SignalPlus Macro Research (20230626): US stocks pull back, bullish sentiment in the cryptocurrency market surges.
With traders continuing to reduce risk exposure as the low liquidity summer approaches, the TradFi market faced pressure ahead of the weekend, with the S&P 500 falling 0.8%, and every sector experiencing declines. This marks the worst weekly performance for the index since March (-1.4%), but it had been on a 5-week continuous rise before the pullback, so a correction was inevitable. In terms of data, both the US and European manufacturing PMI figures disappointed, while the Bank of England's 50 basis point rate hike last Thursday was a clear reminder that Europe is still grappling with inflationary pressures.
The Treasury General Account (TGA) liquidity drawdown, which the market had already anticipated, has been carried out quite smoothly so far, thanks to the prudent use of reverse repos (RRPs) to replenish cash positions rather than direct liquidity extraction. The Treasury currently has a cash balance of $292 billion, fully in line with Wall Street's expectations, with the sources being roughly evenly split between RRP and reserve balances. Additionally, the Fed's discount window and BTFP usage limits have remained stable since the peak in March, indicating that regional banks' balance sheets are not experiencing excessive volatilities.
Interestingly, Secretary Yellen, in an interview, stated that the rise in interest rates and recent turmoil in the banking industry could lead to more bank mergers in the second half of this year, as weaker institutions face the challenge of increasing costs of retaining deposits and reduced profitability. Although the US regional banking crisis seems like a distant memory, if Secretary Yellen's prediction comes true, it implies that financial stocks may experience lower-than-expected earnings as early as this quarter.
As we approach the end of the first half of the year, the summer season is about to arrive, even though the calls for economic recession have diminished, the yield curve of global developed markets has quietly inverted close to historical lows. While bond and stock investors may currently be caught in the conflicting mindset of optimism or pessimism, they unanimously anticipate a perfect scenario where the Federal Reserve has complete control over inflation, and any potential economic recession is benign. Additionally, the continuous innovation of AI is expected to usher in an era of unprecedented productivity growth. In the foreseeable future, a strong catalyst may be necessary to change the current status and perspectives of investors.
In the cryptocurrency space, bullish sentiment continues, with BTC staying above $30,000 and leading the market higher. Over the weekend, some blue-chip DeFi tokens also experienced explosive gains (AAVE +25%, SNX +16%, Uniswap +11%, and CRV +8%). Compared to previous years, the secondary market liquidity remains relatively weak, and long-term holders are unlikely to be willing to sell even at current price levels. Therefore, the current rebound trend has the potential to last longer than many expect, as the recent interest in TradFi spot ETF applications seems too perfectly timed to be purely coincidental. Wishing everyone good luck in the current market!
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