Macro and data analysis reveals a positive outlook

Author: zhili @MacroFang @chenchenzhang Source: X, PSE Trading

I.Macro Dynamics

• Market Status:The collapse of the yen carry trade led to the liquidation of a large number of positions. The market quickly corrected the error, and the Topix Index led the "deep V" reversal.

• Data Adjustment:Although the recent CPI, PPI and other data are in line with expectations, there are doubts such as the "forced" adjustment of energy and used car prices, which will reduce the market implied volatility.

• Federal Reserve Movement:Fed officials' speeches show cautious policy adjustments, and the September dot plot is expected to continue to maintain an accommodative stance.

• Federal Deficit:The Fed's dovish stance, the Treasury's short-term bond issuance and bond repurchase program have eased market tensions. Although large financing programs may put pressure on market liquidity, the increase in reserves and the flexibility of fiscal operations will help maintain market stability.

• Corporate Performance and Repurchase:S&P 500 companies performed steadily in the second quarter. The opening of the corporate repurchase window will enhance liquidity, and the US stock market is expected to continue to grow in the short term.

• Medium-term Market Outlook:The market outlook is complex, and uncertainties such as inflation, change of government, policy and fiscal deficits need to be closely monitored.

Second,Crypto data

• Stablecoin growth:The issuance of stablecoins continued to rise in 2024, indicating that market demand remains strong.

• ETF liquidity:The net inflow of Bitcoin spot ETFs decreased after May, and market sentiment turned to wait-and-see.

• Holding cycle:Nearly half of Bitcoin is controlled by long-term holders, and market confidence is solid.

• Holding cost:The on-chain holding cost is higher than the current market price, and the market still has room for upward movement.

• Market resilience: Despite the volatility, investors are willing to hold on to their coins and the market is healthy and stable.

III.Macro enters a turning point

1. August: will recover from turmoil

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1.1 The collapse of the yen carry trade led to a large number of positions being liquidated, the market corrected its mistakes, and the Topix index led the "deep V" reversal

Over the past four weeks, USD/JPY has fallen sharply, from nearly 162 yen/dollar to around 142 yen/dollar, which is consistent with our bearish expectations. The sharp decline was caused by the Bank of Japan's interest rate hike and the Japanese government's July 11 and 12 The recent USD/JPY move mirrors similar declines in 1990 and 1998, though it is worth noting that this move does not always foreshadow a long-term trend reversal for USD/JPY, unlike EUR/JPY and AUD/JPY.

August 5 Panic Selling: Global Markets Collapse

The Bank of Japan’s unexpected rate hike caused the Topix to fall 20% in a single day – as investors panicked to cover their positions. Stocks fell sharply over a few trading days as recession risks rose and fears that sharp moves in the yen would trigger a broader de-risking.

ISM Weaker-than-expected data, rising unemployment claims, and disappointing nonfarm payrolls paint a gloomier picture of the U.S. macroeconomic outlook, raising concerns about an impending recession. Our economists note that rising unemployment and weak ISM may already signal the start of a recession cycle.

Despite the absence of risk events over the weekend, S&P futures fell nearly 5%, NDX fell more than 6%, and VIX soared above 60. The FOMC is busy hinting at a rate cut in September.

High leverage in the financial system, especially in cryptocurrencies and high-cap stocks, has led to high market volatility. Notional volume was three standard deviations above normal, the largest volume on a non-index rebalancing day in the U.S. market since February 2022. Investor activity was mixed, with S&P bullish positioning declining and Nasdaq positioning relatively unchanged despite volatility. We expect Friday's large number of new short positions to have a large impact on Nasdaq's net-long position in the coming sessions.

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1.2 Market turmoil: Macroeconomic positives boost risk appetite

After the leverage was removed, the market rebounded sharply, led by the Topix. Positive macroeconomic data released last week drove the return of bullish investor flows to the US index, with more than $16 billion in new funds added to the S&P index and further expansion of positions. The Nasdaq and Russell 2000 indexes rose modestly, and the losses on the Nasdaq long position eased. Global market sentiment was positive, with almost all European and Asian indices rising in nominal terms. The DAX and FTSE turned net positive, while the KOSPI and Nikkei continued their bullish momentum. The Nikkei's capital flows were strongest in Asia, while the KOSPI index hit a nearly three-year high. In contrast, the China A50 index remained bearish and the risk of positions was limited.

CTA Quantitative buying also drives huge liquidity into the market, and in the short term, it is expected that CTA will buy more than 60 billion stocks, 30 billion will flow into US stocks, and strong buying demand will drive the market further up. According to statistics from Scott Rubner of Goldman Sachs, in the past three weeks, the change of dealers' Gamma was nearly 16 billion, and long-term positions turned into short-term positions, and then turned into long-term positions. The gamma of dealers is no longer short-term and will serve as a buffer for the market in the future.

2. Data contradictions

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2.1 Data "falsification" helps restore market sentiment and strengthens expectations of interest rate cuts

Last week's CPI, PPI, retail, PMI and other data are very "just" in line with market expectations, dispelling market expectations of recession while maintaining the Fed's expectations of rate cuts. We see the "irrationality" in the coincidence of data, such as PPI data. Energy rose by about 2% year-on-year while energy remained unchanged from the previous month. Although it can be explained by increased exports and government purchases, the CPI's used car sub-item (-10.9%) does not conform to normal logic.

In June, CDK's software and technology experienced a network failure, and most used car dealers were unable to deliver vehicles, resulting in a large backlog of order demand. According to the Mannheim Used Car Report, both transaction volume and transaction price rose in the first half of July (1.6%). We expect a decline in the second half of July, but according to our estimates, a year-on-year decline of more than -10.9% is very unreasonable, far exceeding our expectation of -4.3%. The actual data may be biased, and we expect the implied volatility of the market to decline until the election results are determined.

3. Fed trends

In response to the recent adjustments in the speeches of Fed officials, we expect the September dot plot to emphasize the expectation of three interest rate cuts.

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3.1 Officials’ Speeches

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3.2 Dot Chart Forecast

Powell’s speech and interest rate changes in September are not expected to cause volatility. The dot chart in September is more likely to determine the short-term market trend. Combining the above Fed speeches and our subjective judgment on the officials’ long-term, we believe that the median and mode of the dot chart shown in September are 75 bps.

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3.3 Rate cuts will usher in a super cycle

In recent minutes, most federal officials support easing policy if data is in line with expectations. Chairman Powell acknowledged that rate cuts were mentioned in the July discussion, and several officials also supported a 25 basis point cut, while leaning towards a trend of a possible larger rate cut in September. Officials expressed confidence in the slowdown in inflation, given the slowdown in wage growth and consumers’ resistance to high prices, while the risks to employment increased.

Yesterday's revision to the Bureau of Labor Statistics' employment data showed a loss of 818,000 jobs over the past 12 months, reinforcing the signal of a weak labor market, which will affect market sentiment and FOMC pricing.

The labor data on September 6 will be very critical, but we think the risk of this event is low.

This month's S&P 500 It may end with an increase. In the past history, it was rare to close higher before the rate cut (1973-Now), only in 1984 and 1989, and there was no significant correction within 1m, 3m and 6m after the rate cut. (However, due to the small amount of data, the judgment of the market trend after this rate cut is limited, for reference only).

4. Federal Deficit

- The federal deficit has widened, but the Fed's dovish stance, the Treasury's short-term bond issuance and bond repurchase program have eased market tensions. Although large-scale financing plans put pressure on market liquidity, the increase in reserves and the flexibility of fiscal operations will maintain market stability.

4.1 Ample Financial Liquidity

The market expects the total deficit for this fiscal year to reach $1.6 trillion, accounting for about 6% of GDP. The increase in debt levels alone has led to higher interest payments, which soared by $185 billion year-on-year. It is a relief that the federal government's total debt as a percentage of GDP remains at around 110%, which is relatively healthy among major economies.

Major primary dealers have accumulated record-high US debt and must reduce leverage. In the long run, it will put very great pressure on the US government, but in the short term it will allow the Fed to maintain a more "dovish" voice. Quantitative indicators such as the Chicago Fed's Financial Conditions Index (NFCI) show that financial conditions have reversed all the tightening pressures that the Fed has seen when raising interest rates.

4.2 Debt Structure Adjustment

The Ministry of Finance plans to raise $740B in July-September and $565B in October-December. Although the amount is huge, it is slightly lower than our team's forecast (due to the Fed's slowdown in quantitative tightening and the high cash surplus at the end of the quarter due to higher tax revenue in the previous quarter).

There are voices in the market that worry that the Ministry of Finance's huge financing plan will drain liquidity from the reserve market and cause the market to fall, but we are not pessimistic about this.

Since the Fed began quantitative tightening in June 2022, ONRRP balances have decreased by $1.68 trillion, while reserves have increased by $15.5 billion. ON RRP balances fell by $127.7 billion last week and by $141.1 billion over the past four weeks. Reserves increased by $186.2 billion last week, an increase of $30.5 billion from the previous month. Therefore, the impact of the balance sheet reduction is felt more in ON RRP balances without directly affecting reserves, the main source of financial liquidity.

The Ministry of Finance introduced liquidity management repo in the last refinancing in May. Although cash management repo has not yet been launched, we believe that it is reasonable to conduct repo in the weeks of September tax period, which will reduce the demand for T-BiI issuance in September.

In the future, the market estimates that the holding ratio of the Ministry of Finance's T-Bils may rise to more than 20% (implying a relative reduction in the scale of long-term bond issuance), which will drive down the term financing premium in the medium and long term, and further guide the loose financial market. However, due to the negative attention caused by the recent TBAC financing guidance, the Ministry of Finance may not abandon the guidance of 15%-20% in the short term.

5. Corporate earnings and buybacks

S&P 500 companies performed steadily in the second quarter and are expected to continue to grow rapidly in the next two quarters; market buyback activities will also continue to inject liquidity into the market.

5.1 Optimistic earnings growth

Although the market is obviously more picky about M7's performance, the overall performance of S&P500 in the Q2 earnings season is normal. This quarter is different from the previous growth quarters led by M7. S&P493 Q2 earnings are one of the important factors driving the rise of US stocks in this quarter, offsetting some of the impact of M7's substandard earnings. We expect that S&P493 will see double-digit earnings growth in Q3 and Q4, while driving up risk appetite and sentiment, and risk assets (Russell 2000 and Bitcoin, etc.) will usher in spring.

5.2 Large scale of corporate buybacks

Most companies are now in the buyback open window, and when the market fluctuated greatly on August 5, the speed of corporate buybacks increased significantly. According to Goldman Sachs block trader data, the buyback volume is 1.8 times the average daily trading volume (ADTV) so far in 2023; the buyback volume is 1.3 times compared to the ADTV so far in 2022. On September 13, most companies entered the repurchase lock-up window before the financial report. We expect that the liquidity of the US stock market will be relatively abundant in the short term (before mid-September), and the daily repurchase amount of companies will exceed $50B.

6. Medium-term outlook

The macro market is in a very complex state. We can only infer the short-term market trend based on the temporary information. For the medium term, our judgment will be vague.

6.1 Inflationary pressure still exists

The decline in inflation is mainly due to the sharp decline in oil prices and used car prices, while service inflation, especially housing inflation, remains high. The layoff rate has not increased, and the salary growth rate is even higher than the inflation index. When the Fed cuts interest rates, companies will inevitably speed up financing and expand their business territory, which will be more unfavorable to the suppression of inflation.

6.2 Government change increases uncertainty

Tariffs - Harris's policies will be more moderate than Trump's, especially in terms of tariff policies, which will help reduce global trade disputes. Trump's policy of significantly increasing tariffs will greatly increase the possibility of global trade disputes, especially increasing tariffs on China, leading to increased commodity prices, a significant increase in domestic employment, and huge pressure on inflation.

Federal Reserve - The change of government will have little short-term impact on the Federal Reserve. The president cannot directly influence the independent Federal Reserve in the short term, but if Trump comes to power, he can appoint an "economically friendly" chairman when Powell's term expires in May 2026, increasing our uncertainty.

Deficit - According to the CBO forecast, the initial deficit rate in 2025 is expected to drop from 3.9% in 2024 to 3.1%, but if Trump is elected, we expect the deficit rate to increase to 4.1% (based on Trump's tariff policy, tax policy, immigration policy, energy policy, etc.). When the fiscal policy continues to increase, the monetary policy will continue to swing in order to maintain the inflation rate, and the market will also increase concerns about the sustainability of debt, which is very unfavorable for us to judge the future market trend.

6.2.1 Bipartisan attitude towards cryptocurrencies

Republican Party - Trump criticized Biden's anti-cryptocurrency stance, including the expulsion of Bitcoin mining companies and the potential threat of tax increases, and emphasized that the government and SEC Chairman Gary opposed the FIT21 Act's regulatory measures as unreasonable.

Democratic Party - The Democratic Party is also more accepting of cryptocurrencies, realizing the importance of attracting crypto enthusiasts in the fierce campaign. Harris has frequently made statements promoting the cryptocurrency industry. At a Bloomberg roundtable at the Democratic National Convention in Chicago, Nelson emphasized Harris's commitment to supporting policies that promote the thriving of emerging technologies. In addition, Harris has begun to engage with cryptocurrency executives to better understand and advocate for the development of the industry.

6.3 About the yen carry trade

The risk of yen carry trade is worth noting. The market expects BOJ to restart interest rate hikes early next year. Combined with the Fed's interest rate cuts, the yen-US bond spread will inevitably narrow significantly, but the specific carry positions and risks cannot be measured now. We prefer to discuss this issue in November.

7. Conclusion

We believe that whether from the perspective of market sentiment, capital flow, corporate operating conditions, fiscal capital circulation and monetary policy, our team's bullish view in the short and medium term is supported. In the short term, the cryptocurrency market may be affected by the volatility of the U.S. stock market or Nvidia's financial report, but it will not change the overall trading logic of the market.

Next year's specific market performance will depend on changes in political arena, monetary policy, fiscal policy and inflation data.

Fourth,Crypto chain data

Prices are usually the result of multiple forces pulling each other. Some forces may not show their effects immediately, and it takes a long time to reflect the results. We have also proposed our own framework for on-chain analysis, covering liquidity, holding period and average cost.

1. Liquidity

1.1 On-chain stablecoin value

The issuance of on-chain stablecoins is highly correlated with the market. The supply of stablecoins has increased significantly in the past few years, especially from 2020 to 2021. The rapid growth of stablecoins during this period is closely related to the prosperity of the global cryptocurrency market.

After entering 2024, although the issuance of stablecoins has slowed down, it has maintained an overall growth trend. As can be seen from the chart, compared with the rapid expansion in previous years, the growth rate of stablecoin supply in 2024 has slowed down significantly, and the curve has become flatter. This shows that although the market demand for stablecoins still exists, compared with the explosive growth in previous years, the market is gradually entering a more mature and stable stage.

The recent stablecoin supply has re-entered the issuance stage after slowing down, and has set a new high in this round of rising cycle. Overall, the stablecoin market in 2024 is still in a growth trend, and it should also have a corresponding boosting effect on the sluggish market.

1.2 ETF data

From the beginning of the year to the beginning of March, the cumulative net inflow rose rapidly, indicating that the market demand for Bitcoin spot ETFs is strong. However, as time went on, especially after May, the amount of funds flowing into the market decreased, and the cumulative net inflow began to stabilize, maintaining at around $20 billion, failing to reproduce the previous growth momentum. We can see that despite occasional large-scale inflows, the overall net inflow has decreased since May, accompanied by some net outflows. This further proves the change in market sentiment, from active buying to more wait-and-see and cautious, and the effect of "spot ETF" in bringing in new funds has also weakened.

2.HOLD Waves

2.1 BTC: Realized Cap HODL Waves

Bitcoin's Realized Cap HODL Waves, used to analyze the holding time and maturity of coins in the market.

The figure below represents the proportion of coins held for more than 6 months. As of August 20, the total proportion of holdings for more than 6 months is 47.097%, which means that nearly half of the Bitcoin in the market is in the hands of long-term holders. In the top range of the first two bull markets, this value was below 20%.

This means that the current situation on the chain is that the proportion of long-term holders is still high, indicating that despite price fluctuations, many investors choose to continue holding Bitcoin rather than selling.

2.2 Trend Accumulation Score

Swinging between selling and holding, the current state is returning to the HOLD cycle.

This chart shows the change of the **Trend Accumulation Score** of different Bitcoin holding groups over time. The bluer the color, the more likely the on-chain holders are to hold or buy, and the redder the color, the more likely investors are to sell.

After the selling pressure some time ago, both large and small holders are now inclined to hold.

2.3 Bitcoin: Long/Short-Term Holder Supply Ratio

This chart shows the change of the supply ratio of Bitcoin long-term holders (LTH) and short-term holders (STH) over time.

It should be noted that the holding period for long-term holders and short-term holders is 155 days, with a 10-day buffer period

The current LTH/STH supply ratio is 4.8604, and there is a clear upward signal, which is 13% higher than the 30-day average (see the green bar chart)

3. Holding Cost

3.1 Bitcoin: Realized Price-to-Liveliness Ratio

***Blue line: Realized Price (Realized Price Price), ***The blue line represents the "realized price", which is the average holding price of all Bitcoins on the chain (based on BTC transfer data).

***Orange line: Realized Price-to-Liveliness Ratio (RPLR), ***The orange line represents the "realized price-to-liveliness ratio", which is an indicator that combines the realized price and Bitcoin holding behavior. It adjusts the realized price by comparing the "activity" of Bitcoin (that is, the time Bitcoin is held or spent) to estimate the "holding cost of active addresses" of Bitcoin.

Current value: As of August 11, the cost of holding coins on the chain is $31.3k; the cost of holding coins by active addresses on the chain is $51.3k.

Current market prices are above these cost prices.

3.2 Bitcoin: PiCycle Top Indicator

This indicator is composed of 350DMA*2 and 111DMA. 350MA refers to the 350-day moving average, which is used to calculate the average closing price in the past 350 days.

In history, every bull market will see 111DMA cross 350DMA*2, that is, the short-term moving average crosses 2x long-term moving average, and the intersection of the two moving averages is often the top range. At present, there is still a gap between the two moving averages. Currently:

350DMAX2:$102.579

111DMA: $63,742

3.3 Market Cap BTC Dominance

Possible time nodes for Altcoin outbreaks:

4. Conclusion

Against the backdrop of a challenging and volatile market environment, long-term Bitcoin holders remain steadfast, and there is evidence that they are increasing their accumulation behavior. Compared with the peak of the previous cycle, this group of investors holds a higher proportion of Bitcoin network wealth, showing investors' patience and waiting for prices to rise. In addition, despite the largest price contraction in the cycle, these investors did not panic sell, highlighting the resilience of their overall conviction.

At the same time, the stablecoin supply chain remains sufficient, and although the inflow of external funds has slowed down, the current price is still higher than the average holding cost on the chain, and the holding structure is also very healthy. At this stage, BTC's liquidity has the motivation to overflow, and the Altcoin season has not yet arrived.

In general, we remain positive and bullish on the market outlook.