Last week, global risk asset markets saw a general rise. The S&P 500 increased by 0.5%, the Nasdaq 100 by 1%, and the Hang Seng Index and Shanghai-Shenzhen 300 both rose by 4.7% and 0.6% respectively. The Nikkei 225 and South Korea Composite Index also increased by 0.8%. Most major government bond yields saw a decline, with the 10-year Treasury yield falling by 17 basis points to 4.50%. The market uncertainty surrounding interest rates temporarily settled due to the release of several key data and policies, strengthening the expectation of a possible slowdown in inflation and providing the Federal Reserve with room to cut interest rates. As a result, the market entered a round of valuation correction and oversold rebound.
Several reassuring factors contributed to market stability. These included lower-than-expected US non-farm payrolls, ISM manufacturing and services indices, dovish signals from the FOMC and Powell, Apple and Amazon’s large buybacks and strong financial reports, and negotiations between Hamas and Israel under the mediation of major powers. The only slightly unsettling factors were the ECI labor costs and the Treasury Department’s quarterly debt issuance exceeding expectations.
Unexpectedly, the US Treasury Department not only did not lower, but instead significantly raised its borrowing expectations for this quarter by 20% to $243 billion, and increased the cash balance at the end of the third quarter from $750 billion to $850 billion. These pieces of information indicate that the volume of future bond issuance will increase, further draining market liquidity, and there is also a risk of further increase in bond yields. The Treasury Department clarified that it did not include adjustments to the Fed’s balance sheet reduction in this new borrowing plan, and still assumed that the Fed would reduce its balance sheet at a pace of $60 billion per month for the next two quarters. Furthermore, the Employment Cost Index (ECI) showed a 1.2% increase in labor costs for the first quarter, significantly higher than the expected 0.9%. The annual increase was 4.2%, also higher than the expected 4.0%, and unchanged from the previous quarter. The downward trend in wages is limited, and the Fed needs this number to be at a level of 3% to 3.5% to meet the 2% inflation target, which has increased the market’s anticipation of a more hawkish stance from Powell on Wednesday. This may have been the background for the market’s sharp decline in the first half of this week. (The good news is that long-term government bonds will not undergo significant adjustments, and a small-scale high-cost bond repurchase plan has been announced.)
However, unexpectedly, both the FOMC statement and Powell’s Q&A session were dovish. Firstly, the statement did not provide any hints about the future trend of inflation, even if the data showed stubborn inflation. Furthermore, the dovishness was evident in the Fed’s decision to start slowing down its balance sheet reduction in June, reducing it from the original $60 billion to $25 billion, which is more than the market’s expected reduction. Previously, the Fed had expressed that most officials were inclined to halve the reduction, which would be at the $30 billion level. Although this additional $5 billion has a minimal impact, it can easily be interpreted as a dovish signal. Secondly, during the press conference, Powell denied the possibility of future rate hikes and emphasized that the policy is already sufficiently tight. He also pointed out that the labor market has loosened and that waiting a little longer is the current officials’ inclination. Powell also mentioned the lag in housing inflation, stating that as long as housing inflation remains low, it will eventually come down, but the timing is uncertain. Therefore, the press conference was also dovish and did not provide the usual verbal hedging of the dovish statement.
In terms of data, the US non-farm payrolls report for April showed an increase of 175,000 jobs, lower than the market’s expectation of 240,000. The unemployment rate slightly rose to 3.9%, and average hourly earnings growth was lower than expected, with a monthly growth rate of 0.20% compared to the expected 0.3%. Finally, the market saw all three core sub-items weaken together, combined with the JOLTS job openings dropping to a three-year low, indicating that the tightness in the labor market may be easing. Combined with the dual decline of April’s ISM PMI and the dovish Fed the day before, the market confirmed the reversal of sentiment. We saw a surge in stocks, cryptocurrencies, and bonds, while the US dollar, gold, and oil weakened.
It is worth noting that temporary employment services had the largest decline in positions, decreasing by 16,000. Temporary workers are usually considered a leading indicator of the job market, as they are the first to be reduced when demand starts to decline. In the past few months, temporary employment has been declining, but it has been overlooked due to the overall strength of employment. From the GDP in the first quarter to the financial reports and statements of consumer companies such as McDonald’s and Starbucks (indicating consumer weakness), and to the non-farm payrolls and PMI of this time, more and more data suggests that the economy may not be as strong as expected. This means that we should start paying attention to the potential downside risks to the economy, which could affect the investment logic for the entire year. (However, at this stage, there is still a debate between a soft landing and reflation.)
For example, the leading indicator, the ISM new orders index, has declined for three consecutive months.
For the market, bad news has once again turned into good news. The interest rate market is currently fully pricing in two rate cuts in 2024 and three more in 2025:
The first rate cut is expected to be confirmed in September:
In addition, due to news of easing geopolitical tensions, a slowdown in the US economy, and higher-than-expected EIA crude oil inventories, oil prices fell by 7%, while gold prices decreased by 1.4% to $2,301 per ounce.
There has been slight progress in the efforts to reach a ceasefire agreement and release hostages in Gaza. Both sides resumed negotiations in Cairo on Saturday. However, there are still significant differences between the two parties. Hamas demands that any agreement must be conditional on ending the Gaza war, while Israel demands the release of hostages and the permanent disarmament and dissolution of Hamas.
The Japanese yen experienced significant volatility, and the Bank of Japan may intervene. On April 29, the yen briefly fell below 160, but then rose to around 156. On April 30, the Bank of Japan stated that its current account surplus may decrease by 7.56 trillion yen, significantly higher than market expectations, indicating that the Bank of Japan may have conducted intervention of around 5.5 trillion yen.
However, government intervention has once again proven to be ineffective, as $35 billion was spent but only managed to pull the exchange rate back from 160 to 156. The subsequent upward movement of the yen exchange rate was driven by the aforementioned factors.
【Apple: $110 billion buyback, 4% dividend yield】
Apple announced better-than-expected second-quarter earnings (due to pessimistic expectations for iPhone revenue) and the largest stock buyback plan in US history, totaling $110 billion. They also increased their dividend by 4% to $0.25 per share. Apple’s stock price jumped by 6%. Apple broke its previous record for the largest buyback program and achieved 12 consecutive quarters of increasing dividend yield. Analysts believe that this move may indicate that Apple is becoming a value stock that returns capital to shareholders, rather than a high-growth stock that requires cash for research and expansion. (It should be noted that there are many A-shares with a dividend yield higher than 4%, and many have fallen below book value.)
Before the announcement of the financial report, Apple’s stock price had fallen by more than 8%, far behind the 6% increase in the S&P 500 index.
On May 7th, Apple plans to launch a new iPad, which may help boost future iPad sales. The company has not released a new model since 2022, which may be why iPad revenue has been relatively weak. Additionally, next month is Apple’s developer conference, where investors will pay close attention to the AI strategy Apple announces. Whether this new strategy can help Apple find new growth points is worth noting.
【Tesla fails to sustain previous week’s strong rebound, down 3.7%】
The focus was previously on China giving Tesla the green light for its Full Self-Driving (FSD) feature, although the specific details are still unknown. After returning to the US from China, Musk suddenly disbanded the entire supercharging team and decided not to proceed with the next-generation integrated casting GIGACASTING project, casting uncertainty over the company’s prospects.
Currently, purchasing FSD in China requires 64,000 RMB (approximately $8,840), which is relatively high. Additionally, according to an article by 36Kr, Tesla’s FSD is mainly trained using overseas data and may not perform as well in China. In the short term, the novelty factor may help boost Tesla’s revenue, but its sustainability will depend on FSD’s performance on Chinese roads. The article also mentions that China’s roads are much more complex than those in the US, and the training required will be higher than in the US. However, Tesla’s Shanghai data center cannot connect to the supercomputers in the US, and Nvidia’s GPUs are also restricted, so there is no way to fully unleash their capabilities. On the other hand, Chinese domestic automakers have much more data trained locally. So, although Tesla is technically ahead, it may not have a decisive advantage.
Tesla’s business scope is actually very broad, including automobiles, energy, batteries, autonomous driving, and robotics, and each field requires continuous investment. From the last financial report, it can be seen that Tesla’s free cash flow is negative, with $1 billion spent on AI capital expenditures alone. Overall, the cash position has decreased by $2.2 billion, and the company currently has $26.9 billion in cash. Although it is not yet a problem, this trend is not favorable. Furthermore, the company’s largest automotive business has experienced weak growth and a significant decline in profits, and it seems difficult to improve in the near future. With expenses continuing and income significantly decreasing, it is necessary to reassess the priorities of each business.
S&P 500 +568%, Berkshire Hathaway +554%
【Coinbase exceeds expectations in Q1 report, ETF drives institutional trading volume to reach a historical record】
Thanks to the rebound in Bitcoin prices and the listing of spot ETFs, the largest cryptocurrency exchange in the US saw a doubling of its first-quarter performance, with net profit turning from a loss to a profit, far exceeding expectations.
After-hours on May 2nd, Coinbase released its Q1 financial report. The report showed that the company achieved $1.64 billion in revenue in the first quarter, surpassing the expected $1.34 billion, with a year-on-year growth of 113%. With the support of a $737 million unrealized gain on holding cryptocurrencies, Coinbase achieved a net profit of $1.18 billion in the first quarter, marking the second consecutive profitable quarter and a turnaround from a loss of $78.9 million in the same period last year.
Following the release of the financial report, Coinbase saw a small increase but still ended the week with a 2.8% decline. The company’s stock price has risen by over 45% since the beginning of the year.
Cryptocurrency Market Overview
Bitcoin hash rate continues to remain high.
Mining difficulty has been raised twice after the halving.
Ripple’s XRP had a brief moment of popularity.
GBTC used to be the main source of selling pressure for spot Bitcoin ETFs, but the trend unexpectedly changed. Since the launch of spot Bitcoin ETFs, GBTC saw a net inflow of $63 million ($1020 BTC) on Friday.
Although there was still a net outflow overall last week, the net inflow on Friday jumped to $380 million, the largest since March 26. On Wednesday, investors sold US spot Bitcoin ETFs at the fastest pace ever. The 11 ETFs had a cumulative net outflow of $563.7 million:
CME futures market hedge funds began reducing their record short positions last week, bringing the net short positions back to the level of seven weeks ago.
The contract market fee rate remained at a low level during this bull market and reached the most negative level last week.
March 13 was the day when the market shifted from pricing in more rate cuts to rate cuts lower than the Federal Reserve’s “dot plot,” and on that day, Bitcoin reached a historical high of $73,157.
Notable cryptocurrency news:
Manuel Nordeste, Vice President of Digital Assets at Fidelity, stated at an event in London that they are working with pension funds that want to allocate Bitcoin.
Hunter Horseley, CEO of Bitwise, stated, “Many traditional and reputable companies have started to participate in the Bitcoin business in unprecedented ways.”
BlackRock stated that they are meeting with a range of investors to discuss Bitcoin ETFs, including “pension funds, endowments, sovereign wealth funds, insurance companies.”
A BTC ETF whale named Ovata Capital Management has appeared in Hong Kong. The fund is distributed among four different US ETFs, with a total allocation of $60 million. They stated that their goal is to “generate absolute returns unrelated to the overall stock market.”
Well-known European institutions disclosed their BTC holdings in 13F filings: Swiss bank Lombard Odier ($209 billion AUM) holds $1.5 million worth of IBIT tokens; BNP Paribas in France bought 1,030 shares of IBIT token shares in the first quarter.
【Overseas discussion on ‘ABC’】
Recently, with the conclusion of the earnings season and the tone set by the Politburo meeting, expectations of easing and reform have started to strengthen. Global funds have shown a strong willingness to allocate to undervalued Chinese assets, and market risk appetite in China has significantly increased. The ABC strategy that was discussed last fall and winter has proven to be a major failure:
EPFR’s inflows into Chinese funds turned positive and reached the largest net inflow in eight weeks.
It lagged behind Northbound funds for a week and has been absent for the past five weeks.
This week is relatively light in terms of macro data, with a focus on speeches by several Federal Reserve officials and the progress of the Gaza ceasefire agreement. Barring any surprises, the upward trend may continue moderately.
