Recent Macro Market Hot Topics Review

Macroeconomic Background Improves

Inflation has noticeably cooled down in the past two months. In June, the U.S. CPI decreased month-on-month for the first time in four years, and the core year-on-year growth rate hit a new low in over three years. Inflation is expected to continue declining over the next two years. Housing inflation is accelerating its slowdown.

The job market has softened slightly, but overall it remains relatively stable. The economic surprise index is at a low point, indicating that economic data is generally below expectations. The financial conditions index shows continued easing, at its most relaxed level since the end of 2022.

These backgrounds are favorable for the risk asset market, as investors expect the Federal Reserve to take action to support economic expansion. Concerns about inflation at the end of the first quarter proved to be excessive, although inflation in the service sector remains above the central bank's target, inflation in goods has decreased significantly.

As the US dollar weakens and the Federal Reserve begins to cut interest rates, emerging markets and cryptocurrencies may benefit, provided that a recession does not occur. If expectations shift to a hard landing, a swift transition from stocks to bonds may be necessary.

Pressure High During Q2 Earnings Season

The current market focus is on the earnings season that has begun. Market expectations are very optimistic, but it may be difficult to achieve the same level of surprises as before, so there may be some profit-taking or sector rotation.

Wall Street expects S&P 500 earnings to grow by 8.9% year-on-year in the second quarter, significantly higher than last quarter's 5.9%. This is the highest earnings growth expectation since the first quarter of 2022.

From the market response in the first quarter, the rise in good news is not as pronounced as the drop in bad news. Companies with a positive EPS surprise have an average stock price increase slightly below the five-year average. Companies with a negative EPS surprise have an average stock price decrease slightly larger than the five-year average.

The market is increasingly questioning the profitability of AI. As large tech stocks emerge from the performance low of 2022, the likelihood of maintaining strength after earnings reports has decreased, except for a few companies. There may be a shift from Mag7 to the 493 sectors, or a transition of speculation focus from AI to branches such as humanoid robots and autonomous driving.

Boeing Company Pleads Guilty

Boeing agreed to plead guilty in two 737 Max crash cases, admitting to deliberately concealing safety risks during the certification process. The company will face a fine of nearly $500 million, but the actual amount will be determined by the judge. Due to having previously paid some fines and compensation, the company will need to pay $244 million in criminal fines this time.

Despite the controversy over the severity of the penalties, from an investment perspective, this represents the end of Boeing's negative news, which is beneficial for valuation recovery. This situation is similar to the surge of BNB after Binance's guilty plea and fine in November 2023.

Market Expectations for Republican Victory

The derivatives market is pessimistic about Biden's prospects. The probability of Trump winning has risen from 40%-50% at the beginning of the year to about 60%. The probability of the Republican Party winning both the House and Senate as well as the presidency has increased to about 50%. The probability of Biden winning has fallen below 20%.

Investors' focus has shifted from growth and monetary policy to politics. The spotlight is on the tariff, tax, and regulatory policy changes that Trump may implement. An expected increase in tariffs will benefit domestic companies while being detrimental to those with international operations, potentially slightly dragging down GDP growth and pushing up inflation.

Political uncertainty may lead companies to postpone investments. Despite strong economic performance, business equipment investment remains below 2019 levels. A Republican landslide victory could extend tax cuts and increase fiscal spending, which would be most beneficial for the stock market.

Affected industries include:

• Renewable Energy and Traditional Energy
• Technology and Big Data

Investment Strategy:

• Focus on the performance of growth and value stocks
• Pay attention to the fluctuations of interest rate-sensitive stocks.

China's Deflationary Effect

China is in a deflationary state, with policy measures increasing overcapacity. As the world's largest commodity exporter, China is exporting the deflationary effect. This has reduced the core inflation rates in Europe and the United States by about 0.1 percentage points, potentially providing more room for central banks to cut interest rates, which is beneficial for stocks and cryptocurrencies.

China holds a significant market share in several export product sectors, including traditional manufacturing and high-tech fields. The long-term investment-driven economic growth model has led to overcapacity, with capital expenditure levels far exceeding those of other major economies.

It is expected that China's Producer Price Index ( PPI ) will not end deflation until the second half of 2025. Although China's market share in the U.S. has declined, the net export value in USD has increased, which may boost demand for U.S. Treasuries. Apart from China, other Asian countries continue to show increasing demand for U.S. Treasuries.

Bitcoin's Performance Lags Behind

Since the beginning of this year, the risk-return ratio of Bitcoin has been significantly lower than that of U.S. stocks, which is relatively rare. The main reason is the unexpected sharp drop in the past month; at the beginning of June, Bitcoin's Sharpe ratio year-to-date was still higher than that of the S&P 500.

Misleading Economic Indicators

Some traditional recession warning indicators have failed in this economic cycle:

• The yield curve inversion has persisted for two years but has not led to a recession.
• The decline in M2 has not triggered an economic downturn.
• The ISM index has been negative for a long time, but the economy remains strong.
• The unemployment rate rose by 0.5 percentage points, but this was mainly due to an increase in labor supply.

This situation is similar to the 1990s, where multiple traditional recession signals appeared but the economy did not immediately decline, instead experiencing a long period of expansion.

RWA market develops steadily

BlackRock's BUIDL tokenized government bonds scale has surpassed $500 million. MakerDAO plans to invest $1 billion of reserves in tokenized U.S. government bond products, which will significantly increase the RWA token market size.

From a revenue perspective, this could bring MakerDAO an additional annual income of 40 to 50 million USD. This may also become a key turning point for Maker's collaboration with traditional large institutions.

Market Capital Flow and Sentiment

• The short selling ratio in the US stock market slightly increased in June, approaching the highest level in four years, but overall it remains low.
• The S&P 500 and Nasdaq 100 index CTA positions are high, while the Russell 2000 index positions are neutral.
• Northbound funds had a net purchase of 15.9 billion yuan this week, reaching a new high in 11 weeks and reversing the net selling trend of the previous 4 weeks.