Global politics has once again taken center stage, with French President Macron unexpectedly announcing the dissolution of parliament and calling for new elections following his allies’ dismal performance in last week’s European Parliament elections. Led by Le Pen, the RN/National Rally has made significant gains in opinion polls, indicating a potential absolute majority for the far-right party in the elections on June 30. This has raised the risk of a “Frexit,” with the current finance minister warning of a possible financial crisis.
The rise of the NR marks a turbulent period in European politics, as pressure mounts on immigration policies and rising living costs, leading to significant progress for far-right parties relative to mainstream ruling parties. This year is historic in democratic elections, with over 70 countries globally holding federal elections, seeing an increase in votes for right-wing political figures in Germany, France, the Netherlands, Spain, Italy, Argentina, and elsewhere. Is this a prelude to a further shift towards nationalist issues in the upcoming US elections? It certainly seems so.
Market sentiment deteriorated from the outset, beginning with the French stock market and bonds, quickly spreading to credit markets, with the US 5-year investment-grade CDS spread widening by 2.5 standard deviations in a short period. Market liquidity is generally poor, with one-way risk-off flows from Europe putting pressure on historically high levels in the US credit market.
Most other macro assets remain stable, benefiting from optimistic AI sentiment, with the SPX and Nasdaq indices hovering near their year-to-date highs. However, the narrowing leadership in these indices remains evident, with only AI-related stocks standing out.
Last week’s economic data did not offer any help, as the Michigan Consumer Confidence Index fell to 65.6, well below the expected 72, marking the lowest level since November. In addition, inflation expectations are moving in the wrong direction, with the median 5-10 year inflation expectation stuck at 3.3%, while the long-term average expectation has soared to 5.3%, reaching the highest level since 1994.
Cryptocurrency market sentiment remained subdued last week, lacking catalysts and showing weak price performance, with a series of slow liquidations of long futures positions over the past two weeks. While global stocks, commodities, and even gold saw widespread gains, cryptocurrencies had a weak quarter, dropping by 5%. The number of new registered Bitcoin addresses year-to-date also declined, aligning with our long-standing argument that the current rebound, driven mainly by TradFi interest in a few tokens (or essentially just BTC), is different from previous cycles. As general investors shift their interest to the next hot topic (AI), the influence of cryptocurrencies themselves is diminishing. Remaining builders in the industry are primarily focused on improving blockchain and capital market efficiency. Compared to the typical “get rich quick” theme of cryptocurrencies, these projects have noble goals but usually require more time. Who says cryptocurrencies cannot mature further?
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