LD Capital Weekly Macro Report (12.25): Data tailwinds, red sea crisis, repo bottoming, fund manager FOMO, retail investor sentiment overheated

Last week, the market was supported by further data, indicating that the US economy has not only achieved a soft landing, but also that the economy is making steady progress without the expected rebound in inflation, which in turn will extend the Fed’s rate hike cycle. Markets have been debating the possibility of a soft landing for the economy, while also considering the prospect of a prolonged high Intrerest Rate environment. But that view changed quickly after the Fed’s dovish shift last week, as inflation slowed at an accelerated pace, growth held solid, real yields retreated, equities rose in response, and financial conditions eased rapidly. Investors have shown a strong interest in stocks lately. Bank of America said customers bought a net $6.4 billion in U.S. equities in the latest week, the largest weekly net inflow since October 2022.

Last week, as inflationary pressures continued to subside, nominal PCE was negative for the first time in November, with core PCE prices rising 0.1% month-on-month, lower than expected, and falling to an annual rate of 3.2%.

And income and expenses rebound at the same time:

On the economic data front, last week’s survey, which included the Philadelphia Fed survey and the Consumer Confidence Survey – showed that the economy was still growing, but not too fast, while US durable goods orders for November exceeded investors’ expectations. New orders for durable goods rose 5.4%, higher than expectations of 2.2%. Durable goods orders shrank by 5.1% in October. Q3 GDP was revised down slightly to +4.9% last week, but this is still the strongest quarterly GDP growth since 2014 (excluding the post-pandemic reopening phase). New home sales in the U.S. plunged in November as mortgage Intrerest Raterise weighed on homebuyers, but the market didn’t pay much attention to the data given that second-hand listings also shrank sharply and winter is already the off-season.

The theme of the market now is the US economy no landing, and the so-called landing was originally expected to be marked by the trough of activity in Q4 2023/Q1 2024, although US GDP is still expected to reach 2% during this time and then accelerate again.

U.S. stocks rose for the eighth straight week (SPX’s longest winning streak since 2017), despite plummeting 1.5% intraday on Wednesday for no apparent reason and without much discussion, with sporadic comments attributed to escalating geopolitical tensions in the Taiwan Strait or massive S&P 500 put options trading. The mainstream understanding is still more reasonable, and the explanation is still technical, and the market needs some calm space after continuous rises.

On Friday, China introduced a series of new measures to limit players’ spending on video games, sending ripples through global stock markets. Not only Tencent NetEase fell sharply, but also Ubisoft in France and Unity in the United States followed suit. Tencent’s major shareholder, Naspers/Prosus, plunged 20%.

The CSI 300 index posted its sixth straight week of declines on Friday, the longest losing streak since January 2012. The index is down nearly 14% this year, lagging most major national stock indices around the world. The Golden Dragon’s decline deepened to around 8% in 2023, well behind the Nasdaq 100’s 54% gain. As policymakers ramp up their support, some have renewed hope that 2024 will be better, especially given the low valuations of China’s stock market.

Net long crude oil increased last week for the first time since late September, rebounding from record lows, largely due to Houthi attacks on merchant ships crossing the Red Sea, which led to a rise in shares of companies transporting everything from manufactured goods to oil and commodities, with oil prices posting their biggest weekly gain in months.

Speculators are ramping up their bearish bets on the Canadian dollar, boosting their net short positions to their highest level in nearly five years. This is mainly due to stubborn inflation and sluggish growth

U.S. Treasury yields generally continued to decline this week, but not as much as the week before the Fed meeting released a dovish turn signal, and short-term bonds fell sharply, with 10 Y still flat at 3.9% and 30 Y flat at 4%:

Markets are betting that the Fed will start cutting rates by 160 basis points in March, and some indicators such as labor will need to deteriorate significantly to meet the market’s pricing target, and there is no sign of that happening at the moment:

Recall that the theme of fiscal discipline chaos that the market feared in July ~ September caused the stock and bond markets to plummet, and in fact there will be no improvement in 2024, only worse, the net issuance of US bonds in 2023 is $1 trillion, but it will soar to $1.9 trillion in 2024, and the reverse repo facility may be exhausted in March and it is difficult to provide more liquidity support, which may be a big background for the market to bet that the Fed must cut interest rates sharply in addition to inflation.

Red Sea crisis, seaborne inflation soars

Perhaps the biggest theme in global financial markets last week was the Red Sea shipping crisis. Due to the risk of continued Houthi attacks, 158 ships carrying about $105 billion in seaborne cargo were forced to leave the Red Sea, causing cargo prices to soar.

According to a report released by the Ningbo Shipping Exchange on December 22, 85% of container ship liner companies have notified the suspension of cargo on the Red Sea route. More and more freighters will choose to detour the Cape of Good Hope, which means that the distance and transportation costs will increase significantly. According to media estimates, the overall range has increased by 40% and the cost of transportation has increased by more than 40%. This has driven the domestic container transportation index and market freight rates to continue to rise. The Market Maker Contract of Shanghai International Energy Exchange Container Shipping Index (European Line) Futures has hit the upper limit for 5 consecutive trading days, with a cumulative increase of more than 50% in a week.

Shipping companies will benefit financially from the Red Sea disruption pushing up freight costs, with the total Market Cap of the world’s largest publicly traded shipping company jumping to about $22 billion since the attacks really intensified on December 12.

The Red Sea-Suez Canal corridor accounts for 12% of international trade and nearly one-third of global container traffic. The route has all but come to a standstill, signaling a resurgence of global supply chain disruption in the near term. According to media reports last Friday, sea freight from Shanghai to the UK rose to $10,000 per 40-foot container, up from just $2,400 the previous week. According to industry experts, once the logistics are tight for more than a month, inflationary pressures will be felt and seen at the supply chain and even the consumer level.

Money Flow & Sentiment

Cash funds attracted $1.3 trillion in inflows, dwarfing the $152 billion that flowed into global equities, according to EPFR Global. Investors are also investing more in U.S. Treasuries than ever before, reaching $1, 77 billion. These figures illustrate how this year’s stock market Rebound has come as a surprise to most investors after a dismal 2022. This could mean that if the central bank’s expectations are in line with expectations, there is still plenty of money on the sidelines in the new year, waiting to be pushed into stocks and bonds.

BofA Wealth Management clients Holdings 60% in equity, 21.4% in bonds, 11.8% in cash, rise in equity, and decreasing in cash:

Over the past two weeks GS Hedging both total and net leverage of fund clients have accelerated

However, the total long-short ratio hovers in a historical position:

In recent weeks, GS clients have added to defensive stocks (staples, healthcare, utilities) and consumer discretionary, significantly reduced cyclicals (energy, materials, industrials, financials, real estate) and slightly reduced their TMT. GS clients’ operations are not entirely consistent with recent market movements, with a strong rebound in the real estate, consumer discretionary, industrials, and financial sectors recently, but GS clients choose to underweight and defensive stocks perform weakly, but GS clients choose to overweight:

The financial sector, for example, rebounded 19% from the November location, but the bulls began to sell last week:

The BofA CBBS indicator continues to rally:

In the latest AAII sentiment survey, individual investors’ optimism about the short-term outlook for stocks rose to its highest level in two and a half years. At the same time, pessimism has risen slightly, but remains at an unusually low level.

The bull-bear spread refreshed its highest level since March 2021 at 32, with a historical average of 6.5%, indicating that retail optimism has been extreme:

The CNN Fear and Greed Index has remained at the “Extreme Greed” level for two consecutive weeks:

Institutional perspectives

DB: 2024 The Year of Valuation Repair

Over the past five years, the price-to-earnings (P/E) ratios (of a rough calculation) of several European and Asian countries, which account for about half of the market share in our analysis, have been below the average of 0.75 standard deviations over the past five years. Even in the United States and Japan, multiples are only now reaching their averages. If the risk appetite pattern in the market persists in 2024 against a more certain macroeconomic backdrop, it is likely to support cheap assets. Many of them are located outside of the United States, where they can provide diversification benefits and are gaining momentum right now:

To add a comparison of the valuation of GS, it can be seen that the valuation of US stocks is not high. The US, the most expensive developed market, started 2023 at 17x P/E and is now 20x, while historically the median P/E at 1 – 3% inflation is 20x, so the market is already pricing in a scenario where inflation returns to normal:

DB: 202 X ushers in the next bubble era

Historically, asset bubbles have tended to re-form after a period of economic turmoil and falling bond yields. This was the case in the 90s, 2000s, and early 2020s of the 20th century. Now that yields have fallen and the global economy is recovering from the effects of the pandemic, there is reason to believe that at some point in the 20s, there will be a new round of asset bubbles. The systemic risk in the credit market is not large in the short term, and private equity funds have a lot of cash ammunition. The short-term risk is that if the US suffers a recession in mid-2024 + the European economy has also slowed, market sentiment could deteriorate again, at which point many investors will revisit their risk appetite. (The political risk is not limited to the United States, voters in countries representing 41% of the world’s population and 42% of the world’s GDP in 2024 will participate in the leadership transition)

CICC: How long can the reverse repo be supported? At present, the pressure is not great, and the US stock market still has support, and it may turn to contraction again in the second quarter of next year, unless the balance sheet reduction is stopped

The Fed’s balance sheet reduction continues, and the TGA cover has been completed, and reverse repo will naturally become the key to future liquidity changes. At present, there are still 1.15 trillion US dollars in reverse repo, and the net issuance of short-term bonds exceeding 460 billion US dollars in the first quarter may make it fall by 390 billion US dollars, which can still hedge the scale of balance sheet reduction in the same period; but the net issuance of short-term bonds in the second quarter will slow down significantly or even turn negative, which may slow down the release of the remaining reverse repo. If balance sheet reduction continues during the same period, financial Liquidity will begin to contract in the second quarter. Therefore, the current liquidity pressure on US stocks is not large, but it may face some pressure again in the second quarter of next year, unless the Fed stops shrinking its balance sheet.

(I feel that the theme of fiscal chaos + daily supply will recur in 2024, especially when it comes to the US presidential election, people’s attention is easily involved in huge deficits, especially the downside of long-end bond yields may be very limited, if the Central Bank cuts interest rates sharply, the yield level itself will not reach such a high level this year, but as a higher risk premium and a steeper curve, that is, the inversion returns to normal.) Money market funds may be a pool of potential takeovers in addition to RRPs, but this would require a significant drop in Intrerest Rates, otherwise bonds would not be more attractive to the average investor)

Cathie Wood: The theme for 2024 is deflationary trading

Deflation will be a key theme in 2024 and is expected to prompt the Fed to cut interest rates aggressively. Technological advances, combined with such an economic environment, have created the conditions for significant expansion in the coming years for companies that are adapting to deflation and focusing on innovation. While previously skeptical of its Metaverse strategy and reduced its stake, there is renewed interest in Meta due to bullishness on CEO Zuckerberg’s strategy of leveraging open source AI. She also highlighted the transformative potential of gene editing technology, specifically mentioning CRISPR therapeutics, which are inexpensive to invest in due to the early stages of the field and the industry’s inefficient pricing.

BofA Fund Manager Survey

BofA’s Monthly Global Fund Manager Survey Shows Investor Sentiment Is Most Positive Since January 2022, with Cash Levels Falling to 4.5% (2-Year Low)

Equity allocation rises to net 15% OverWeight, up 13% in a single month, the largest monthly increase since November 2022, and the highest equity-to-cash net allocation ratio since January 2022, and now fund managers OW stocks are only 2 months old:

Fund managers are comfortable with the current level of risk they are taking, with risk tolerance increasing by 21 percentage points over the past two months, but showing no signs of overheating:

Investors remain pessimistic about global economic growth, but it has improved, and the probability of a global economic slowdown is expected to decrease;

91% of respondents believe the Fed’s rate hike cycle is over; 89% of respondents expect short-term intrerest rates to fall, the highest percentage since November 2008, and 62% expect bond yields to fall

Bond allocations are now 20% net Long Position, the highest in 15 years:

If the Fed cuts interest rates in the first quarter, the most optimistic deal will be long-term Treasuries first, long-term technology stocks (e.g. biotech, renewables), then long-term value (e.g. banks, REITs, small-cap stocks…). ）：

The most crowded trading positions were Long “Magnificent 7” (49%) and Short Chinese stocks (22%); China real estate is seen as the most likely systemic credit event (29%):