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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:

This week, the focus was on Chinese concept stocks, with particular attention to Pinduoduo, NIO, and Xiaomi. The key points of focus are as follows:

Risk Disclosure and Statement for this Article: Dolphin Research Disclaimer and General Disclosure

Please refer to the following recent articles from Dolphin Research's weekly portfolio report:

"Is the US Government Spending Money Like Water? The Backlash Has Arrived"

"Is There Redemption for Hong Kong Stocks?"

"Fitch Ratings is Just a 'Paper Tiger,' Chinese Concept Stocks Still Have Hope"

"After the Violent Rebound, Should Hong Kong Stocks Stay or Go?"

"With US Interest Rates Topping Out, Can Hong Kong Stocks Be Saved?"

"Reality Strikes, How Far Can Chinese Concept Stocks Rebound?"

"Looking Ahead, Will US Interest Rate Hikes Aggravate Stagflation?" Decoding the Mystery of Low Savings in the United States: Is it Sustainable?

The U.S. Housing Market: Subprime Sins, Why is it Resilient this Time?

Unraveling the Recession: Where Did it Go After Being Mentioned, and Can it Come Back?

Does a Short Essay Influence the Market? Overcoming Extreme Pessimism is the Key

Is the U.S. Stock Market Still Celebrating? Economic Schizophrenia, Beware of Excessive Joy

Trading What in the U.S. and Hong Kong Stock Markets: Purgatory vs. Celebration?

Pulling Valuations in the U.S. Stock Market, Killing Beta in the Hong Kong Stock Market? Don't Despair, Reversal is Imminent

Depositing High Interest Rates in Another Bank? The Probability of a Soft Landing Has Increased

ChatGPT vs. Earnings Reports, Can Giants Support the U.S. Stock Market?Is the Promise of "US Recession, Chinese Recovery" Going to Be in Vain?

The Direction of US Recession is Set, Only a Minor Decline is Enjoyable, While a Major Decline is Harmful

US Service Consumption Collapses, and US Stocks Celebrate?

《Fed Rate Cut: Just One Moment Away from a US Version of Yu'EBao Attack?》

《US Stocks Are Going to Recede and Rates Are Going to Be Cut? Anyway, Trading Has Already Rushed Ahead》

Silicon Valley Bank Run Crisis: Is the US Recession Going to Arrive in a Hurry?

After Trading Retreats, Global Markets Can Finally Breathe a Sigh of Relief

《Confirmation of Inflation? Adversity Brings Opportunities》

Putting Inflation Aside, the Signals in Alibaba and Baidu Are More Important

Both Hong Kong and the US Are Weak, Is the Wolf Coming Again?》 channel=t3933964&invite-code=276530)"

"The Puppet of High-Frequency Macro, Is the US Stock Market a Puppet Market?"

"A Bullish Candlestick Changes Beliefs, Can Tesla Lead the US Stock Market to a Comeback?"

"How Far is the US Stock Market 'Danger' from a Turning Point?"

"No Red for the US Stock Market During the Chinese New Year, But Earnings Reports Are Just Around the Corner?"

"Digging into the Root Cause of the US Stock Market's Stagnation"

"CPI Has Fallen, Why is the Fed Still So Stubborn?"

"Is It Really That Easy to Eliminate Service Inflation? Beware of Market Overcorrection"

"Has the Hong Kong Stock Market Finally Found Its Backbone? Can It Maintain Independent Momentum?"

"The Darkest Hour Before Dawn: Is the Key in the Darkness or the Dawn?"

"The US Stock Market 'Strikes Back' at Reality, How Long Can Emerging Markets Keep Bouncing?"

"Global Valuation Recovery: Still a Hurdle to Test Earnings" 《China's Asset Violence Boosts, Why the Ice and Fire of China and the US》

《Amazon, Google, Microsoft's Superstars Fall? The Meteor Shower of US Stocks Still Needs to Fall》

《Behind the Expectation of Policy Turning: Unreliable "Strong US Dollar Fund" GDP Growth?》

《The Southbound Acquisition vs. the Northbound Frenzy, It's Time to Test "Steadfastness" Again》

《Slowing Down Rate Hikes? The American Dream is Shattered Again》

Reacquaintance with a "Iron-blooded" Federal Reserve

Sad Second Quarter: "Eagle's Voice" is Loud, and It's Difficult to Cross the Collective

《Falling to Doubt Life, Is There Still Hope for Desperate Reversals?》

The Federal Reserve's Violent Hammering of Inflation, Domestic Consumption Opportunities Have Come?

The World Has Fallen Again, and the Shortage of People in the United States is the Root Cause

《The Federal Reserve Becomes the Number One Bear, and the Global Market Collapses》 One bloodbath caused by a rumor: risks have never been cleared and sugar can be found in glass slag

The United States goes left, China goes right, and the cost-effectiveness of U.S. assets has returned

Layoffs are too slow to pick up enough, and the United States still has to "decline"

American stocks mourn weddings: recession is good, the highest rate hikes are negative out of the market

Raise interest rates in the second half, "performance thunder" opens

The epidemic wants to counterattack, the United States wants to decline, and funds want to change their minds

China assets at present: "No news is good news" for US stocks

Growth is already carnival, but is the United States really in decline?

Is the United States in 2023 in recession or stagnation?

American oil inflation, China's new energy vehicles become bigger and stronger?

The Fed raises interest rates faster, and opportunities for Chinese assets come instead 《US Stock Inflation Explodes Again, How Far Can the Rebound Go?》

《The Down-to-Earth Dolphin Research Portfolio is Launched》

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