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When does the US stock bubble burst?
Jul 2,2020 08:14CST
translation
Source:Futures daily
The content below was translated by Tencent automatically for reference.

SMM News: recently, the US stock market has fluctuated greatly, among which even the technology stocks, which have remained strong before, have fallen by a large margin. We believe that there are several reasons for the major pullback in US stocks: first, the second outbreak of New Crown pneumonia in the United States, and the market is worried that the US economic blockade measures will restart; second, the warming of trade frictions between the United States and Europe makes the market more worried about the prospects for economic development; third, there is a bubble in the valuation of US stocks, and corporate profits are not the main cause of this rise in US stocks, but the asset bubbles brought about by the flood of liquidity.

Data on June 26th showed that technology stocks could not hold up, with FAANG's top five technology stocks tumbling as the US stock market plummeted. A portfolio of internet stocks, such as Facebook, fell more than 4 per cent on June 26th, the worst day since march 16th. Facebook fell by as much as 8.6 per cent. It recorded the biggest decline since the outbreak. In addition, Twitter is down more than 7%, and Magi Alphabet and Netflix are down more than 4.5%, while Amazon is down 2.1%.

The factors that put an end to the bull market in US stocks

Historically, the two biggest obstacles to a rally in US stocks or the end of a bull market in US stocks are monetary tightening and rapidly rising inflation. Therefore, we believe that the current rally in US stocks may slow down, but the bursting of the US stock bubble is not yet coming, because the Fed's monetary policy remains loose, and the US government says it will not restart large-scale blockade measures as a result of the second outbreak of the epidemic. On June 22nd Kudlow, director of the National Economic Council, said a nationwide shutdown was unlikely. On June 23rd, U.S. Treasury Secretary Mnuchin said that even if the number of new crown pneumonia cases increased, it would be almost impossible for the United States to shut down the economy again.

At present, the US economy is recovering from the resumption of work and production, which makes it more difficult for the US government and residents to accept a new round of blockade measures. From May to June, the data showed that the economic recovery in Europe and the United States driven by the resumption of work was faster than expected, while the PMI index in the US, eurozone, Japan and the UK rebounded significantly in June and exceeded market expectations. In particular, the euro zone, which resumed work more smoothly, had an initial composite PMI of 47.5 in June, higher than market expectations of 42.0, and rebounded significantly from 31.9 last month. The signed sales index of existing homes in the United States, a leading index used to measure the signing of contracts for the sale of second-hand homes in the United States, unexpectedly rose to 99.6 in May, a three-month high, up 44.3 percent from a month earlier, the largest monthly increase since records began in 2001. significantly higher than the 18.9% increase expected by the market.

Personal spending, which accounts for 2/3 of the US economy, rose 8.1 per cent in May from a month earlier, the biggest monthly increase since statistics began in 1959, but weaker than the 9.1 per cent expected by the market. It plunged 13.6 per cent in April, the biggest drop ever.

Of course, the fact that the US government will not restart the widespread blockade does not mean that the US economic recovery will accelerate and some measures to restart the economy will be withdrawn, which means that the economy may only recover moderately. At least 11 states have suspended or delayed restart plans, according to CNN. Among them, the governors of Florida and Texas withdrew some of the measures in the restart plan and announced a moratorium on restart. In addition, the governors of Arizona, Arkansas, Delaware, Idaho, Louisiana, Maine, Nevada, New Mexico and North Carolina also announced that they would not press ahead with the next phase of the restart plan.

The risk of severe upheaval in US stocks still exists.

Revenue improvement for US companies has also been slow as the economy recovers modestly. In the case of the second outbreak of the epidemic, consumer confidence in the United States has fallen again, which will affect the strength of the economic recovery. Data show that the final consumer confidence index of the University of Michigan in June was 78.1, weaker than expected of 79.2 and 78.9. The final value of the current situation index, which measures the current financial status of consumers, is 87.1, which is weaker than the expected value of 88 and the initial value of 87.8; the final value of the expected index is 72.3, which is weaker than the expected value of 74 and the initial value of 73.1.

Of course, US dollar liquidity easing continues to support US stocks and other risky assets at present. Recently, the Fed's balance sheet has declined for two consecutive weeks, but from the perspective of asset structure, it is mainly a decrease in repo and currency swaps, because of the recent maturity of a large number of repo and currency swaps, and the Fed did not choose to continue with the improvement of US dollar liquidity; other new tools such as PPPLF, SMCCF, CPFF, MLF and MSLP, are all rising significantly, so the overall direction of the Fed is still on the loose side.

Stocks performed strongly in the second quarter in March after the Fed injected trillions of dollars into the market. Of this, $2 trillion was spent to relieve pressure on consumers and businesses and revive consumption after the epidemic. In addition, the market is expecting Congress to come up with another fiscal plan this summer, which is expected to provide aid to state and local governments, expand unemployment benefits and provide more support to businesses.

The risk of severe volatility in US stocks still exists. on the one hand, with the arrival of the end of the month and the end of the quarter, large funds are under pressure to readjust their portfolios and may take profits from the gains from the rise in US stocks in April and May. On the other hand, at present, US stocks mainly rely on the ultra-loose monetary policy of the Federal Reserve and the fiscal stimulus of the US government. The performance of US stocks has been ahead of economic fundamentals. Once the confirmed cases in the United States climb higher than expected, the US government will eventually have to restart the blockade measures, the US household finances will collapse immediately, more enterprises will close down, the US dollar liquidity crisis will occur again, and the risk of adjustment of US stocks will come at any time.

Position strategy

From a strategic point of view, the author does not think that the bursting of the US stock bubble will happen soon, because the Fed's loose monetary policy has not yet turned and there is no threat of high inflation. However, judging from factors such as trade frictions between the United States and Europe, the second outbreak of the epidemic in US stocks, and the adjustment of positions by financial institutions such as large funds in the middle of the year, the risk of moderate adjustment of US stocks is increasing. Therefore, it is suggested that investors can buy the mini-E mini-stock index series of Zhi Stock Exchange to hedge the potential adjustment risk. Data show that with the intensification of US stock market volatility, the turnover and positions of mini-E mini-index contracts have risen sharply in the past year, of which the trading volume has exceeded 272 million contracts.

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