Ping An Securities: Global "group trading" changes, "Trump trade 2.0" first phase market may gradually cool down

According to the Wise Finance APP, Ping An Securities released a research report stating that the market has already priced in the expectations of an interest rate cut. Attention should be paid to the July FOMC meeting and the August Jackson Hole meeting for guidance on interest rate cuts. The "Trump Trade 2.0" first phase may gradually cool down, with the next phase possibly starting again during the September TV debate. At the same time, recent attention should be paid to uncertainties such as the July Bank of Japan interest rate hike and the August quarterly refinancing meeting. In the short term, if there is a significant pullback in the US stock market, it may be a good opportunity to enter the market. Small-cap growth stocks will have more opportunities before the interest rate cut, especially in the biotechnology sector.

The "recession trade" cannot fully explain the significant drop in gold prices and the relatively strong US bond yields in this round, as the US economy still shows some resilience. Comparing the "recession trade" with this round of trading, from the trend of major asset classes, the "recession trade" cannot fully explain the significant drop in gold prices and the relatively strong US bond yields in this round. Also, looking at the US GDP data for the second quarter, it performed better than expected, showing that domestic demand in the US remains strong, with personal consumption expenditure strengthening marginally and fixed asset investment performing well, indicating that the economy still has some resilience and suggesting that the market's expectations for the US economy may be overly pessimistic in the near term.

Overall, with multiple intertwined clues recently, it is difficult to form a clear consensus, and the market is in a state of chaos. It is recommended to focus on the important themes in each market:

In the US stock market, interest rate trading and second-quarter earnings reports remain important themes. Recently, there has been a clear sector rotation and large-small cap rotation in the US stock market. The rotation between large and small caps is more influenced by interest rate trading, with funds previously concentrated in large technology stocks dispersing under the expectation of interest rate cuts. The sector rotation guidelines are more influenced by second-quarter earnings reports: 1) Although the TMT sector remains a major contributor to S&P 500 earnings, its contribution in Q2 has significantly decreased compared to Q1. Tesla and Google, which have recently released their latest financial reports, have also performed poorly. Due to the impressive earnings growth of tech stocks in the first quarter, investors may have higher expectations for second-quarter earnings performance, so there is a short-term risk of further sector decline. 2) The healthcare and financial sectors are expected to contribute more to S&P 500 earnings in Q2, combined with the positive impact of "Trump Trade 2.0", these two sectors have been among the top performers in the S&P 500 among the eleven sectors in the past two weeks.

In the US bond market, under the influence of interest rate trading and "Trump Trade", the steepening of US bond yields has increased certainty. At the same time, recent deficits and issuances are one of the main themes in the market, with a focus on the August refinancing meeting. Currently, the pressure on the US Treasury Department to increase the size of bond issuances is not significant. In late June, the CBO raised the US deficit rate to 7%, far exceeding the expected 5.8%, mainly due to the Biden administration continuously expanding fiscal expenditure. As of June, the cumulative US fiscal deficit size was $758.3 billion, lower than the $971.6 billion in the same period last year, but with the arrival of measures such as student loan forgiveness in July, expenditures in the second half of the year may expand. Currently, under the impact of the US Treasury Department restarting bond repurchases and the Fed slowing down its balance sheet reduction, the pressure on the US Treasury Department to increase the size of bond issuances is not significant. We expect that the size of US bond issuances from August to October will continue the pace seen from May to July, with additional net financing needs still being met by T-bills. Concerns about increased supply of US bonds leading to longer durations (as seen in October last year) may have a limited short-term impact on the US bond market Subsequent Asset Allocation? The market has priced in the rate cut expectations quite fully. Attention is focused on the July FOMC meeting and the August Jackson Hole meeting for rate cut guidance. The "Trump Trade 2.0" first phase rally may gradually cool down, with the next phase potentially starting again during the September TV debates. At the same time, recent attention should be paid to uncertainties such as the July Bank of Japan rate hike and the August quarterly refinancing meeting. In terms of allocation, it is recommended to focus on structural opportunities.

Regarding the U.S. stock market, large-cap stocks have been continuously pulling back recently. Patience is needed in the short term, and opportunities may arise when the market drops further. A significant pullback in the U.S. stock market will further intensify the urgency for the Fed to cut rates. This round of rate cuts is more like a preventive measure, and after a slight rate cut, the economy may be repaired, stimulating demand once again. Therefore, in the short term, if there is a significant pullback in the U.S. stock market, it may be a good time to enter the market. Small-cap growth stocks will have more opportunities before the rate cut is implemented, especially in the biotechnology sector.

Regarding U.S. bonds, the short-term 10-year U.S. bond yield may fluctuate widely in the range of 4.0%-4.4%. Shorting at highs or buying at lows is advisable, with higher success rates for short-term U.S. bonds. Steepening of the yield curve is a possible direction to consider