Original title: "Cycle Capital Recearch: 5.6 Weekly Report, Expectations of Rate Cuts Finally Settled, Valuation Repair Market Opens"

Original source: LD Capital

Last week, global risk asset markets rose across the board, with SP500+0.5%, Nas100+1%, Hang Seng Index and CSI 300 up 4.7% and 0.6% respectively, and Nikkei 225 and Korea Composite Index both up 0.8%. Most of the major government bond yields fell, and the 10Y US Treasury yield fell sharply by 17bp to 4.50%. Due to the release of multiple key data and policies, the market's uncertainty about interest rates has been temporarily settled, and the market's expectations of a possible slowdown in inflation have increased, providing the Federal Reserve with room to cut interest rates, and the market has thus entered a round of valuation repair/oversold rebound.

The things that reassure the market include the lower-than-expected US non-farm payrolls report, ISM manufacturing PMI, service industry index, dovish signals from FOMC and Powell, Apple and Amazon's 100 billion buybacks + strong financial reports, and Hamas and Israel's peace talks under the mediation of major powers. The only slightly disturbing thing is the ECI labor cost and the Ministry of Finance's quarterly bond issuance exceeding expectations.

First, to Wall Street's surprise on Monday, the US Treasury Department not only did not lower, but significantly raised the expected scale of borrowing this quarter by 20% to US$243 billion, and raised the cash balance at the end of the third quarter from 750 billion to 850 billion. All this information is saying that the volume of treasury bond issuance will increase in the future, further extracting market liquidity, and there is also a risk of further increases in treasury bond interest rates. Regarding this new debt plan, the Treasury Department clarified that it did not take into account the Fed's balance sheet reduction adjustment, and still assumed that the Fed would reduce its balance sheet at a rate of 60 billion per month in the next two quarters. Secondly, the employment cost index (ECI) showed that the cost index rose by 1.2% month-on-month in the first quarter, significantly higher than the expected 0.9%. The annual increase was 4.2%, also higher than the expected 4.0%, and the same as the previous quarter. The trend of wage decline has stagnated to a limited extent. The Fed needs this number to be at a level of 3% to 3.5% to meet the 2% inflation target, which makes the market feel that the possibility of Powell's hawkishness on Wednesday has increased, which may be the background of the market crash in the first half of this week. (The good news is that there will not be a particularly large adjustment in long-term Treasury bonds, and a small-scale high-cost bond repurchase plan has been announced)

However, unexpectedly, the FOMC was dovish in both the statement and Powell's Q&A. First of all, the Fed did not give any hints about the future trend of inflation in the statement, even though the data showed that inflation was stubborn. The next dovish part was the Fed's statement of slowing down the balance sheet reduction. This time, the Fed decided to slow down the balance sheet reduction in June, and changed it from the original 60 billion to 25 billion, which is more than the market expected. The Fed has previously expressed that most officials prefer to halve it, that is, to 30 billion. Although the extra 5 billion has little impact, it can easily be interpreted as a dovish signal. Secondly, at the press conference, Powell first denied the idea of a possible interest rate hike in the future, and emphasized that the policy is already tight enough. He also pointed out that the labor market has loosened, and waiting is the current tendency of officials. Powell also mentioned the lag of housing inflation, saying that as long as housing inflation remains low, then housing inflation will definitely come down in the future, but it is not clear when it will come down. So the press conference is also dovish, and there is no verbal hedge against dovish statements as sometimes happens.

In terms of data, the US non-farm payrolls report for April increased by 175k, lower than the market expectation of 240k, the unemployment rate rose slightly to 3.9%, and the average hourly wage growth was lower than expected, with a monthly growth rate of 0.20%, lower than the expected 0.3%. Finally, the market has waited for a situation where all three core sub-items have weakened. Combined with the JOLTS job vacancies falling to the lowest point in three years, it shows that the tightness in the labor market may be easing. Combined with the double decline in the April ISM PMI on the same day and the dovish Fed the day before, the market confirmed the reversal of sentiment. We saw a sharp rise in stocks, cryptocurrencies, and bonds, while the US dollar, gold, and crude oil weakened.

It is worth noting that the largest decline in jobs was in temporary labor services, which fell by 16,000. Temporary workers are often considered to be a leading indicator of the in-place market because when demand begins to decline, the first to decline is temporary labor services. In the past few months, temporary vacancies have been declining, but they have been ignored because of the overall strong employment. From the first quarter GDP to the financial performance of consumer companies such as McDonald's and Starbucks and the management's statement (consumer weakness), to the non-farm payrolls and PMI this time, more and more data show that the economy does not seem to be that good. In other words, we should now start to pay attention to the possible downside risks of the economy. If the economy unexpectedly declines, it may affect the investment logic for the whole year. (But at this stage, it is still a battle between soft landing and re-inflation)

For example, the leading indicator ISM new orders index has fallen for three consecutive months

For the market, bad news has turned into good news. The interest rate market has fully priced in two rate cuts by 2024 and another three rate cuts in 2025:

The first rate cut expectation was confirmed in September:

In addition, due to the easing of geopolitical situation, the slowdown of the US economy, and the unexpected EIA crude oil inventory, crude oil fell by 7%. Gold price -1.4% to $2,301/oz.

Gaza's efforts to reach a ceasefire agreement and release hostages have made slight progress: the two sides resumed negotiations in Cairo on Saturday. However, there are still major differences between the two sides. Hamas requires that any agreement must be based on the end of the Gaza war, and Israel requires the release of hostages and the permanent disarmament and dissolution of Hamas.

The yen fluctuates sharply, and the Bank of Japan may intervene: On April 29, the yen fell below 160 and then rose to around 156. The Bank of Japan said on April 30 that its current account may decrease by 7.56 trillion yen, which is significantly higher than market expectations, indicating that the Bank of Japan may have intervened in the exchange rate by about 5.5 trillion yen.

However, government intervention once again proved to be useless. After spending $35 billion, the exchange rate was only pulled back from 160 to 156. Later, the yen exchange rate continued to rise due to the above factors.

[Apple: $110 billion buyback, 4% dividend rate]

Apple announced its second-quarter results that exceeded expectations (market expectations were pessimistic due to weak iPhone revenue) and announced the largest stock buyback plan in US history of $110 billion, while increasing dividends by 4% to 25 cents per share. Apple's stock price jumped 6%. Apple broke its previous record for the largest buyback scale and achieved 12 consecutive quarters of dividend rate increases. Analysts believe that this move may mean that Apple is becoming a value stock that returns funds to shareholders, rather than a high-powered growth stock that needs cash for research and development or expansion. (By the way, there are a lot of A-shares with dividend yields higher than 4, and many of them have fallen below net assets)

As of the release of the financial report, Apple's stock price has fallen by more than 8%, far less than the 6% increase of the S&P 500 index:

Apple plans to launch a new iPad on the 7th of this week, and it may be noted that it will boost future iPad sales. The company has not launched a new model since 2022, which may be the reason for the relatively sluggish iPad revenue. Next month is Apple's Developer Conference, when investors will pay close attention to Apple's announced AI strategy. Whether this new strategy can enable Apple to find new growth points is worth paying attention to.

【Tesla failed to continue the strong rebound of the previous week and closed down 3.7% last week】

The previous focus was that China gave Tesla's autonomous driving FSD the green light, although the specific details are still unknown. After returning to the United States from BJ, Musk suddenly disbanded the entire company's supercharging team and decided not to advance the next-generation integrated die-casting GIGCASTING plan, casting a layer of uncertainty on the company's prospects.

Currently, it costs 64,000 yuan, or about 8,840 US dollars, to buy FSD in China, which is relatively expensive. In addition, according to an article by 36Kr, Tesla's FSD is mainly trained with overseas data, and it may not be suitable for China. In the early stage, it may help to increase Tesla's revenue driven by the sense of freshness, but whether it will be sustainable in the end depends on the performance of FSD on Chinese roads. The article also mentioned that China's roads are much more complicated than those in the United States, and the amount of training required is higher than that in the United States, but Tesla's data center in Shanghai cannot connect to American supercomputers, and Nvidia's GPU is also limited, so there is no way to completely let go. The data for local training of Chinese car companies is much higher, so although Tesla is indeed ahead in technology, it may not be able to form a dimensionality reduction attack.

Tesla's business scope is actually very broad, including automobiles, energy, batteries, autonomous driving and robots, etc., and each field requires continuous investment. From the last financial report, we can see that Tesla's free cash flow is negative, of which AI capital expenditures cost $1 billion, and the overall cash position has decreased by 2.2 billion, while the company currently has 26.9 billion in cash on hand. Although it is not a problem yet, the trend is not good. Then the company's largest automotive business has weak growth, profits have fallen sharply, and it seems difficult to improve in the future. On the other side, expenses are still continuing, but revenue has been greatly reduced, so it is necessary to re-plan the priorities of each business.

S&P 500 +568%, Berkshire Hathaway +554%

【Coinbase's first quarter report exceeded expectations, ETFs drove institutional trading volume to a record high】

Thanks to the rebound in Bitcoin prices and the listing of spot ETFs, the largest cryptocurrency exchange in the United States doubled its performance in the first quarter year-on-year, and its net profit turned from loss to profit year-on-year, far exceeding expectations.

After the U.S. stock market closed on Thursday, May 2, Coinbase released its first quarter financial report for fiscal year 2024. The financial report shows that the company's revenue in the first quarter was US$1.64 billion, which was expected to be US$1.34 billion, a year-on-year increase of 113%. With the support of unrealized gains of $737 million in crypto assets, Coinbase achieved a net profit of $1.18 billion in the first quarter, making a profit for the second consecutive quarter, turning a loss into a profit year-on-year, compared with a loss of $78.9 million in the same period last year.

After the financial report was released, Coinbase rose slightly but still closed down 2.8% for the week. So far this year, the company's stock price has risen by more than 45%.

Crypto Market Overview

Bitcoin computing power continues to remain high:

Mining difficulty has been raised twice in a row after halving:

Rune fever was short-lived:

GBTC is the main source of selling pressure for all spot Bitcoin ETFs, but the trend unexpectedly changed: For the first time since the launch of the spot Bitcoin ETF, GBTC saw a daily net inflow of +US$63 million (1,020 BTC) on Friday

Although there was still a net outflow last week, net inflows jumped to $380 million on Friday, the largest since March 26. Just on Wednesday, investors sold U.S. spot Bitcoin ETFs at the fastest pace ever. These 11 ETFs have seen a cumulative net outflow of $563.7 million: CME futures market hedge funds began to reduce their record net short positions last week, with net shorts returning to levels last week: Contract market rates remained at lows in this bull market and were the most negative last week: March 13 was the day when the market shifted from pricing in more rate cuts to a rate cut less than the Fed’s “dot plot,” and on that day Bitcoin hit a record high of $73,157.

Crypto News Worth Watching:

· Manuel Nordeste, vice president of Fidelity Digital Assets, said at an event in London that they are working with pension funds that want to allocate Bitcoin.

· Hunter Horseley, CEO of Bitwise, said: "Many traditional and reputable companies have begun to participate in the Bitcoin business in an unprecedented way."

· BlackRock said they are meeting with a range of investors to discuss Bitcoin ETFs, including "pensions, endowment funds, sovereign wealth funds, insurance companies."

· A BTC ETF whale has emerged in Hong Kong, named Ovata Capital Management. The fund is distributed in four different US stock ETFs with a total allocation of US$60 million. They said their goal is to "generate absolute returns that are unrelated to the overall performance of the stock market."

· Well-known European institutions disclosed BTC holdings in 13F documents: Swiss bank Lombard Odier ($209B AUM) owns $1.5 million worth of IBIT; BNP Paribas bought 1,030 shares of IBIT tokens in the first quarter.

【Hot discussion overseas about ABC】

Recently, with the end of the earnings season, the Politburo meeting set the tone, expectations for easing and reform began to strengthen, the room for speculation in the U.S. stock market has shrunk, and global funds have a strong willingness to allocate undervalued Chinese assets. The risk appetite of the Chinese market has increased significantly. The ABC strategy discussed in the fall and winter of last year failed:

EPFR's Chinese capital inflows turned positive and created the largest net inflow in 8 weeks:

Lagging behind northbound funds for one week, the past 5 Zhou Takong: This week is a week with relatively light macro data. The main focus will be on the speeches of several Federal Reserve officials and the progress of the Gaza ceasefire agreement. If there are no unexpected events, the upward trend may continue moderately.

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