For all investors who have been affected by the storm of selling US bonds in the third quarter, the just past November has undoubtedly completely relaxed their tense nerves. As the market's expectation of the Federal Reserve shifting towards interest rate cuts intensifies, the US bond market achieved its best monthly performance in nearly 40 years in November, and the global stock and bond markets also surged across the board
As shown in the figure below, the total market value of global bond and stock markets increased by over 11 trillion US dollars in November, which is the second largest monthly increase on record - second only to the increase of 12.5 trillion US dollars in November 2020
And the global bond market has just hit its best month since December 2008. Behind this, the US bond market undoubtedly plays a crucial role. In the past month (November), investors wildly raised the prices of US treasury bond bonds, institutional bonds and mortgage bonds. The Bloomberg US Bond Composite Return Index hit its best monthly performance since May 1985.
The 10-year US Treasury yield, known as the anchor of global asset pricing, fell by a cumulative 60 basis points in November, completely moving away from the 5% mark hit in October.
"People seem to be a bit worried about missing out on opportunities. Suddenly, a 5% yield has become a distant memory," said Ed Al Hussainy, interest rate strategist at Columbia Threadneedle Investment
For bond investors who were originally preparing for a possible third consecutive year of losses, this rebound in the bond market is undoubtedly stunning. And with the decline in US bond yields, it is undoubtedly the "rise of all things" in the market.
Driven by the rise of the Nasdaq, almost all major US stock indices have experienced uninterrupted gains over the past month - with November gains generally reaching around 8-10%.
The energy sector was the only sector in the US stock market to experience a decline this month, while the technology and real estate sectors became the big winners.
As market panic dissipates, the CBOE volatility index VIX, also known as the "panic index," has suffered a heavy setback against the backdrop of a sharp rise in the stock market. The VIX index has plummeted to 12 points this week, marking the largest monthly decline since November 2022.
Meanwhile, in the foreign exchange market, the Bloomberg dollar index fell 3% in November, the largest monthly decline since November 2022 and the second largest decline since July 2020. From a technical perspective, the index is currently under pressure below the 200 day moving average.
In sharp contrast to the decline of the US dollar, there has been a sharp rise in the prices of cryptocurrencies and precious metals. Bitcoin has been rising for the third consecutive month, with prices returning above $38000.
The price of gold has also risen for the second consecutive month, and there is great hope of launching a shock to the historical high set in May.
In addition, spot silver has also soared above the $25 mark.
The core theme behind the November market frenzy: the Federal Reserve's expectation of interest rate cuts next year
In fact, behind the sharp increase of $11 trillion in global stock and bond market value in November, the core driving force behind the sustained upward trend is actually very clear - that is, in the context of a series of weak data and dovish speeches by the Federal Reserve, the expectation of a US interest rate cut next year has been put on the agenda ahead of schedule by industry insiders.
The direction of the November market was actually established on the first day of November, and the Federal Reserve's interest rate decision on that day was interpreted by market participants as dovish. Subsequently, the cooling of US non farm payroll data and the unexpected decline in CPI data further increased the credibility of the Federal Reserve's bet on ending this tightening cycle. FOMO (fear of missing out) sentiment is gradually spreading among Wall Street and US retail investors, with investors betting that there is still room for further market growth.
As shown in the figure below, it is not difficult to see from the comparison between the November S&P 500 index and the "hard data" of the United States that the core logic of the market in the past month is: "bad data" in economic data="good news" in financial markets. As the stock market soared to near historic highs, "hard data" hit a 14 month low.
"The recent economic data we have received reinforces the idea that the" blonde woman "style economy is gradually slowing down," said Rebecca Patterson, former chief investment strategist at Bridgewater Fund. "Inflation is decreasing and it has not excessively affected economic growth."
At present, futures prices have generally digested the expectation of a 25 basis point interest rate cut in May next year, and the possibility of a rate cut in March may even reach 50%. The market expects a probability of 30.8% for interest rates to drop to 4% -4.25% by the end of 2024, which means that it is generally expected that the total rate cut in 2024 will reach 115 basis points - close to 5 rate cuts, each with 25 basis points.
It is obvious that the frenzy in the stock and bond markets over the past month has had a significant impact on the overall degree of tightening in the financial environment.
A US Financial Conditions Index compiled by Goldman Sachs shows the largest monthly easing shift in US financial conditions in history in October. The history of this indicator can be traced back to 1982.
Of course, if we want to look ahead to the market situation by the end of the year and even next year, this actually raises a huge question: can investors make loose bets without leaving a way out? Will the Federal Reserve really cut interest rates so early and so significantly next year?
The answer may not be certain, but it doesn't seem to hinder people's ongoing frenzy