LD Capital Weekly Macro Report (12.25): Fund manager FOMO, retail investor sentiment is 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, inflationary pressures continued to subside, nominal PCE was negative for the first time in November, core PCE prices rose 0.1% month-on-month, lower than expected, and the annual rate fell to 3.2%, and the Fed has basically achieved its price target from the six-month annualized data

And income and expenses rebound at the same time:

On the economic data front, last week’s survey of the Philadelphia Fed and consumer confidence – suggesting that the economy is 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 5.1% in October. Last week’s Q3 GDP was revised down slightly to +4.9%, 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 adversely affected 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 current theme of the market is the US economy, which was originally expected to be marked by the trough of activity in the fourth quarter of 2023/first quarter of 2024, but the US GDP is still expected to reach 2% during this time, and then re-accelerate.

U.S. stocks rose for the eighth straight week (the longest streak in SPX2017 years), despite Plummet 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 bearish 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 continued to decline overall this week, but the decline was not as large as the week before the Fed meeting released a dovish turn signal, and short-term bonds fell sharply, with 10Y still flat at 3.9% and 30Y 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 made the stock and bond markets plummet, 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 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, Soaring Maritime Inflation

Perhaps the biggest theme in global financial markets last week was the Red Sea shipping crisis. 158 ships carrying about $105 billion in seaborne cargo were forced to leave the Red Sea due to the risk of continued Houthi attacks, 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 voyage has increased by 40% and transportation costs have increased by more than 40%. This has driven the domestic container transportation index and market freight rates to continue to rise. The Market Maker Futures Contract of Shanghai International Energy Exchange Container Shipping Index (European Line) has hit the limit for five consecutive trading days, with a cumulative increase of more than 50% in one 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 on Friday, sea freight from Shanghai to the UK rose to $10,000 per 40-foot container, up from $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 flowing into global equities, according to EPFR Global. Investors are also investing more in U.S. Treasuries than ever before, reaching $177 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% equity, 21.4% bond, 11.8% cash, rise equity, and decreasing debt to cash:

Over the past two weeks GSHedging 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 increased their holdings in defensive stocks (staples, healthcare, utilities) and consumer discretionary, significantly reduced their holdings in cyclicals (energy, materials, industrials, financials, real estate) and slightly reduced their TMT holdings. GS customers’ operations are not exactly consistent with recent market trends, the recent rebound in the real estate, consumer discretionary, industrials, financial sectors is strong, but GS customers choose to reduce their holdings, defensive stocks are weak, but GS customers choose to increase their holdings:

The financial sector, for example, rebounded 19% from the November location, but the bulls began to turn 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 the highest 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 level of “extreme greed” for two consecutive weeks:

Institutional perspectives

DB: 2024 Year of Valuation Repair

Over the past five years, the price-to-earnings (P/E) ratios (P/E) of several European and Asian countries, which account for about half of the market share in our analysis, have been lower than 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:

Adding a comparison of the valuation of GS, it can be seen that except for the valuation of US stocks, the valuation is not high. The U.S., 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 was 20x, so the market is already pricing in a scenario where inflation returns to normal:

DB: 202X welcomes 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 global GDP in 2024 will participate in leadership transitions)

CICC: How long can the reverse repo be supported? At present, the pressure is not great, and the U.S. 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, 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 of reverse repo, and the net issuance of short-term bonds exceeding 460 billion US dollars in the first quarter may make it fall back to 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 significantly slow down 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 receivers 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 of 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, interest in Meta is being revived as it is bullish 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 “cash burning” problem, which is inefficient in pricing.

BofA Fund Manager Survey

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

Equity allocation rising 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, fund managers are now only 2 months old:

Fund managers are comfortable with the level of risk they are currently 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 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%):