Contrarian Updates on 09 Nov 2024

 Global Markets

US Yield Curve

 

 

Fed Rate Monitor

Crypto Spot Market Cap

Crypto Derivatives Open Interest

Crypto Dominance

 

Key Technicals

Market Commentary 

MSCI World continues to move higher having hit 3791 from 3649 in 27/09 which is an ATH confirming the risk-on trading environment. SPX has nearly hit 6000 level after Trump victory and revised Fibo clusters at 6100 and 6200 respectively. Despite Kamala strong polling last few months, Trump decimated her badly which suggest that last few months polling has either been inaccurate or deliberately manipulated. Based on prior market cycles the rally from trough to peak has been between 50 – 100% which is around these levels. Those of you who trimmed US equities at 5800 levels and still have dry powder should clear remaining positions at 6000 – 6200 levels. At the end of the day, the SPX has rallied from 3500 in Nov 2022 to 6000 in Oct 2024 which is clearly significant so best not to get too greedy now. Can use dry powder for average into other lagging positions or keep dry powder via T-bills for the next downcycle.

 

In the aftermath, investors perceive Scott Bessent and John Paulson to be leading candidates for Treasury Secretary as both financially backed his campaign and talking nice about him. Republican sweep of House and Senate also intepreted as fewer rate cuts due to fiscal spending likely to boost US economic growth. US Treasuries have reacted with higher yields whlist high-grade corporate spreads have tightened to 1998 levels. This also means US budget deficits and government debt levels are projected to surge under Trump. Interestingly, Fed Chair Powell struck a relatively dovish tone in his latest press conference on 08/11 despite Trump victory. Some have speculated that it was to counter the bond selloff whgich tightens financial conditions and endanger economic growth. The 10Y UST has soared 80 bps since Fed cut rates by 50 bps on 18/09 sparking concern Fed could lose control of the long-end of the curve. Others have proposed that Fed will now opt for a “go slow” approach this interest rate cycle due to Trump inflation risk. Analysts also expect more trade tariffs like 60% on China, clampdown on illegal immigration, lower taxes and business deregulation.

 

In retrospect, Atlanta Fed Bostic signalled on 30/09 that he was open to backing another 50 bps rate cut in Nov meeting should labor market show unexpected weakness. He also saw the Fed targeting 3 – 3.25% by end-2024 but the market favors just a 25 bps rate cut. Fed Powell also said the same citing 50 bps for Nov and Dec meeting at the National Association for Business Economics conference in Nashville, Tennessee.

 

Also on 04/10, Chicago Fed Goolsbee calls US job report “superb” but still sees rate cuts ahead despite quipping that “if we get more reports like this I’m going to feel a lot more confident that we are in fact settling in at full employment”. He also added that “the job market by a broad set of measures is cooling, and there are even signs that inflation could undershoot the Fed’s 2% target”. Fed paper losses cross the $200B mark on 03/10 but hasn’t faced any political heat for this financial situation which has surprised some central bankers.

 

On 21/10, San Francisco Fed Daly said that she has not seen anything to suggest that the Fed would stop cutting interest rates which are absolutely still high enough that they are restraining the economy. She added that she estimates that a policy rate around 3% would a level neight too tight or too loose. UBS strategists saying that the US economy is on the verge of experiencing a modern-day version of the Roaring 20s. This scenario hinges on strong GDP growth, moderate inflation and stable interest rates simialr to the 1990 economic boom 

 

At the end of the day, on 07/11 the Fed followed through on another 25 bps rate cut as expected but not 50 bps which shows the Fed still feeling out the market. BCA strategists now cite that investors attempting to replicate the 2016 Trump trade strategy in 2024 are making a mistake. The primary challenge lies in the contrasting inflation and interest rate environment which were low in 2016, allowing fiscal stimulus to fuel economic expansion wihtout major inflationary pressures.

 

On 04/10, US job gains increased by the most in 6M in Sep and unemployment rate fell to 4.1%, underscoring the resilience of the US economy. Also, the US employment report showed that the US economy added 72k jobs in Jul and Aug through revisions. Accoding to Ballinger Group Kyle Chapman, “if the Fed had known the revisons in Jul and Aug in advnce, its very likely they would have gone for 25 bps move instead in Sep meeting”

 

The US PMI Composite Index accelerated from 51.5 in Aug to 54.9 in Sep but Employment PMI within it fell to 48.1 in Sep from 50.2 indicating contraction. This will be a potential worry for the Fed which is laser-focused on the labor market having started a rate-easing cycle last month. New Order PMI also moved higher but its inconsequential given the services are much less cyclical than manufacturing PMI making it a poor indicator in that regard. On 03/10,

 

 

Other major equity moves has been Chinese equities landscape with CSI 300 rallying +10.8%, Shanghai Comp +11.8% and Shenzhen Comp +17.3%. Seems monetary and fiscal stimulus actually getting a market reaction after 4 bad years since ANT Financial. Taking a step back, the CSI 300 actually had a broadening formation since 2008 which demonstrates clear market uncertainty. It also had a false break in 2021 before making this recent turnaround last month. Reviewing the technicals, reveal that the CSI 300 is well supported at major trendline which suggest another spike upwards. Those of you with losses or profits should take advantage of any follow through to right size your positions in coming quarters. Typically mistakes with Chinese market has been market timing and outsized positions due to CCP politics and international relations.

 

Big picture, Chinese economy expanded 4.6% in 3Q24 from last year, slightly beating analyst expectations, maintaining pressure on policymakers for more stimulus. When XJP took over the Chinese economy was growing +9% so he must be under a lot of stress. This incompetence is particularly glaring since his predecessors Jiang Zemin and Hu Jintao were able to prop up the economy from 6.7% low in 1998 and 6.4% in GFC 2008 without changing Deng's old playbook. He will have to throw everything and the kitchen sink to restore investor confidence wrecked in ANT debacle or risk further challenges from marginalized and disaffected groups.

 

Longtime China bull Ray Dalio on 02/11 said that China on a fork in the road between a “beautiful deleveraging” or letting the debt criss lead to a Japan-style economic malaise. However, he added that China has one key advantage in that most of its bad debt is denominated in CNY with debtors and creditors being Chinese citizens. Since 24/09, Beijing has slashed interest rates, cut the reserve requirement ratio and released strong statements on stabilizing the property markt. Three Chinese cities have subsequently made it easier for people to purchase homes and six major Chinese banks are also adjusting mortgages for existing home loans.

 

On 02/10, Jefferies raised price target on China’s internet stocks with price targets for BABA moved from $116 to $142, JD from $43 to $54, PDD from $151 to $181 and Tencent from HK$ 390 to HK$540. They said prior to recent policies measures, online shopping has been trading at low end of sector valuation 8 – 9x which is about 40 – 50% discount to high end 15 – 16x.

Chinese tech giants saw consumer spending surge during the Golden Week based on data released by Meituan and Douyin. During the first 5 days of the annual break, spending on in-restaurant dining booked via Meituan grew 41.2% from last year. Chinese consumers also splurged on hotel reservations, overseas trips and holiday packages via online travel agencies such as Trip.com and Alibaba Group-owned Fliggy. The rise in spending reflect a welcome shift in consumer behaviour following Beijing’s announcement of wide-ranging stimulus since 24/09. HSBC saying that “it not too late to enter China rally” on 03/10.  

 

However since 08/11, Chinese consumer prices continue to fall whilst producer price deflation has deepened last 4M. Latest stimulus package of CNY 10T to ease local govenrment “hidden debt burdens” rather than injecting money directly has been underwhelming for investors. UBP Casanova says China needs CNY 23T package to resolve local debt and property problems which represent 15% of its economy. Stock prices rallied sharply in late Sep but have since lost momentum. Apparently, investors were dissapointed as there were rumours that the NPC stimulus would have been larger if Trump won the US election.

 

European, Indian and ASEAN stocks however still lagging as they have actually pulled back since last month between 3.5% to 7.8%. This shows that money flows are going into US and Chinese equity markets which also present a good opportunity for stockpicking and index plays here. Typically these markets will have to follow US indices at some point.

 

MTUM and ILCG has been the best performing trading styles since last month which signals momentum and growth plays are back in fashion. Interestingly, investors are abandoning thematic ETFs like AI and video gaming in favor of beta funds. According to Morningstar, thematic ETFs are on pace for their 3^rd consecutive year of net outflows which from total assets $108B has last $5.8B YTD versus $4.8B in 2023.

 

Trump victory has led to a significant repricing of US Treasuries with 2s and 10s trading at 4.25% and 4.3% today. This move has been large enough to see the 10Y UST not respecting the prior neckline, remains to be seen if there is follow through on the reversal. Aside from that the rest of fixed income has been relatively stable with slight creeping up of 2Y JGB from 0.367% to 0.506%. IG, HY, EM corporate spreads have barely moved much. XAU/$ and XAG/$ higher by 6.8% and 4.9% and whilst NG Futures are +37% that nothing significant given its natural volatility.

 

USD Index +4.6% which is reflected across both G10 and Asian FX rates. On 08/11, the University of Michigan Consumer Sentiment Index came in at 73 which exceeded forecasted 71 and previous reading 70.5. Amid the backdrop of declining US inflation, the index suggest consumer are more optimistic which could boost spending helping spur US economic growth. FX traders have reacted to this narrative positively hence the strong USD.

 

GBP/$ looking a bit bottomish at 1.2921 as the historical range has been 1.05 – 1.3500 so those of you with long GBP positions should watch closely for favourable sell levels. $/JPY 152.63 also looking toppish as its above the top of the consolidation range at 150 which suggest those with long USD position should look for exit points. Given that only the ECB is ahead of the Fed curve and other CBs like to follow suit, so many of these consolidation ranges will stick around assuming interest rate parity.

 

On 02/10, the JPY got rattled by 2% which is one of the steepest decline in over a decade excluding COVID 2020. This drop is due to PM Ishiba unseemly comments favoring “loose monetary policy” after a few days of taking office which dampened rate hike expectations. On 30/09, the Tankan Survey are steady but service sector firms unlike manufacturers projected business conditions to sour in the following 3M which might have played into this loose positioning by PM Ishiba. On 07/11, Japanese household spending also found to have fallen in Sep for the 2^nd straight month further discouraging rate hikes.

 

SNB Martin hints at further rate cuts citing “with inflation being reasonably low in Switzerland and with an economy that could grow faster, that tends towards the direction of a lower policy rate”. SNB has been ahead of the curve among central banks having cut the policy rate from 1.75% in Feb to 1% today through three cuts YTD.  He even said that SNB could eventually consider taking interest rates into the negative territory.

 

HSBC advocating to buy the AUD on Chinese support on 09/10 saying that what matters for the AUD is not the immediate size or effectiveness of the policy measures but the “policy put” coordinated across fiscal and monetary authorities. The bank also said that there is a growing easing bias among central banks which should see more supportive conditions for risky assets which stands in stark contrast to the RBA’s “restrictive for longer” stance.

 

$/MYR have moved higher by 6.3% to reach 4.38 which coincides with DMI crossover confirming resumption of bull trend. This makes sense as BN tends to lag Fed moves and given political, social situation and lack of innovation the bull trend will unlikely change. Fibo retracement favors entering at 4.17 – 4.22 levels which has come true so those of you who hesitated can still convert your MYR into $ at current levels for offshore investments.

 

Crypto also very exciting lately with BTC/$ breaking the 80k level whilst all other altcoins are lagging tremendously. For those of you with this view, this appears to be a good arbitrage opportunity to get long some ETH/$ or other altcoins and shorting BTC/$. Next Fibo price clusters for BTC/$ stand at 86.8k and 97.8k respectively so there is some money to be made. BITB, HODL, IBIT all +16% which is lagging the BTC/$ spot by 4% but drawing in a lot of new invetors. Memecoin also going gangbusters with SHIB/$ and DOGE/$ +29/5% and 106% respectively which shows the crypto market is really heating up.

 

Former Binance CZ following through on Giggle Academy and Michael Saylor shared a BTC prediction that 99% of BTC will be mined by 01/35. At the moment, 94.1% of BTC maximum supply of 21M has been mined leaving 1.24M remaining. Bybit announces that its expanding its Bybit card cashback program to included BTC and ETH in addition to USDT option. This move enables holders to increase BTC or ETH holdings and potentially capture market upside when prices go up. October saw a rise in memecoin activity with 4 of the top 5 being memecoins with trading volume hitting around 12% of top 50 altcoins’ market cap on average.