With the S&P 500 Index recording its best weekly performance since November 2022 last week, the 10-year US Treasury yield hit its largest weekly decline since March, and a wave of Wall Street's largest cross asset backlash of the year seems to be unfolding
According to data compiled by the media to track popular ETFs, the hawkish attitude of Federal Reserve Chairman Powell weakened last week, triggering the largest cross asset rally since November 2022- including the overall rise in stocks, bonds, and credit markets. Other catalysts that trigger market growth include the US Treasury's quarterly refinancing plan and a weak non farm employment report.
Bulls may need to thank the large number of bearish price behavior and defensive positions in the market in recent months, which has lowered the threshold for market turning. A large amount of evidence suggests that hedge funds and systemic quantitative investors who previously shorted the market were forced to carry out short covering last week.
Luke Hickmore, Investment Director of Abrdn Investment Management, pointed out that "the consensus in the market has shifted towards the blonde girl scenario of a soft landing and interest rate suspension. There are signs of short covering everywhere
How fierce is the wave of cross asset counterattacks?
Market data shows that both the S&P 500 index and Nasdaq 100 index had their best week of the year last week, with gains of around 6%. Industries that are particularly sensitive to the rise in bond yields, such as real estate and information technology, are one of the industries with the greatest growth. The S&P 500 index has maintained a double-digit return of around 14% so far this year.
The global stock market also recorded its largest weekly gain in nearly a year, with the MSCI Global Index recording its largest five day gain in ten months last week.
In the bond market, with the influx of long positions in US Treasuries, the 10-year US Treasury yield fell nearly 30 basis points last week, marking the largest weekly decline since March. In the past three trading days, the sharp decline of this "global asset pricing anchor" has reached 36 basis points, making it one of the largest declines in the past 12 years. With the rise of treasury bond, investment grade bonds and junk bonds also rose simultaneously.
According to data compiled by the media, this was the best week for the stock bond portfolio since November 2022.
In the past three months, due to the selling storm in the stock and bond markets, market sentiment has been very low. According to data tracked by institutional brokerage firms under Goldman Sachs Group, hedge funds have been selling heavily for three consecutive months, setting the second largest selling trend in the past decade. Data from the U.S. Commodity Futures Trading Commission (CFTC) also showed that before the recent sharp rebound in the bond market, professional speculators' net short bets on U.S. treasury bond bonds hovered near record highs.
At present, both the view of further weakening the stock market and the bond market have been strongly impacted. Investors who bet on a stock decline have been particularly hit, with a basket of the most bearish companies rising by over 11% in the past two days.
At the same time, Wall Street female stock god Casey Wood's flagship product Ark Innovation Fund (ARKK) rose nearly 19% in its best week on record, boosted by interest rate sensitive speculative technology stocks as traders have been reducing interest rate hikes.
Meanwhile, the VIX and VVIX indices indicate that market panic is rapidly dissipating.
Scott Rubner is an investment bank executive who has been researching capital flows for twenty years. He said, "We are in the early stages of a rebound in short covering. Given the return of corporate repurchases, significant systemic demand for fixed income and stocks, significant short covering in popular themes, and a surge in hedge fund net exposure after reaching historic lows, we saw a comprehensive shift from fundamentals to technology in early November.
He estimates that if market prices remain largely unchanged, commodity trading advisors (CTAs) may snap up approximately $105 billion in bonds in the next month; If the upward trend last week continues, there may be a rush to buy up to $456 billion in bonds. Meanwhile, if the upward trend of the stock market remains unchanged, CTA's previous short position in the stock market may also lead to a $81 billion buying of S&P 500 index futures.
What is the origin of the counterattack wave?
Among the rebound catalysts in the market last week, two are obvious - the US Treasury Department said last Wednesday that it planned to issue bonds at a slower pace than expected in the fourth quarter, temporarily calming people's concerns that the surge in government bond supply will prolong the decline of treasury bond for nearly two years. As of last Friday, the US October non farm employment report was significantly weaker than expected, indicating that the labor market is yielding to the Federal Reserve's cooling measures.
The speech by Federal Reserve Chairman Powell after last week's interest rate meeting was interpreted by investors as dove like. Despite repeated assurances from the Federal Reserve chairman that interest rate cuts have not yet been considered, the direction of interest rates will depend on new data releases in the future.
Powell believes that the rise in long-term bond interest rates may suppress inflation by tightening the "screws" of the economy. People are also pleased with Powell's suggestion that the hawkish predictions released by Federal Reserve officials in September are becoming less relevant - Powell stated that "the effectiveness of the dot chart may weaken" and added that the rate hike cycle has "gone a long way".
This is indeed a wonderful coincidence, "said Brian Jacobsen, chief economist at Annex Wealth Management
Priya Misra, portfolio manager at JPMorgan Asset Management, believes that "the Treasury and Federal Reserve have responded to the market, and now the market is responding to the Treasury and Federal Reserve. The data from the past week supports the Fed's patient stance. If an economic recession looks imminent, risky assets will be nervous, but this is not the story currently unfolding
According to data from the interest rate swap market, traders currently believe that the probability of the Federal Reserve raising interest rates again by January next year is only 16%, and have fully priced in the expected rate cut for June next year.
Of course, there are also some industry insiders who remain cautious about the current frenzied counterattack in the market. I think the rebound we've seen in the past few days may have gone too far, "said Sonal Desai, Chief Investment Officer of Fixed Income at Franklin Templeton
There is a view that the US Treasury is the backing of the market, but it cannot. The size of the budget deficit means that the Treasury can do absolutely limited things, "she added.