Global politics has once again taken center stage as French President Macron unexpectedly announced the dissolution of parliament and called for new elections following the dismal performance of his allies in the European Parliament elections last week. Led by Le Pen, the RN/National Rally has made significant gains in the polls, signaling a potential majority win for the far-right party on June 30th, thereby increasing the risk of a “Frexit,” with the current finance minister issuing warnings of a possible financial crisis.
The rise of the NR marks a turbulent period in European politics, with pressure increasing on immigration policies and rising living costs leading to significant advances for far-right parties compared to mainstream ruling parties. This year is a historic one for democratic elections, with over 70 countries globally holding federal elections, and right-wing political figures gaining more votes in Germany, France, the Netherlands, Spain, Italy, Argentina, and other places. Is this a prelude to a further shift towards nationalist issues in the upcoming US elections? It certainly seems so.
Market sentiment deteriorated from the outset, starting with the French stock market and bonds before quickly spreading to credit markets. The US 5-year investment-grade CDS spread widened by 2.5 standard deviations in a short period, with poor market liquidity exacerbated by a historic high of risk-off capital flows from Europe to US credit markets.
Most other macro assets remained stable, thanks to optimistic AI sentiment, with the SPX and Nasdaq indices hovering near their year-to-date highs. However, the issue of a narrowing leadership group remains evident, with AI-related stocks standing out prominently.
Economic data from last Friday provided no relief, with the University of Michigan’s Consumer Confidence Index plummeting to 65.6, significantly below the expected 72, marking its lowest level since November. In addition, inflation expectations have been trending in the wrong direction, with the key 5-10 year inflation expectations median stuck at 3.3%, while the long-term average expectation soared to 5.3%, reaching its highest level since 1994.
The cryptocurrency market sentiment remained subdued last week, lacking catalysts and showing weak price performance, leading to a slow liquidation of a series of long futures positions over the past two weeks. Compared to the widespread rise in global stocks, commodities, and even gold, cryptocurrencies have shown a weak quarterly performance, dropping by 5%. New Bitcoin addresses registered year-to-date have also declined, aligning with our long-standing argument that the current rebound, unlike previous cycles, is primarily driven by TradFi interest in a few tokens (or really just BTC). As general investors shift their interest towards the next hot topic (AI), the influence of cryptocurrencies themselves is diminishing, with industry builders focusing primarily on improving blockchain and capital market efficiency. These projects have noble goals but typically require more time compared to the get-rich-quick themes often associated with cryptocurrencies. Who says cryptocurrencies can’t mature further?
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