LD Capital Weekly Report The real war has not yet begun

LD Capital Weekly Report The True Battle Has Yet to Commence

In the backdrop of global stock market decline, cryptocurrencies have been able to rise against the trend. This breaks the previous positive correlation between the two and will help cryptocurrency regain confidence and establish an independent market.

Original Source: LD Capital

Influenced by war hedging sentiment and Q3 earnings reports falling short of expectations, government bond yields reached new highs, the Fed sounded more hawkish, and economic data (retail and initial jobless claims) were better than expected. After a slight increase in the previous two weeks, US stock indexes fell sharply last week, with NAS100 dropping over 3% and SP500 dropping 2.5%. The closing prices were below the 200-day moving average, with big tech companies leading the decline. In addition, stock markets in Europe and Asia also generally declined, with Germany 30 dropping 2.4%, China50 dropping 4.3% (despite China’s GDP surpassing expectations with a growth of 4.9% and a deflator of -1.4%), and JPN225 dropping 2.7%. Small-cap stocks in the US and the Chinese stock market have fallen below this year’s lows.

Last week, gold prices rose nearly 3%, reaching the highest level in five months. In the backdrop of macroeconomic headwinds, cryptocurrencies led by BTC surged. This is consistent with the view we proposed in last week’s report. In an environment of increasing uncertainty, the demand for diversified allocation will become more prominent, benefitting alternative assets such as gold and digital currencies, even though the cryptocurrency market started a week later than gold.

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In the backdrop of global stock market decline, cryptocurrencies have been able to rise against the trend. This breaks the previous positive correlation between the two and will help cryptocurrency regain confidence and establish an independent market.

Defensive stocks perform better:

According to GS PrimeBook data, the information technology sector saw significant selling and profit-taking behavior among institutional investors last week, with a focus on lower-quality stocks:

The 10-year US Treasury yield almost reached 5% during trading on Thursday, hitting the highest level since July 2007. The 30-year US bonds also challenged the 5.1% level on Thursday and Friday, setting the highest level since May 2007. Since August, the 10-year and 30-year yields have risen by 1 percentage point, equivalent to 4 interest rate hikes. In addition, the government bonds of major European countries are also challenging multi-year highs (DE 10-year 2011, IT 10-year 2012, GB 10-year 2008).

Historically, US bond yields peak ahead of the Fed’s policy rates. If we expect the Federal Reserve to complete its rate hikes soon, then the yields may have already reached its peak level.

The Bank of Japan failed to contain the 10-year government bond yields from surpassing the 0.8% level (the highest since 2013), which could further reduce Japanese capital’s reliance on US dollar assets.

S&P confirms Italy’s sovereign debt rating remains at BBB with a stable outlook. The widening gap between Italy’s government bond yields and those of Germany and other core eurozone bonds could become the focus of this week’s European Central Bank meeting, as investors speculate whether it will be supported through the PEPP and reinvestment program.

Data released by the US Treasury on Wednesday showed that Chinese investors sold $21.2 billion worth of US bonds and stocks in August, the highest in four years, including a record $5.1 billion in US stocks. This has sparked speculation that China is liquidating assets to obtain US dollars in preparation for future intervention operations to defend the renminbi.

Progress on 3Q Earnings Reports

Based on the actual performance of 86 companies that have released their earnings reports, as well as the forecasts of companies that have not yet announced their results, the earnings expectations for companies in the S&P 500 index this quarter have worsened.

Combining the companies that have reported their earnings last week, it is expected that overall net profit will decrease by 0.4% compared to the same period last year. This expectation is slightly lower than the previous week’s expectation, which projected a YoY growth of 0.4%.

Of particular note is Tesla, the star company, whose 3Q 2023 financial report shows that Tesla’s revenue in the third quarter of this year was approximately $23.4 billion, a 9% increase YoY, lower than Wall Street’s expectation of $24.3 billion, marking the slowest growth rate in three years. Net profit was $1.853 billion, a 44% decline YoY, and the gross margin further dropped to 17.9%, down 0.3 percentage points from the second quarter, reaching a new four-year low. Against the backdrop of a general pullback in tech stocks, Tesla’s stock plummeted by 15.22% last week, resulting in a market capitalization loss of more than $100 billion.

Another star company that has a different fate than Tesla is TSMC. The company announced its third-quarter revenue last week, which was NT$ 547 billion (approximately $17 billion), a decrease of 11% compared to the same period last year. Its net profit was NT$ 211 billion, higher than the analyst’s forecast of NT$ 190 billion, but a decrease of 25% compared to the same period last year. However, the company expects a broader recovery in the semiconductor industry next year, with stronger demand for high-end chips. As a result, TSMC’s stock price rose by 1% last week, against the trend.

It is also worth noting that the revenue from the high-performance computing department, including high-end AI chips, accounted for 42% of its total sales, lower than the previous quarter’s 44% but higher than the same period last year’s 39%.

Progress of the Israeli-Hamas Conflict

The Israeli Defense Forces, along with mobilized reservists, are currently gathered on the border between Israel and Gaza, ready to launch a ground offensive against Gaza.

In order to prevent the escalation of the Israeli-Hamas conflict, more than a dozen countries held a peace summit in Cairo over the past weekend. Officials from major countries around the world attended the summit, but it was embarrassing that Israel refused to attend. In the end, due to differences among the Arab and Western leaders and representatives present at the summit, no joint statement was issued after the meeting. Arab leaders at the summit condemned Israel’s bombing of the Gaza Strip and demanded an immediate end to Israel’s actions. Western leaders mostly emphasized the need to protect civilians and called for humanitarian assistance for them.

Last week, Joe Biden visited Israel, and his show of support during the war was particularly evident. He subsequently proposed $14 billion in aid to Israel to Congress (totaling $100 billion, a significant fiscal stimulus), but he did not make the same commitment to send US troops to Ukrainian territory to engage in combat with Russia.

According to insiders, the US government has pressured Israel to postpone its impending invasion of Gaza in order to release more Hamas hostages. Blinken said, “There are still 10 Americans missing in this conflict… we know that some of them are being held hostage by Hamas, and there are an estimated 200 hostages being held in Gaza.” However, at the same time, the US military is also deploying more missile defense systems to the Middle East and increasing the deployment of US troops based on prepared deployment orders.

The Israeli side takes a tough stance and states that they will dismantle Hamas regardless of the situation with the hostages. Hamas proposed to return two Israeli women on Saturday, but Israel refused to accept them. The Prime Minister’s Office considered it a propaganda stunt by Hamas to gain international sympathy.

The spokesperson for the Israel Defense Forces, Daniel Hagari, said on Saturday that the Israeli military will increase airstrikes on Gaza starting today. When asked if Israel stopped ground operations in Gaza due to pressure from the United States, Hagari stated that the Israeli military will take such action when the military conditions are optimal.

Israeli Prime Minister warns Hezbollah of “devastating” consequences if they join the battle.

According to the Gaza Palestinian Health Ministry on Sunday, the death toll in Gaza has risen to 4,651 people since October 7, with over 14,245 people injured.

It seems that the war between Israel and Hamas may not have truly begun yet, and the US is unlikely to organize Israeli ground operations. The impact on oil prices may continue for some time, as Middle Eastern countries may use oil as a weapon against Israel and its allies. For example, last week, the Iranian Foreign Minister called for all Muslim countries to impose an oil embargo on Israel, which stimulated another rise in oil prices.

A decrease in Iranian oil exports is the most likely short-term consequence. Iranian oil exports are currently at the highest level since 2018, at 2 million barrels per day, largely due to the relaxation of US sanctions. However, due to Iran’s open support for Hamas and Hezbollah, it may lead to a significant shift in US policy towards Iran, although it has little impact on OPEC’s daily production of over 30 million barrels.

Let’s not forget the drone attacks on US forces in Iraq and Syria last week, as well as the naval attacks with drones and cruise missiles launched by Yemen.

In addition, the US Department of Energy announced last week that it is prepared to buy 6 million barrels of oil for reserves at a price of $79 per barrel or lower. The potential purchase period is December and January. This, of course, means zero replenishment, as oil is unlikely to drop that low. With geopolitical risks reaching the highest level in years, the strategic oil reserves of the United States are already half depleted:

The news of the SPR replenishment plan helped push up oil prices, and $79 seems to be the new lower limit for oil prices.

Another impasse for the Speaker of the US House of Representatives

As mentioned last week, Jim Jordan was ultimately not selected, and some commentators have said that from the beginning of the year, McCarthy went through 15 rounds of voting before becoming Speaker of the House, and now it is difficult for the Republican Party to even produce a recognized party candidate. The “impasse” of the Speaker of the House has become one of the “most serious institutional crises” in the US political arena in decades.

With temporary government funding set to run out on November 17, concerns about government shutdown will resurface in the market over time. Coupled with Biden’s plan to provide military aid to Ukraine and Israel, which exceeds hundreds of billions of dollars, this has led to a significant increase in US fiscal spending and a larger supply-side pressure on US bonds due to internal political turmoil. As a result, the 10-year yield has reached a new high since 2007.

There is a bit of a Truss Moment flavor here, thinking back to last year when the UK’s inflation caused a capital market crash and brought about the shortest-lived UK Prime Minister, Ms. Truss.

Hawkish Fed Officials Speaking

Fed Powell: Suggests that rates may remain unchanged at the next policy meeting ending on November 1st. However, inflation is still too high and if the economy is doing well, there is still a possibility of raising rates. (Hawkish)

Fed Logan: Currently, there is no intention of cutting rates and it is uncertain if inflation is returning to the 2% level. While there are some encouraging signs of inflation development, it still remains at a high level, hence the need to maintain restrictive monetary conditions. (Hawkish)

Fed Bostic: The long-term equilibrium of the US economy is still moving in a positive direction. He believes there won’t be a possibility of rate cuts until mid-2024, but there might be a chance in the second half of 2024. He believes inflation will return to the 2% policy target, but the Fed should be very careful and patient. He emphasizes that the US economy will not fall into a recession. (Dovish)

Fed Harker: The US economy is very healthy, and the labor market is strong. Again, he emphasizes a preference for keeping rates unchanged while closely monitoring economic data. (Hawkish)

Fed Mester: Supports another rate hike. It is possible that rates have reached or are close to their peak. It is expected that rates will stay at their peak for some time. Quantitative tightening can be independent of rate hike policies. (Hawkish)

Expert Viewpoints

[Morgan Stanley: Rising yields equivalent to 3 rate hikes, slowing in Q4 will prompt Fed to pivot]

Rising bond yields have led to a significantly tighter financial environment. According to Morgan Stanley’s Financial Conditions Index (MSFCI), the current environment is equivalent to raising policy rates three times by 25 basis points compared to the September policy meeting.

The tightening is caused by exogenous or endogenous factors. Continuous exogenous interest rate hikes are likely to slow economic growth, requiring the Federal Reserve to adjust the path of policy rates over time to offset the drag from rising rates. Conversely, if rising rates are an endogenous response, reflecting sustained economic strength driven by more fiscal support, higher productivity, or a combination of the two, the Federal Reserve may deem it unnecessary to lower the policy path.

“We are more inclined towards the former explanation rather than the latter. We believe the momentum of growth in the third quarter is unlikely to persist. Morgan Stanley’s Chief US Economist, Ellen Zentner, pointed out that consumer spending in the third quarter benefited from large one-time events – Barbenheimer, Taylor Swift’s The Eras Tour, and Beyoncé’s Renaissance Tour… The conclusion of these events, along with the expiration of the student loan pause, will significantly impact real personal consumption in the fourth quarter of 2023, thereby affecting economic growth. The tightening financial conditions caused by the rise in long-term yields will only exacerbate this drag. Therefore, we expect fourth-quarter data to show a slowdown in growth, leading to a reversal in yield spikes caused by term premium compression in the near term.”

Fund Flows and Positions

The US money market fund saw the largest weekly outflow since Lehman Brothers (Q3 2008), at a staggering -$99 billion:

All of the outflow came from institutional funds (retail funds flowed in):

This could be due to the extension of tax payment deadlines, but it could also be something else?

Subjective investor positions (37th percentile) and systematic strategy positions (36th percentile) showed slight decreases, slightly below neutral:

Global equity funds (-$5.2 billion) saw outflows for the second week. The US ($300 million) experienced a small inflow, while other major regions saw outflows. Bond funds ($2.1 billion) saw a slower pace of inflows compared to last week.

CTAs continued to further reduce their overall equity exposure after shorting stock indices for the first time since November 2022.

By industry, almost all sectors except for the energy sector (68th percentile) showed decreases and were below the 50th percentile. Particularly, materials (27th percentile), healthcare (17th percentile), and financials (12th percentile) positions were significantly below average, while utility (5th percentile) and real estate (2nd percentile) positions were at extreme lows.

CFTC futures data showed an overall increase in net long positions for stocks, driven by increases in net long positions for the S&P 500 and Nasdaq 100, while the net short position for the Russell 2000 decreased.

In terms of bonds, overall net short positions have slightly decreased because the reduction in net short positions for the 10-year and 30-year bonds outweighed the increase in net short positions for the 2-year and 5-year bonds.

As for foreign exchange, with the increase in net long positions for the Euro, the overall net short positions for the US dollar have slightly increased:

In terms of commodities, net long positions for crude oil have increased slightly; net short positions for silver have remained stable, while net short positions for gold and silver have turned into net long positions; net short positions for copper have further increased.

Sentiment Indicators

The Bull and Bear indicator for Bank of America has entered the “extremely bearish” zone. According to Hartnett, Chief Investment Strategist at Bank of America, this means that the reverse buying signal for risk assets has been triggered: historically, the median return in the 3 months after the buying signal implies an upside potential of 5.4% for US stocks, 7.6% for global stocks, and 9.1% for investment-grade bonds.

The AAII survey shows a simultaneous decline in the bull-bear ratio and an increase in neutral views, highlighting a period of market indecision:

The CNN Fear & Greed Index is close to extreme fear:

Focus this week

US GDP Test

The US government is set to release the initial estimate of third-quarter economic growth on Thursday, with market expectations of an annualized quarter-on-quarter growth of 4.3%, double the 2.1% growth in the second quarter.

US Core PCE for September

Market expectations are for a 3.7% year-on-year increase in core PCE, excluding food and energy, which is a slight slowdown from the 3.9% growth in August, but a faster month-on-month growth from 0.1% in August to 0.2% in September. The market expects the overall PCE price index to rise by 3.4% year-on-year, a slight slowdown from the previous value of 3.5%, and a slower month-on-month growth from 0.4% to 0.35%.

ECB Interest Rate Decision

This pause in interest rate hikes is now a reality, but there is still a possibility of an increase in December. It is important to pay attention to the views of the central bank governor, Lagarde, on the economic situation and interest rate trends during the press conference.

Important company financial reports will be released intensively

This week, 162 companies will announce their financial reports. The most noteworthy financial reports include Microsoft, Alphabet, Coca-Cola, GE, GM, Meta, IBM, Amazon, Intel, Mastercard, Colgate-Palmolive, and ExxonMobil. Although Wall Street currently expects a slight decline in overall profit growth for the S&P 500, companies with massive valuations like Meta and Amazon are expected to contribute significantly to overall profit growth.

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