Geopolitical tensions once again become the market focus. Israel launched an attack on Iranian facilities, followed by Iran's counterattack, causing oil prices to surge and weakening market risk sentiment last Friday. The market is worried about the risk of escalating conflict, especially the potential scenarios of Iran blocking the Hormuz Strait and possible US intervention, which will affect oil prices during the US summer driving peak.
Meanwhile, the oil price rally has reached a two-year downward trend line, and a more convincing upward breakthrough may not be favorable for overall risk sentiment in the short term. However, the market generally believes that the impact of energy supply disruption should be limited, such as Saudi Arabia's rising production and other supplementary sources, but the most sustainable path still depends on resolving the situation through diplomatic channels.
More notably, in this wave of conflict, the US dollar and US Treasury bonds did not show a significant "flight-to-quality" buying, indicating that global investors' concerns about US capital flows remain higher than their focus on the Middle East situation, which cannot be ignored.
Interest rate volatility has also fallen back to near multi-year lows, suggesting that the macro market is more inclined to refocus on tariffs and economic fundamentals.
In fact, this conflict has almost no impact on market expectations for rate cuts in 2025, with the market still anticipating only two rate cuts before the end of the year, even though inflation data has repeatedly been lower than market expectations.
Before the changes last Friday, the market was celebrating inflation data that simultaneously declined in multiple developed markets (excluding Japan), with US CPI, PPI, New York Fed inflation expectations, and University of Michigan inflation expectations all below expectations.
In fact, the recent core CPI has been significantly lower than expected, which helps boost risk sentiment and gives the Federal Reserve more room to maintain loose financial conditions.
Stock long-short hedge funds have re-increased their stock long positions, with net exposure rising to a one-year high, and the path of least resistance in the short term remains upward.
Cryptocurrencies once again verified their "high-risk asset" positioning, with token prices across categories plummeting last week. Cryptocurrency prices fell on Friday along with the stock market, with over $1.2 billion in futures positions being liquidated. Friday's decline was mainly from altcoins, while BTC returned to around $105,000 with stable ETF fund flows and support from listed company holdings.
BTC ETF net inflows reached $1.4 billion, while ETH ETF just broke the record of net buying for more than two consecutive weeks, indicating that TradFi participation remains good. We expect prices to continue to follow stock market sentiment and gradually move upward during the summer.
This week will see multiple central bank meetings (including the Federal Reserve, Bank of Japan, Bank of England, Norges Bank, and Swiss National Bank), but we believe the substantive impact will be limited. For the Federal Reserve, it may release slightly dovish signals, and the market will focus on whether recent consecutive lower-than-expected inflation data and weak unemployment claims will be used as a basis for further dovish turn. We do not expect major policy actions, and the market's recent focus will remain on the developments between Israel and Iran, especially any substantial military escalation or dangerous political moves, while the US remains stuck in tariff and budget negotiations. Wish everyone a smooth trading week!
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