Global Capital Market Daily Recap & Outlook-20230517

Market Overview: Stocks were slightly down, short-term bonds rose while long-term bonds fell, cryptocurrencies mixed, gold plunged, crude oil was slightly down, US dollar was slightly up.

SPX -0.64% at 4,109
NDX +0.09% at 13,426
DJIA -1.01% at 33,012
RUT -1.44% at 1,736.

1-month US Treasury yield down 17 basis points to 5.55%
The 3-month US Treasury yield down 1 basis point to 5.22%
2-year US Treasury yield up 6 basis points to 4.08%
10-year US Treasury yield up 3 basis points to 3.54%

Sector Performance:

Most sectors declined. Big tech stocks such as Meta, Microsoft, Nvidia, AMD, and Amazon rose, while AI small-cap concept stocks fell across the board. Semiconductor stocks rose first and then fell, and the banking index plummeted.

Real Estate -2.61%, Energy -2.54%, Utilities -2.3%, Materials -1.64%, Industrials -1.36%, Finance -0.97%, Consumer Staples -0.88%, Health -0.82%, Consumer Discretionary -0.25%, Tech +0.16%, Communication Services +0.59%.

Main Drivers:

On Tuesday, both parties thought they made some progress in the debt ceiling negotiations, but no conclusion was reached and “differences remain large”, causing widespread pressure in the risk asset market. The good news is that Republican McCarthy hopes to reach an agreement before the weekend, and Biden decided to return to the United States for further negotiations this Sunday.

McCarthy said after the meeting: “This does not mean that we will reach an agreement, but now there is a better overall process.”

Key Event — Debt Negotiations

On Tuesday afternoon, Biden hosted the second meeting on the debt ceiling with congressional leaders at the White House, with all four top congressional leaders in attendance. Biden will depart for Japan on Wednesday the 17th and decided to return to the United States on Sunday the 21st, canceling his planned visits to Papua New Guinea and Australia.

Biden instructed staff to continue meeting daily on pending issues. He said he wanted to contact congressional leaders by phone later this week and meet with them after he returns from abroad.

The White House statement today wrote: Biden instructed staff to continue meeting daily on pending issues. He said he wanted to contact congressional leaders by phone later this week and meet with them after he returns from abroad. Biden optimistically believes that if both parties negotiate in good faith and realize that neither side will get everything it wants, there is a path to a responsible bipartisan budget agreement.

Senate Majority Leader Schumer: The debt meeting was good and productive, and he added that they all agreed that default is a terrible choice.

House Speaker McCarthy stated: They are prepared for further discussions in the debt negotiations, and Biden agreed to appoint several government officials to negotiate directly with his team. There is a lot of work to be done in a short time, and the distance between them is still far, but he added that it is possible to reach an agreement before this weekend, and it is not difficult to reach an agreement. However, later McCarthy stated that he is not optimistic about reaching an agreement this weekend.

US Treasury Secretary Yellen warned: There are only a few days left until early June, the debt ceiling deadlock has affected investors and increased the debt burden of American taxpayers; we have already seen the impact of waiting until the last moment to raise the debt ceiling: investors are less willing to hold government debt that will mature in early June.

Large Corporations: More than 140 leaders of the largest US companies including Goldman Sachs, Pfizer and KKR have urged the White House and congressional leaders to raise the debt ceiling to avoid a “potentially devastating scenario.”

Bloomberg interest rate strategist Ira Jersey: He agrees with Yellen’s assessment that “debt ceiling X day might be as early as June 1st”, but his calculations show that the date could be a few days later, between June 5th and 8th.

Comments from Barclays’ Joseph Abate align closely with BBG’s conclusions, believing that the Treasury Department may exhaust its cash between June 4 and June 12. Deutsche Bank believes that the most likely X-date is early June, with a possibility at the end of July. Jay Barry from JPMorgan Chase analyzed that the Treasury Department will exhaust all available resources before June 7, slightly earlier than their previous estimate of June 9.

The interest rate market is currently relatively optimistic, with the yield on 1-month Treasury bonds falling to 5.55% today, down from 5.7% yesterday. However, updated data today showed that the Treasury Department’s cash balance plummeted by $52 billion, from $140 billion to just $87 billion, bringing the number back to pre-tax revenue season levels.

Possible negotiation outcomes:

A compromise agreement that reduces government spending is passed. This would be positive for stocks and cryptocurrencies.

Seek a short-term pause, pushing potential disputes back by dozens of days or several months. This would be positive for stocks and cryptocurrencies.

If an agreement cannot be reached before the X date
(1) The risk of a sovereign credit rating turning negative would increase significantly, even if an actual downgrade might not happen. CDS prices would soar, with peak pricing at 8% in 2011, even though a CDS would need an actual missed payment to trigger.
(2) Prices of ultra-short-term bonds would fall, but long-term bond yields might rise.
(3) The dollar would be hit hard. The euro and Swiss franc, gold, and cryptocurrencies might benefit, and global stock markets might plummet significantly.

Analysis from the White House Council of Economic Advisers predicts that even under the assumption of avoiding default, 200,000 jobs would disappear due to the government having to cut spending, reducing annual GDP by 0.3 percentage points. A brief default would cost the U.S. economy 500,000 jobs. A long-term default lasting several weeks would reduce GDP by 6.1% and lead to the loss of tens of thousands of businesses and about 8.3 million jobs. The stock market is expected to lose half its value, and the unemployment rate would skyrocket by 5 percentage points.

Analysis from Moody’s also shows that if the debt ceiling deadlock lasts for six weeks, the U.S. would lose more than 7 million jobs, the unemployment rate would surge to over 8%, the economy would slide by more than 4%, and household wealth would evaporate by about $12 trillion.

Data:

Overall economic data is mixed, with more falling short of expectations.

China

Chinese data shows the rebound after reopening is significantly slower than expected, with Chinese stocks and China concept stocks plummeting.

April retail sales increased by 18.4% year-on-year, higher than 10.6% in March, but lower than the widely expected 21%. Industrial output grew by 5.6% year-on-year in April, higher than the 3.9% in March, but lower than the expected 10.9%. The urban investment rate fell to 4.7% year-on-year, lower than the expected 5.5%.

Comment from Capital Economics: China’s recovery still has some support, but it may disappear in the second half of the year as fiscal support is being lifted, the rebound in credit growth is stagnating, and the real estate market seems to be struggling to find momentum. Moreover, global economic challenges may hinder the resurgence of China’s exports.

United States

Although U.S. retail sales data fell short of expectations, it turned positive for the first time since January, and retail sales excluding autos rose by 0.4% month-on-month, in line with market expectations. In addition, U.S. industrial production unexpectedly increased in April, which partially supported the positive sentiment in the market today.

U.S. retail sales rose 0.4% month-on-month in April, weaker than the expected increase of 0.8%, and the month-on-month decline in March was revised to a narrower 0.7% from 1%.

Data shows that U.S. consumers are shifting more discretionary spending to the service sector, and there are some signs that consumers are overspending. Sales at furniture retailers, sports equipment and other hobby stores, and electronics and appliance stores fell. The only service category — restaurants and bars — saw sales increase by 0.6%.

Looking forward, analysts predict that due to the lagging effect of monetary policy, tightening credit conditions, slowing growth, and the bottoming out of excess savings brought about by the COVID fiscal stimulus, the economy will slow down and consumer spending may decrease before the end of the year.

The NAHB Housing Market Index rose for the fifth consecutive month to a neutral 50 in May (previous value 45.0) — a 10-month high, and higher than the expected 45.0, suggesting some upside risk to housing starts in the coming months according to Oxford Economics.

Other Regions

Germany’s ZEW investor sentiment index for May unexpectedly fell to -10.7, and the Eurozone’s ZEW economic sentiment index also fell to -9.4%, indicating that the already unfavorable economic situation will deteriorate further in the next six months.

Federal Reserve officials once again gave a mixed dove-hawk speech

Logan (voter) dovish speech, pointed out that when there is uncertainty, you may need to slow down, claiming that gradual policy adjustments can help alleviate financial stability risks. Logan also said that the speed of increase and the length of time at peak rates will affect their impact on stability. She said policy needs to mitigate stability risks and also offset the impact of bank pressures on monetary policy.

Mester (non-voter) hawkish speech, she hopes the policy rate will reach a point where it may increase or decrease, but she believes we have not yet reached that level because of how stubborn inflation is. Mester said she does not want to express it in terms of a pause, but rather in terms of maintaining, she believes they have not yet reached that hold rate. From the data, this indicates that U.S. interest rates are not at a sufficiently strict level.

WILLIAMS (voter) neutral speech: The economy is facing unacceptable high inflation,

but the economy is starting to return to a more normal pattern, with demand and supply balancing out. He pointed out that inflation is gradually developing in the right direction, but it will take some time for the Fed’s decisions to fully impact the economy.

Goolsbee (voter) neutral speech: He has not made any decisions for the rate meeting in June, promising rate changes would be a mistake when more data is to come. He added that some bubbles have been seen in the labor market, but it’s unclear whether we have imposed enough restrictions on the economy. It’s too early to talk about rate cuts now.

Barr (voter) dovish speech: Risks associated with the debt ceiling have increased. Caution should be exercised when considering capital changes, but whether changes in the value of Available-for-Sale (AFS) securities in capital requirements should be considered is being studied. The Fed considered expected credit tightening when formulating monetary policy.

Market Research

The latest BofA Fund Manager Survey (FMS) — conducted between May 5th and 11th with 161 participants managing $666 billion in assets — shows that institutional investor sentiment continues to deteriorate, even though the S&P index has not changed much since the April survey:

Institutional cash allocation ratios are rising due to fears of an imminent economic recession and credit crunch:

But somewhat paradoxically, two-thirds of investors believe that a soft landing is the most likely scenario for global economic growth:

Another paradox is that exposure to stocks also climbed to its highest level of the year, mainly driven by a surge in allocation to tech stocks, which soared 14% month-on-month to a net 16% increase, the highest allocation since December 2021:

Most crowded trades: Firstly, long big tech stocks, followed by short US banks, short the dollar, long European stocks, long Treasury bonds and long Chinese stocks.

Bloomberg strategist Simon White: Buy in May, don’t shy away because the Fed is easing the brakes

He believes the Fed is close to completing its rate hikes, and the U.S. stock market outlook is optimistic, especially compared to other developed markets. Growth is a lagging indicator, which often falls before the central bank stops raising rates, and then continues to decline. But because other developed market central banks are lagging the Fed, they continue to tighten policy, causing developed market GDP to underperform U.S. GDP in the quarters following the Fed’s last rate hike. Since the stock market is forward-looking, U.S. stocks will continue to outperform other developed countries next year.

Crypto News

【Coinbase suspends Ethereum staking rewards payments, expects to resume within three days】

The largest cryptocurrency exchange in the United States, Coinbase, announced on Tuesday that it is temporarily suspending payments of ETH staking rewards to address a minor technical issue. The exchange stated that ETH staking will not be affected, rewards are still being earned and will be paid, and they expect to resolve this issue within the next 72 hours. Coinbase stated that the suspension of ETH staking reward payments “has nothing to do with any regulatory or legal issues”. The exchange did not disclose the nature of the technical issue, nor why it would take 48–72 hours to resolve it. A spokesperson said: “Once this issue is resolved, we will share updates.”

【SEC filing: Jump Trading makes $1.28 billion profit market making for UST】

A document released by the SEC yesterday shows that cryptocurrency trading company Jump Trading provided support for the failed TerraUSD (UST) a year before Terra’s collapse. A contract dated November 2019 discussed a loan of 30 million LUNA provided by Terraform Labs and Jump Trading’s subsidiary Tai Mo Shan Limited over three years. Another document released by the SEC is an email sent to investors by Kwon on January 13, 2020, in which he mentioned an “important arrangement” with Jump Trading. Kwon asked for confidentiality regarding this information. The SEC said the arrangement was designed to generate $1.28 billion in profits for Jump Trading.

According to the SEC, to support the stablecoin UST, Terraform and its CEO Do Kwon allowed Jump Trading to buy LUNA tokens at prices of $0.3, $0.4, and $0.5. The SEC emphasized that Jump Trading was able to purchase these tokens at a price of $0.4, while the trading price on the open market was $90. When UST first decoupled in May 2021, Terraform Labs boasted that its recovery of the peg was evidence of the effectiveness of its algorithm. However, according to the SEC, UST’s return to stability was entirely due to Jump Trading’s intervention.

【SEC Chairman: Cryptocurrency market generally non-compliant, business models often based on customer funds and have conflicts】

SEC Chairman Gary Gensler said yesterday that the cryptocurrency market is generally non-compliant, and is based on a false narrative of decentralization. Their business models are often built on non-compliance, and often also based on customer funds, mixing them together, and there are conflicts.

Gensler said that the SEC would never allow the NYSE to operate in the way that cryptocurrency platforms do, where the exchange might trade its own books on its own platform, act as a market maker or hedge fund, or borrow its own tokens, and not disclose its actions. He said, “What we require in the token rules is just registration and full, fair, and truthful disclosure, of course, and registration of intermediaries. Deal with conflicts and ensure they have time-tested rules to prevent fraud and manipulation.”

Gensler also pointed out that three of the four most recent bank failures in the United States held large amounts of cryptocurrency accounts. The more traditional finance and the world of cryptocurrency are intertwined, the more likely it is to trigger a disaster in the financial markets.

【Celsius has initiated billions of dollars of Ethereum withdrawal requests】

Just after Lido Finance enabled withdrawal functionality yesterday, the bankrupt lending company Celsius has now initiated withdrawal requests worth about $800 million, 428,000 Ethereum. But theoretically, Celsius will not sell these ETH, perhaps re-staking them to remove middlemen. Celsius needs court approval to sell these ETH, and it currently plans to allocate part of the digital currency and part of

the cash to creditors, so it may not end up selling all.

【Ethereum Layer2 Optimism is scheduled to undergo a Bedrock hard fork on June 6】

Optimism is scheduled to undergo a Bedrock hard fork at 16:00 UTC on June 6. According to the Optimism team, the upgrade is expected to take two to four hours, during which time deposits and withdrawals will not be possible. The new upgrade will provide Optimism with a “new level of modularity, simplicity, and Ethereum equivalence, offering unprecedented performance and features.” This upgrade is described as the “biggest upgrade released on the OP mainnet” and a “complete rewrite”. The Optimism community approved the upgrade in April with 99.87% of the vote.

【Under the MEME coin wave, which NFT KOLs are making profits?】

Blockchain data platform Lookonchain took stock of the investment portfolios and profit and loss situations of 8 NFT KOLs including VincentVanDough and Huang Licheng (Machi Big Brother) on MEME coins, of which 4 people made profits and the remaining 4 people suffered minor losses.

@Vince_Van_Dough bought 90 billion PEPE for 90 ETH (about $167,000) at $0.000001736, and sold them all at $0.000001935, making a profit of 6 ETH (about $10,900).

@ohhshiny bought 7007 billion PEPE for 326 ETH (about $610,000) at $0.000000870, and sold 4799 billion of them at $0.000001991, getting 496 ETH (about $956,000). He currently holds 2208 billion PEPE (about $385,000), making a floating profit of $731,000.

@machibigbrother has been buying 2700 billion PEPE for 258 ETH (about $471,000) at $0.000001745 since May 7. The current total price is $469,000, and it is in a loss state.

@Zeneca bought 60 million TURBO for 16.5 ETH (about $31,000) at $0.0005143, and the current total price is $44,000, making a floating profit of $13,000.

@fvckrender traded 4 MEME coins PEPE, GENSLR, KEK, and WOJAK, making a total profit of $546,000.

@ColeThereum traded 18 MEME coins including PEPE, CAPY, TURBO, etc., with a total loss of $3,365. Among them, 9 MEME coins have not been sold yet, and the prices have fallen to zero.

@dingalingts spent about $50,000 to buy FOUR, THEND, TURBO, and COPE. Currently only TURBO is in a profitable state.

@boredGenius traded 7 MEME coins including PEPE, RIBBIT, JEFF, etc., losing $7,199.

The end.

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