Contrarian Updates on 27 Sep 2024

Global Markets

Crypto Dominance

US Yield Curve

Key Technicals

 

Market Commentary 

US GDP growth has picked up from 2.8% to 3% lately with 50 bps surprise cut from the Fed. Apparently, it was politically motivated as Fed Powell wanted to favor Kamala to mitigate the risk of Trump firing him upon being reelected. The official narrative however is that the soft job report in Aug at 4.2% which somewhat makes sense since unemployment jumped from 3.7% in Mar to 4.2% but its still at manageable levels. Also, Fed Powell made the pivot in Aug during his Jackson Hole speech by softening his tone there in hindsight. During Covid 2020, the same number was at 15% ATH which is way higher.  2^nd assasination attempt on Trump has been faded by the market and hasn’t moved the poll numbersfor him with Kamala. Also Trump talking about more tariffs again which GS proposing a scenario where of 10% tariff on all important and +20% increase on Chinese goods. Having said that the Chinese have been able to circumvent these tariffs through Mexico and other friendly nations and US consumer end up footing the bill. Trade War 2018 has proven that these measures are ineffective in a globalized economy.

EU deposit facility rate have also dropped from 4.25% to 3.65% with minor improvement in jobless rate across UK, France and India. Now hedge funds are net sellers in Aug month but long-only managers have now switched to net buying which strategist highlight suggest a soft landing. Eurozone government bonds rallied on 01/10 as inflation data boosted the case for faster ECB rate cuts. The ECB near term target of 2% is slipping away with latest print 1.8%. Key concerns for ECB are the risk of the hard landing, weak labour markets and potential fiscal tightening. Given the gap not too big right now, it’s very likely that ECB will lag the Fed in cutting rates rapidly this cycle.

 

Next few weeks, we can expect RNBZ/ Eurozone interest rate decision, US CPI and China GDP to be key events.  US retail sales should be quite important since Fed Powell has finally thrown in the towel to reinforce the argument that Fed is indeed well behind the curve and should follow through with more rate cuts. Also weakness in China GDP or consumer spending will be very favourable to more PBOC stimulus needed to change deeply entrenched market perception from uninvestable to investable.

 

Chinese equities have finally made a major upmove triggered from recent monetary and fiscal stimulus. Seems XJP thrown in the towel to get Chinese economy back into gear. Last few years, he risked the Chinese economy for CCP politics and it’s biting him back in the butt. Last month CSI 300 and Shanghai Composite resilience despite SPX dropping heavily was not a coincidence. Better informed traders must have been accumulating positions quietly in advance of PBOC formal announcement. Hang Seng, CSI 300 and SHCOMP have jumped 11.8%, 8.2% and 17.1% respectively which has moved MSCI Asia xJP by +7.8%.  ASEAN stocks have also done well with FTSE ASEAN All-Share and 40 indices climbing 8.2% and 7.7% from China risk-on sentiment spillover.

Few weeks before, Nikkei and TOPIX have hit a new all time high due to re/near-shoring, TSE laws and upmove in semicon and digital industries and JPY weakness. Having said that inflation data has really been cost-push and wages have been lagging inflation last +2 yrs despite wage hikes. TSE laws include publishing profitability goals, more provisions for minority investors to demand transparency and oust underpeforming management reams. Share buybacks aso running at 4x the average of the last decade. The Japanese government has also implemented the new Nippon Individual Savings Account and other programs to stimulate domestic savings into equities. There are also a lot of chatter about the reversal in yen carry trade but so far the $/JPY market has been pretty stable. Seems lots of capital, no systemtic liquidity stress and Fed new tools has mitigated such an outcome so far. Interestingly, Japan GDP doesn’t actually match it recent stock performance so caution is warranted.

 

Japanese business sentiment was steady in the last 3 months, which supports the economic recovery leading scope for further rate hikes. Despite the yen’s 11% surge in 3Q24, big manufacturers set their $/JPY estimates for the current fiscal year at 144.96, up from 142.68 in the June survey.  

 

Equity rallies have also become broad-based and momentum driven given that RSP and MTUM have move 2.7% and 2.1% since then. SPX has is also hitting our initial forecast at 5630 which is a decent enough level to lock-in some profit for more cautious traders. Technical reveals that SPX has a pennat breakout which suggest further rallies. Also redrew the Fibo price clusters and both revised levels are 6120 – 6370 and 6940 respectively. BMO Capital just raised its SPX price target from 5600 to 6100 so The Street is following through with the bullishenss.

 

UST 2s and 10s have dropped to 3.55% and 3.75% with last Fed cut and looks to be that last head and shoulder breakout contiues to follow through. Unsurprisingly all sovereigns yields have moved lower and we can now see tightening for HYB, LQD and EMB. Natural gas futures jumped by 44% but otherwise commodities have not really experience the same risk-on play, SPGSCI remains stuck at 532 levels from last month. Sames goes for FX markets with DXY pinned at 100 but all things being equal would expect dollar weakness in the coming month as yield differential narrows. Crypto market and volatility ETF also muted so no action there either.

Well Fargo now recommending small-cap trade due to 50:50 presidential race odds, which highlights positive risk sentiment across The Street. The bank anticipates 5 – 10% outperformance within 1 – 3 months if Trump secures victory. Atlanta Fed President Raphael signalled on 28/09 that he was open to backing another 50 bps rate cut at the Nov meeting should labour markets show unexpected weakness. Fed Powell just commented that he conveniently sees “two more rate cuts this year if the economy performs as expected”. He even stoked bullishness by saying that the Fed could cut faster if needed.

 

Abrdn Gabriel who manages $ 677B AUM in emerging markets favours Chinese investments as he feels there is more upside than downside”. China’s factory activity shrank for the 54^th straight month and the services sector slowed in Sep suggesting Beijing may need to move urgently to meet its 5% 2024 growth target.  Other investors such as Fidelity George Efstathopoulos are more cautious citing that the last upmoves “were a technical, liquidity driven rally”. He is watching Chinese consumer confidence before adding to his Chinese positions. Given similar remarks from other managers, we should watch the Chinese consumer closely for the next few months.

According to on-chain data, a dormant BTC wallet has suddenly come to life after +10 years. This activation adds to a growing trend of ancient BTC wallets reawakening sparking bullishness. IntoTheBlock highlights that if BTC breaks above $65k well over 95% of holders will be in profit. Also, lately $1B BTC has been moved from a number of unknown addresses to brand new wallets in batches of 2000 BTC. The purpose and origin of these transactions remain unclear, but one of them might be Fidelity Custody, which is a major crypto custodian for FBTC. Also, ex-Binance CEO CZ been released and updated the world on his latest project Giggle Academy. He paid $50M himself whilst Binance paid $4.3B to settle the SEC lawsuit.