SignalPlus Macro Analysis Special Edition: Round 2

Last Friday's "Quadruple Witching" ended smoothly, with the SPX index remaining near historical highs, and Nvidia took a brief pause after becoming the world's most valuable company.

As midsummer approaches, the stock market continues to climb the wall of worry, and market attention will gradually shift towards politics. The U.S. presidential election debate is set to take place on Thursday, and after the court ruling, market odds have significantly favored former President Trump. However, both candidates are likely to continue implementing unsustainable U.S. fiscal expansion policies. The Congressional Budget Office (CBO) has raised the 2024 deficit to over 7% of GDP and expects it to remain at this level for the foreseeable future.

The French elections will begin on June 29/30, with the second round taking place on July 6/7. Le Pen's National Rally remains firmly in the lead, and the far-right coalition is expected to gain an absolute majority. The market has already cast a vote of no confidence in French assets, with the spread of French government bonds relative to German bonds widening to its highest level since 2012.

At the same time, tensions related to foreign exchange are also beginning to escalate. With China's economic growth continuing to languish, the offshore yuan exchange rate has fallen to its lowest level this year, and risk reversals indicate that the market is preparing for further weakness.

The yen is also under pressure, with the dollar nearing 160 yen, and the market expects the Japanese Ministry of Finance to have only about $200-300 billion left for intervention. Meanwhile, Bank of Japan officials remain hesitant on interest rate hikes, and the market anticipates that the dollar will move towards 165 yen before the next round of intervention by the Bank of Japan.

Although the Nikkei index still hovers near cyclical highs, cracks are beginning to appear in other areas. Japan's largest agricultural bank, Norinchukin ("Nochu"), has become the latest victim of the Federal Reserve's prolonged rate hikes. With a balance sheet size of $357 billion (56 trillion yen), it has been dubbed Wall Street's "CLO whale." Due to massive CLO-related losses, this fiscal year's losses could exceed $9.5 billion (1.5 trillion yen), three times the previous estimate.

In terms of the economy, we are seeing more signs that the U.S. economy is finally slowing down, with unexpected indicators of economic growth dropping to their lowest levels since 2022. Other regions of the world are also falling into negative territory, similar to the U.S.

Additionally, American consumers are finally showing some early signs of surrender, as pandemic-era savings have been completely exhausted, and credit card delinquency rates have risen to their highest levels since 2012. In the job market, although overall growth data looks good, the data shows that the number of employees holding multiple "full-time" jobs has reached a new high, which can be interpreted as either excessive labor demand or individuals needing multiple incomes to sustain rising living costs; we lean towards the latter.

High living costs, a slowing job market, and expensive mortgage rates are leading to a year-on-year decline in U.S. housing prices. The previous price increases were mainly due to sellers being unable to transition low-rate mortgages to new homes, resulting in insufficient supply. Will the U.S. residential real estate market follow the trend of other regions globally and become the next area of deterioration?

Last Friday, the stock market closed with major indices still performing strongly. Brokerage reports indicate that due to the resilience of major indices, short covering continued throughout the week, and Friday's PCE will be the most important data release of the week. The narrow market breadth and shrinking leading groups remain concerns for the stock market; however, so far, this has not translated into substantial weakness, and short sellers continue to be eliminated, with interest in shorting SPX, Nasdaq, and the "Magnificent-7" at multi-year lows.

The only asset class that faced setbacks last week was cryptocurrency, with major coins (BTC/ETH) falling 3%, and altcoins experiencing significant sell-offs, with many well-known tokens dropping 10-15% within a week, down nearly 70% from recent highs. The substantial net outflow of funds from BTC ETFs has clearly not helped.

One difference in this cycle is that a rebound in major coins is unlikely to lead to a positive spillover effect for altcoins/NFTs. However, last week, native cryptocurrency users were particularly hard hit due to various "airdrop conspiracies" involving well-known DeFi projects. Many native users have been working hard on airdrops over the past year as a new "alpha," but the actual rewards from projects like zkSync, Layer Zero, and Eigenlayer have fallen significantly short of expectations, shaking user confidence and even sparking discussions about the "era" of airdrops being over. With NFT, memecoin, and Ethereum L1 transaction fees continuously declining, will the native ecosystem undergo another significant transformation? It is indeed an interesting year.