations should reflect fundamentals. If the yen continues to weaken, the government is ready to intervene. USDJPY experienced significant volatility, dropping to 146.8 at one point, but the dollar’s strength and the limited effect of verbal intervention meant it rallied to 147.8 by Friday.
● In an interview, Tohru Sasaki, head of Japan market research at JPMorgan, said that the USD/JPY exchange rate might fall to 152 this year and 155 in 2024. He believes that even if the Bank of Japan potentially abandons its yield curve control policy this year, it doesn’t bring much hope in the long term. Sasaki suggests that the Bank of Japan will still find it difficult to raise policy rates or reduce inflation, thereby weakening the yen’s exchange rate. Notably, Sasaki was the most accurate predictor of the USD/JPY exchange rate in Bloomberg’s survey last quarter. His forecast is higher than the median analyst prediction, which expects the yen to be at 140 in the fourth quarter and 129 next year.
● Several German economic research institutes, including IWH, IFO, and IFW, believe that the country’s GDP growth rate will decline to varying extents this year. Q3 is expected to decrease between 0.2–0.5%.
● US Secretary of State Blinken made a surprise visit to Kyiv, pledging $1 billion in aid. With the EU planning to double artillery production, external observers speculate that the tense situation between Russia and Ukraine might escalate further.
● On the Fed: Goolsbee believes discussions about the level to which interest rates should rise will soon be a thing of the past. The focus in the future should be on maintaining higher rates. Currently, the supply-demand relationship is gradually balancing, and inflationary factors are decreasing, though overall levels remain elevated. Therefore, the trend of declining inflation needs to continue until the economy is confidently on a robust track. Williams believes the current monetary policy direction is correct but emphasizes more data-driven decisions. We need to continually observe data, analyze various situations, and continuously self-examine whether monetary policy is too loose. Meanwhile, Bostic welcomes the current price decline, but the current prices are still double the policy target. Therefore, there’s much work left. We are now at a higher interest rate level, so the focus should be on ensuring that monetary policy remains effective.
● PMI data for the Eurozone in August saw a significant decline. Its final value was 0.3 points lower than the initial figure, a rare occurrence historically. Almost all countries in the Eurozone saw a decline in their PMI, with Germany’s decline being the most noticeable. Even some peripheral countries, especially Spain, which attracted many wealthy Western European tourists this summer and whose economy was performing quite well, saw its PMI suddenly drop by 3.1 points in August. The main decline was in the services sector, which also dragged down the entire Eurozone’s PMI. With the end of summer, Europe’s economic outlook seems less optimistic. Coupled with concerns about future energy demand, this sentiment has been exacerbated, leading to a contraction in energy-intensive industries, which in turn has a ripple effect on other sectors.
● Beijing and Shanghai have now relaxed housing loan policies. At the same time, all first-tier cities have also implemented this policy. Sunac China has been added to the Shanghai-Hong Kong Stock Connect, becoming part of the Hong Kong Stock Connect. It is hoped that this will alleviate the real estate market’s struggles and stabilize the sector. Sunac’s share price rose by 2.8%, but the Hong Kong Hang Seng Index fell by 0.35% overall.
● The Caixin China Services PMI for August stood at 51.8, falling to an eight-month low, indicating a weakening expansion momentum in the Chinese service sector. This is mainly due to a deceleration in the growth rate of new business, especially overseas new orders. However, it still expanded for the eighth consecutive month. The Caixin China Composite PMI for August was 51.7, down from the previous 51.9, the lowest since January this year but still marking the eighth consecutive month of expansion. The data reveals a slight improvement in the manufacturing sentiment while the growth momentum in the service sector slows, suggesting significant economic downward pressure.
● Birmingham in the UK recently declared bankruptcy. This is primarily attributed to the contraction of the local manufacturing sector, with many businesses relocating. Coupled with the global economic downturn following the pandemic, Birmingham’s revenues have faced enormous strain. Additional expenses due to the civil rights movements costing billions of pounds exacerbated the crisis. Analysts believe Birmingham is not an isolated case, as at least 26 local governments in the UK are at risk of bankruptcy within the next two years.
● A paper from the Federal Reserve Bank of Chicago last week found that the current policy measures should be adequate to bring inflation close to the Federal Reserve’s 2% target by mid-2024 without triggering an economic recession. In other words, the Fed’s interest rate hikes have mostly taken effect across the broader economy. However, the impact on the labour market will be slower. While many policy measures have started to take effect, half of the overall impact on working hours has yet to manifest.
● Seasonal performances suggest market participants need to be defensive in September.
● While the US stock and economic surprise indices are highly correlated, the concern lies in the market’s significantly lower economic growth expectations for the third and fourth quarters, suggesting limited space for positive news in the future.
Funds and Positions:
The system strategy position significantly increased (from 61 to 71 percentile) after a slight drop over two weeks. In contrast, subjective investor positions resumed their decline and are now very close to neutral (dropping from 53 to 49 percentile).
Tech stock positions continue to decline but still remain in the overweight range.
Equity funds witnessed a net inflow of $22 billion last week. However, inflows from global funds ($41 billion) were offset by outflows from the US (-$4 billion) and emerging markets (-$5 billion). Japan experienced outflows (-$6 billion) after five consecutive weeks of inflows, while Europe’s outflows (-$1 billion) slowed. Money market funds had robust inflows ($684 billion), the highest in two months, mainly sourced from the US ($520 billion) and Europe ($104 billion).
Technology experienced outflows of $1.7 billion after ten weeks of massive inflows.
Tech (-$1.7 billion) saw outflows after ten weeks of significant inflows. Financial stocks (-$0.7 billion) recorded their 6th consecutive week of outflows. Healthcare (-$0.4 billion), Real Estate (-$0.3 billion), Telecommunications (-$0.3 billion), Basic Materials (-$0.2 billion), and Non-essentials (-$0.1 billion) also witnessed outflows. Energy ($0.3 billion) and Utilities ($0.1 billion) recorded moderate inflows.
Regarding the futures market, last week, with the reduction in net long positions for the S&P 500 and net short positions for the Russell 2000 exceeding the decrease in net long positions for the NASDAQ 100, the overall net long positions in U.S. stocks saw a slight increase.
The institutional position index calculated by Goldman Sachs dropped from 0.9 to 0.7, but it remains in a positive zone.
The AAII Investor Survey shows a return of bullish sentiment, with the bullish ratio jumping from 33% to 42.2%.
The CNN Fear and Greed Index dropped to 51.3, nearing a neutral zone.
The best performer among the top 100 cryptocurrencies on CoinMarketCap this week was Stella, which increased by 13%. The worst performers were Gala and PEPE, both dropping by 13%.
A slight outflow of $86 million from centralized exchanges.
Significant on-chain outflows of $880 million, marking the largest net outflow in three weeks.
USDT and DAI increased by $100 million and $62 million respectively, while BUSD, USDC, and TUSD each had outflows exceeding $250 million.
A San Francisco-based tech company, Story Protocol, aims to utilize blockchain to track the origins of original materials and incentivize communities. The company raised $54 million from investors led by Andreessen Horowitz (a16z). The open protocol intends to empower media creators — writers, graphic artists, and video producers — to track how their work spreads online. It also aims to reward those who repurpose or modify the original content into new content.
The Financial Accounting Standards Board (FASB) essentially approved a rule that mandates public and private companies holding cryptocurrency on their balance sheets to use fair value accounting when reporting holdings. This is a favorable accounting treatment for companies holding cryptocurrency since, under the current mandate, they must mark their crypto holdings at the lowest value reached within a quarter. After the news, Bitcoin surged by 2%, but it quickly retreated.
ARK Invest, led by Cathie Wood, in collaboration with 21Shares, filed to introduce the world’s first spot Ethereum ETF to the market. However, the secondary market price showed no reaction.
Following the recent resignations of the general legal counsel, chief strategy officer, and the director of investigations over the past few months, regional manager Gleb Kostarev and Russia business director Vladimir Smerkis have also resigned. Binance’s head of global fiat operations, Helen Hai, has stepped down. Hai has served in senior roles at Binance since 2018, leading initiatives like the Binance Charity Foundation and Binance NFT operations. Additionally, reports suggest Binance has made staff cuts and reduced benefits.
The U.S. Commodity Futures Trading Commission (CFTC) took enforcement actions against three decentralized finance firms, suggesting that more actions might follow. The CFTC accused three decentralized exchanges of allowing U.S. customers to trade digital asset derivatives without registering, a violation of the agency’s regulations. They demanded Opyn, ZeroEx, and Deridex to pay civil penalties of $250,000, $200,000, and $100,000 respectively, and to cease violations of the Commodity Exchange Act (CEA) and CFTC regulations.
Focus This Week
Before the policy meeting from September 19th-20th, Federal Reserve officials will be in a quiet period. However, on Wednesday, the U.S. government will release August’s Consumer Price Index (CPI), followed by the Producer Price Index (PPI) the next day. The overall CPI is expected to show a 0.6% increase from the previous month, marking the largest surge since June 2022’s peak inflation. These figures might rattle the bond market, as investors brace for a potentially extended period of tighter monetary policy.
Outside of price data, retail sales figures are anticipated to demonstrate consumer demand softening in August after strong growth in recent months. Other U.S. economic data to watch includes industrial production for August and the consumer confidence index for September.
European Central Bank officials will decide on Thursday whether to continue raising interest rates by 25 basis points (for the 10th consecutive time). The market leans towards a pause, but officials may convey hawkish signals. The challenge for the ECB now is deciding whether policy is lagging or if tighter measures are required, given evidence of a weakening Eurozone economy but with inflation persisting above 5%.
Data released on Friday about China’s industrial output and retail sales for August is expected to show a slight increase, potentially signaling that the world’s second-largest economy might have moved past its worst phase.
In the cryptocurrency space, the focus is on the September 13th hearing on FTX’s $3 billion asset liquidation. Even if the subsequent verdict approves the liquidation, it’s unlikely to begin immediately.