Inflation vs. Liquidity Drain, Market Outlook for the Second Half of the Year Doesn't Look Promising

Since Dolphin Research mentioned in last week's strategy weekly report that in the second half of the year, the deficit will be covered by the TGA balance from the first half of the year, as well as the reverse repurchase funds from banks and the Federal Reserve before June and mid-August, the real source of funds for the deficit, if not taken over by major sovereign government players such as China and Japan, will continuously drain physical US dollars.

During this process, while the liability side of the central bank's TGA account is being rebuilt, the reserve balances of banks at the Federal Reserve are continuously decreasing, resulting in increasing liquidity pressure in the equity market.

1. Liquidity drainage has already begun

Observing the weekly changes in the Federal Reserve's balance sheet last week: on the asset side, the Federal Reserve mainly reduced its holdings of MBS; and the reduction in assets requires an equivalent reduction in liabilities, while the balance of the US Treasury's General Account (TGA) on the liability side still increased, which requires other liability items to decrease to a greater extent.

And the latest liability item decrease on August 23rd is completely consistent with Dolphin Research's previous judgment. After the conversion of government bonds into long-term bonds, the liability item that has decreased significantly has shifted from reverse repurchase to banks' reserve balances at the Federal Reserve, with a significant decrease in reserve balances, during which the stock market has generally declined. And historically, during a period of continuous decline in reserve balances, equity assets are unlikely to perform well.

Next, assuming that the interest rate cut expectation remains unchanged, the marginal changes in equity assets will depend on the changes in the issuance of long-term bonds and the TGA/reserve balance.

2. Interest rate cut expectations are absent, and interest rate hike expectations fluctuate

In the case of continuous liquidity drainage caused by long-term bonds, for equity assets to rise, they actually need to be driven downward by high-frequency macro data/events that drive inflation/interest rate hike expectations.

However, at the Jackson Hole meeting last week, Federal Reserve Chairman Powell's speech was generally hawkish, emphasizing the unwavering commitment to the 2% long-term inflation target. The only cautious information about interest rate hikes was that the lagging effects of interest rate hikes need to be observed.

The relatively resilient new home sales data (seasonally adjusted annualized sales volume) and the number of initial jobless claims have increased the possibility of a short-term interest rate hike. Although Dolphin Research believes that the probability of an interest rate hike at the next meeting (September 20th) is relatively low. And although the yield on 10-year US Treasury bonds has fallen from 4.34% to 4.25%, Dolphin Research believes that the decline in long-term bond yields may not be significant, given the continuous issuance of long-term bonds.

Market Trading Trends

Last week, equity assets rebounded slightly after a small decline in the 10-year government bond yield, coupled with Nvidia's strong performance and Tesla gradually returning to a noticeable range, growth stocks rebounded to some extent. However, the rebound was relatively weak in the overall liquidity squeeze, and the overall valuation is still relatively high, so Dolphin Research estimates that the opportunities are still limited.

Portfolio Returns

On August 25th, Alpha Dolphin's virtual portfolio returns increased by 0.7%, which is basically in line with the S&P 500 index (0.8%), outperforming the MSCI China index (-0.2%) and the CSI 300 index (-2%), but lagging behind the Hang Seng Tech index (+1.3%).

Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio was 23.5%, with an excess return of 43% compared to the MSCI China index. From the perspective of asset net value, Dolphin Research's initial virtual assets were $100 million, and it is currently $125 million.

Individual Stock Profit and Loss Contribution

Last week's list of gainers and losers was mainly driven by performance, with stocks either rising or falling sharply due to event-driven factors or good/bad performance.

For the specific reasons behind the top gainers and losers, Dolphin Research has summarized them as follows:

Portfolio Asset Allocation

There were no changes in the portfolio allocation this week, with 21 stocks in the portfolio, including 3 stocks rated as standard allocation and 16 stocks rated as low allocation, with the remaining assets allocated to gold, US bonds, and US dollars.

As of the end of last week, the asset allocation and equity asset weight of Alpha Dolphin were as follows:

Six. Key Events This Week: