Cycle Capital: 5.20 After the historical high of gold and US stocks, how far is the currency?

Market Overview

• With the release of "not so hard" economic data, the market continues to digest the dovish stance of Powell (despite several hawkish comments from other committee members), leading to a rebound in interest rate cut expectations. The Dow has risen for five consecutive weeks, while the S&P and Nasdaq have increased for four weeks in a row, particularly with the Nasdaq tech index rising over 3% this week. Following the CPI data, U.S. stocks have recovered all losses from April and reached a new historical high.

• This bull market, which began in October 2022, has not been smooth sailing, with major setbacks stemming from market concerns about the Federal Reserve maintaining high interest rates for an extended period. Nevertheless, since then, the S&P 500 index has returned nearly 52%, including a rise of over 10% from 2024 to date.
• While a significant portion of the market's rise since 2022 has been driven by substantial growth in the tech sector (along with the so-called "seven giants" and special enthusiasm for artificial intelligence), it is important to note that the breadth of the market has begun to expand recently, which is a positive signal for the sustainability of the bull market. Notably, cyclical sectors such as industrials and financials, as well as more defensive and interest rate-sensitive areas like utilities, have shown improvement in recent weeks.

• Recent inflation data and comments from central bank officials in Europe support a rate cut in June, which seems almost certain. However, European stock investors have started to focus on the prospects for rate cuts beyond June, a sentiment dampened by cautious remarks from officials, leading to a slight decline in European stocks last week (though still near historical highs).
• Chinese stocks continue to strengthen, supported by unprecedented stimulus policies in the real estate market. The CSI 300 has risen to its highest level in seven months, the HXC index has reached an eight-month high, and the strongest Hong Kong stock index, HSI, surged 4.74% to its highest level in nine months, with the domestic property index rising 9.9% and up 40% over the past four weeks. Analysts generally believe that the government aims to support this industry without excessive stimulation, so more policy support is anticipated.
• Gold (at historical highs), silver (+11%), cryptocurrencies, copper, and crude oil have all risen. The main backdrop for the rise in copper prices is the expected increase in demand driven by the wave of electrification, including electric vehicles, AI data centers, and the expansion of grid facilities to meet surging electricity demand. This is compounded by a decrease in new copper mine production and Western sanctions on Russian supplies.
• U.S. Treasury yields have shown a slight decline throughout the week, with a V-shaped trend. This is related to several leading economic indicators from the U.S. suggesting serious growth headwinds, although the stock market generally views this as a positive:

• In the stock and commodity markets, it seems that the "goldiloc" state has returned (good economic momentum, the Fed can control inflation, though not necessarily back to 2%), but there are some concerns in the bond market.

Q1 Performance

So far, 93% of S&P 500 companies have reported earnings, with 78% of EPS exceeding expectations. The earnings growth rate of 5.7% is the highest year-on-year growth rate since Q2 2022 (5.8%). For Q2 2024, 54 S&P 500 companies have issued negative EPS guidance, while 37 have provided positive EPS guidance. Analysts expect Q2 EPS growth to reach 9.2%. Additionally, analysts anticipate earnings growth rates of 8.2% and 17.4% for Q3 and Q4 2024, respectively.

Optimistic expectations support higher valuations: the expected 12-month P/E ratio for the S&P 500 is 20.7. This P/E ratio is above the 5-year average of 19.2 and the 10-year average of 17.8:

Price Data

Last week, the highly anticipated April CPI (Consumer Price Index) report was released. The results aligned with market expectations, suggesting that inflation has returned to a moderate trend after several months of exceeding expectations that had caused market anxiety.

The fundamental trends in the CPI report are encouraging. The overall core CPI year-on-year decreased to 3.6%, the lowest level in three years. It rose 0.3% month-on-month, below the expected 0.4% and last month's 0.4%. While these numbers alone may not seem particularly optimistic, this is the first CPI report this year that did not exceed expectations, which is enough to unleash the pent-up bullish sentiment following the FOMC meeting.

Among the findings, commodity prices continued to decline, with falling costs for automobiles and household goods contributing to this trend. Over the past six months, core commodity prices have been declining except for February, echoing Powell's recent comments that commodity inflation has largely returned to pre-pandemic levels and is continuing to deflate inflation. Core services, however, rose 0.4% month-on-month, with a year-on-year increase of 5.3%, still the most problematic part of the CPI. The biggest contributor to this is housing, which rose 0.4% month-on-month, with a year-on-year increase of 5.5%. Rent inflation and owner's equivalent rent (OER) both increased by 0.4%. Housing and gasoline contributed to over 70% of this nominal CPI increase. Other services, including transportation, auto insurance, and healthcare, saw slight declines, while education unexpectedly rose by 0.2% (possibly due to disruptions from school operations?).

Rent typically has a lag of about a year, and with expected slowing in housing price increases, this is why officials believe inflation will continue to decline. Zillow's new rent price growth rate peaked at +3.27% in September but then stagnated, compounded by rising commodity prices, raising doubts about whether future inflation data will continue to outperform expectations:

Zillow predicts that housing prices will peak this summer and begin to decline. The current forecast for 2024 is a growth of 0.6%, down from last month's prediction of 1.9% growth for 2024, and far below the average annual appreciation rate of around 5% before the pandemic. Zillow forecasts that housing prices will decline by 0.9% over the next 12 months, primarily due to a surge in listings shifting the market in favor of buyers:

"The new Fed mouthpiece," Nick, pointed out that after the April report, two more CPI reports are needed to bolster the Fed's confidence. The Fed may still not cut rates before September. The significance of the April CPI data is that it retains the possibility of rate cuts later this year and alleviates some concerns that the Fed may need to further open the door to rate hikes.

The PPI data released on Tuesday was quite interesting. Driven by energy prices and service costs, the nominal PPI rose 0.5% month-on-month in April, significantly higher than the expected 0.3% and last month's 0.2%, with an annual increase of 2.2%, in line with expectations, but marking a new high for the year. The core PPI, excluding food and energy, also rose 0.5%, well above the expected 0.2%, with an annual increase of 2.4%, also meeting expectations.

At first glance, these inflation numbers are clearly not good news, but the market did not drop much in pre-market trading. The reason for this is the government's revision of last month's data, with the nominal and core month-on-month increases for March revised from an increase of 0.2% to a decrease of 0.1%. This completely changes the interpretation from inflation to deflation, leaving the market puzzled about whether to be nervous about the significantly high PPI expectations or pleased with last month's timely deflation. Ultimately, the market chose the latter, with all three major indices opening higher.

China Sells Record U.S. Treasuries

As of March, China has sold U.S. Treasuries for the fifth consecutive month, with a total of $53.3 billion sold in the first quarter, setting a historical record. Even during the 2008 financial crisis, such a sustained reduction in government and agency bonds was not observed.

Bloomberg analysts point out that despite nearing a Fed rate cut cycle, China continues to sell dollars and U.S. Treasuries, indicating a clear intention… With the resumption of the U.S.-China trade war, the pace of China's sale of U.S. securities may accelerate, especially if Trump returns to the presidency.

While selling dollar assets, official gold holdings are on the rise. According to PBOC data, gold's share in reserves rose to 4.9% in April, the highest level since 2015. The IMF noted that since 2015, China and countries with close ties have increased their gold holdings, while countries in the U.S. camp have remained stable, suggesting that their central banks may be buying gold out of concerns over the risks of sanctions.

On the other hand, Japan is buying. According to Treasury data, the overseas holdings of U.S. Treasuries reached $8.09 trillion in March, up from $7.97 trillion the previous month, setting a new historical high. U.S. Treasuries have performed strongly this month, marking the highest foreign buying month in three months. Japan's holdings of U.S. Treasuries have also surged, now at a historical high of $1.19 trillion.

MEME Frenzy, Companies Immediately Cash Out to Suppress Stock Prices

From Monday to Wednesday, Roaring Kitty's return after three years with posts on X triggered a massive short squeeze for GameStop and AMC Entertainment Holdings, with the company's market value briefly rising to $19.8 billion. The surge lasted only two days before entering a correction. Then on Friday, GME announced a secondary offering of 45 million shares, severely dampening the speculative enthusiasm (retail is fuel, not people). However, so far in May, the stock has still nearly doubled in value (AMC also announced a secondary offering of $250 million this week). Additionally, GameStop forecasted that first-quarter net sales would drop from $1.24 billion in the same period last year to between $872 million and $892 million.

It seems that the MEME concept tokens in the cryptocurrency space have not been affected by the bearish sentiment in the stock market, significantly strengthening over the past seven days, with PEPE rising 10% to reach a market cap of $4 billion, setting a new historical high and entering the top 30 cryptocurrencies (including stablecoins), being the only token in the top 100 to rebound to a new high.

The GME meme coin on Solana surged 40 times last Monday, closely mirroring the movement of GME stock:

GPT 4o Takes a Step Closer to AGI

OpenAI launched a new AI model last week called GPT 4o, which will be available to all users. It can perform real-time reasoning across text, audio, and visual (images and videos) modalities, operating twice as fast as GPT 4 Turbo at only half the cost. The new model can observe your emotions and handle interruptions. The audio model can respond in an average of 320 milliseconds, comparable to human response times. In a demonstration of food videos, 4o can engage in video conversations with users to help analyze their surroundings, and OpenAI showcased 4o assisting children in learning math in real-time on an iPad.

In response, Microsoft’s stock and AI-related cryptocurrencies did not react much. Meanwhile, Apple is reportedly finalizing details to integrate some GPT technology into the iPhone. If Siri can utilize these technologies, the quality of interaction and user experience will see a significant leap, making Apple the biggest market mover last week.

Tesla Rehires the Supercharging Team It Laid Off

According to Bloomberg, one of the returning individuals is Max De Zegher, the former director of North American charging operations, second only to the previous head of charging operations, Rebecca Tinuity. It is still unclear how many people have been called back. Last Friday, Musk wrote on X that Tesla would spend over $500 million to expand its supercharging network, emphasizing that this is for new sites and does not include existing operating costs, attempting to dispel market doubts. Some supporters of Musk cited his previous comments about simplifying steps, suggesting that the simplest way is to cut back, and if you don't at least add back 10%, it indicates that the cuts were not thorough enough. However, others argue that the best talent would have been quickly snatched up, and even if Tesla rehires them, they would be second-rate, which is not a good sign.

Retail Investor Sentiment High

The rise in off-exchange trading volume is often seen as an indicator of increased retail trading activity. On Friday, off-exchange trading accounted for 51.6% of all U.S. stock trading volume, setting a record high. Goldman Sachs analyst Scott Rubner noted that he has heard more discussions about "FOMU" (fear of missing out on significant performance) this week. Additionally, the hashtag "#DOW40K" is trending on social media, indicating that retail traders are excited about the recent performance of the Dow Jones index.

Capital Flows

Money market funds saw inflows for the fourth consecutive week (+$16.4 billion), returning to over $6 trillion, a historical high, and the highest level in a month:

The abundance of cash is also evident globally, with foreign central banks' use of the Fed's reverse repurchase agreements (holding cash to earn interest) rising to the highest level in a year:

Funds flowing into the utilities and infrastructure sectors have reached the largest amount in over a year:

13F Shows Extreme Popularity of Bitcoin ETFs in Q1

Nearly 1,500 holdings were reported, valued at $10.7 billion, accounting for 20% of the total ETF value, with 929 institutions holding at least one Bitcoin ETF. Among these, 44% of companies hold IBIT, and 65% hold Grayscale's GBTC (which should be shares converted from previous holdings after listing, not new purchases), with 99% of institutions located in the U.S., and Hong Kong companies ranking second.

The largest holder, MILLENNIUM, is valued at $1.9 billion. Bracebridge Capital holds over $400 million and manages the endowment funds of Yale and Princeton universities. The Wisconsin Investment Board (primarily public pensions) reported holdings of over $160 million in Bitcoin funds. JPMorgan, which has consistently criticized Bitcoin, also reported holding a small amount of spot Bitcoin ETF shares.

Bloomberg analysts commented that "typically, these large institutional players do not appear in 13F filings for about a year (when ETFs gain more liquidity), but as we can see, this is not an ordinary good sign, as institutions tend to act collectively."

IBIT also gained attention for breaking the previous record of $10 billion set by traditional ETFs, surpassing this threshold in just 49 days. JPMorgan's Nasdaq Stock Premium Income ETF (JEPQ) previously held this record, taking about three years to achieve.

Highlights of Big Players' Actions in Q1

Shift in AI Investments: Despite Nvidia's dominance in the AI sector, many investors turned their attention to other companies in Q1. For instance, Druckenmiller reduced his holdings in Nvidia, believing it to be overvalued in the short term. Meanwhile, some investors began focusing on other stocks expected to benefit from the AI revolution, such as Apple, Meta Platforms, and Microsoft.

Focus on Chinese Companies: Due to concerns about the slowdown in the Chinese economy, the Chinese stock market has faced a tough period. However, some well-known investors see investment opportunities and have increased their holdings in Chinese retail and tech companies. For example, David Tepper significantly increased his stakes in Alibaba, Baidu, and Pinduoduo. Notably, short-seller Michael Burry has heavily increased his positions in JD.com and Alibaba.

Buffett's Secret Stock Revealed: Berkshire Hathaway has kept one of its portfolio stocks a mystery. In the latest 13-F filing, the mystery was finally revealed to be Chubb, a Swiss-registered insurance company.

CME Plans to Trade Bitcoin, Coinbase Plummets

On Thursday local time, media reports indicated that the Chicago Mercantile Exchange plans to launch spot Bitcoin trading to meet Wall Street's demand. The CME declined to comment on the matter. Following the news, U.S. cryptocurrency trading platform Coinbase saw a 9.4% drop overnight. However, the CME primarily serves institutional clients, while Coinbase mainly caters to retail investors—Q1 retail trading revenue for Coinbase was $935 million, far exceeding institutional revenue of $85 million.

This Week's Focus

If there were inconsistent views on inflation signals last week, the next major catalyst is Nvidia's report this week. Consensus expectations are for Nvidia's Q1 FY2025 revenue to reach $24.65 billion, more than doubling year-on-year, with the company's previous revenue guidance being $24 billion, with a 2% margin of error; net profit for the same period is expected to be $12.87 billion, a year-on-year increase of over 530%.

Since Q3 2022, Nvidia has exceeded expectations for five consecutive quarters. It is worth noting that ChatGPT had not yet emerged at that time, with the real explosion occurring in the spring of 2023, after which Nvidia's profits began to surge due to strong sales of AI GPU chips. One concern is that the percentage of exceeding expectations has gradually narrowed over the past three quarters, from 2x% to single digits, but this should not be overly concerning, as it is still significantly stronger than before. Several institutions have raised Nvidia's new target price range, from $1,100 to $1,350.

Factors driving Nvidia's upward earnings guidance include the announcements from four tech giants—Microsoft, Google, Amazon's AWS, and Meta—indicating that capital expenditures in cloud computing this year will reach $177 billion, far exceeding last year's $119 billion, and expected to continue rising to $195 billion by 2025. These investments will provide momentum for Nvidia's data center revenue and profit growth, especially in the next generation.

The Blackwell AI chip is set to be released later this year. Nvidia's data center revenue share has skyrocketed from 50% to 80%, with AI remaining the primary growth driver for Nvidia.

Analysts' high confidence in Nvidia's future growth potential is mainly based on: first, product supply and market demand. Improved supply of H100 GPUs (shorter delivery times) and strong demand for H200 GPUs in China provide robust support for Nvidia's current quarter performance. The upcoming Blackwell series GPUs (B100 and B200) are expected to start selling in Q3 and capture a significant market share in Q4. The average selling price of these two GPUs is over 40% higher than existing products, indicating greater revenue potential.

AMD and Intel are catching up to Nvidia. However, in the GPU market, Nvidia firmly controls about 92% of the market share. As we previously analyzed, Nvidia's barriers are not only the chips themselves but also the software and community ecosystem, which collectively reduce customer costs, making it difficult for competitors to surpass in the short term.

In terms of valuation, Nvidia has entered the $2 trillion club, with Apple’s revenue being over seven times that of Nvidia, so Nvidia needs to maintain high growth to sustain its stock price. However, for the growth story to falter, it would require several consecutive quarters of poor financial performance to potentially shift market sentiment, leading to a significant drop in stock price. Therefore, even if this earnings report disappoints, Nvidia's market position is unlikely to be shaken by one unsatisfactory report, and a rebound in the short term is also expected in the absence of alternatives.

In recent weeks, we have seen tech companies facing significant downturns, including ASML, Intel, AMD, SMCI, and ARM. After disappointing earnings reports, their stock prices have all dropped between 10% to 30%, but so far, most have recovered more than half of their losses.

Additionally, several Federal Reserve officials will be speaking this week, including Governor Barr, Waller, and regional Fed presidents Williams and Bostic. Attention will be focused on Waller's statements regarding the next Fed successor, as he did not comment on any economic or monetary policy outlook in his speech last week. The minutes from the last FOMC meeting will also be released on Thursday.