SignalPlus Macro Analysis Special Edition: Euro Crisis
Global politics has once again become the focus, as French President Macron unexpectedly announced the dissolution of the National Assembly and new elections after his allies suffered a crushing defeat in last week's European Parliament elections. The RN/National Rally, led by Le Pen, has made significant gains in the polls, suggesting that the far-right party is likely to secure an absolute majority in the elections on June 30, increasing the risk of a "Frexit," with the current finance minister also warning of a potential financial crisis.
The rise of the NR marks the beginning of a turbulent period in European politics, as far-right parties have made significant progress relative to mainstream governing parties under pressure from immigration policies and rising living costs. This year is historic for democratic elections, with over 70 countries holding federal elections globally, and right-wing politicians are gaining votes in Germany, France, the Netherlands, Spain, Italy, Argentina, and elsewhere. Is this a preview of the upcoming U.S. elections further shifting towards nationalist issues? It certainly seems so.
Market sentiment deteriorated from the start, first affecting the French stock and bond markets, and then quickly spreading to the credit markets. The U.S. 5-year investment-grade CDS spreads widened by 2.5 standard deviations in a short period, with overall market liquidity being poor. The one-way de-risking capital flow from Europe has put pressure on the historically high levels of the U.S. credit market.
Most other macro assets remained stable, benefiting from optimistic AI sentiment, with the SPX index and Nasdaq index still hovering near their year-to-date highs. However, the issue of a shrinking leading group remains evident, with only AI-related stocks standing out.
Economic data from last Friday did not help either, with the University of Michigan's consumer sentiment index falling to 65.6, significantly below the expected 72, marking the lowest level since November. Additionally, inflation expectations are moving in the wrong direction, with the key 5-10 year inflation expectation median stuck at 3.3%, while the long-term average expectation surged to 5.3%, the highest level since 1994.
Last week, sentiment in the cryptocurrency market remained bleak, lacking catalysts, and price performance was weak, with a series of futures longs being slowly liquidated over the past two weeks. Compared to the general rise in global stocks, commodities, and even gold, the quarterly performance of cryptocurrencies was also weak, down 5%. The number of newly registered Bitcoin addresses has also declined year-to-date, which aligns with our long-standing argument that the current rebound is different from previous cycles, primarily driven by TradFi's interest in a few tokens (or essentially just BTC). Meanwhile, as general investor interest shifts to the next hot topic (AI), the influence of cryptocurrencies themselves is diminishing. The remaining builders in the industry are mainly focused on improving blockchain and capital market efficiency. Compared to the typical "get rich overnight" theme of cryptocurrencies, these projects have lofty goals but often require more time. Who says cryptocurrencies can't mature further?
