01
Stocks, bonds, and foreign exchange are rising together, are they "wrong"?
Since March, U.S. stocks, gold, bitcoin and copper have all risen and reached new highs. But Merrill Lynch's clock tells us that asset prices always move "one after the other." That is, in the evolution of economic recovery→ overheating→ stagflation→ recession, assets such as stocks→ commodities→ cash→ bonds will perform sequentially. Therefore, the "same rise" of stocks, bonds, foreign exchange and alternative assets this time most likely means that the price of a certain type of asset has "risen wrong".
02
Why did stocks, bonds, and foreign exchange rise together?
Abundant liquidity and the expectation of "front-running" are the main reasons. There are three main lines of trading in the market: first, abundant liquidity to drive the prices of bitcoin, gold and copper, second, interest rates, equities and gold driven by expectations of interest rate cuts, and third, copper and crude oil driven by improving demand and secondary inflation. However, the reflation trade itself is "contradictory" to interest rate cut expectations, and this contradiction is further exacerbated by short-term funding behavior.
03
Liquidity Trading – Is It Overbought in the Short Term?
In the first quarter, financial liquidity increased, which meant that there was more "money", which in turn boosted the market's risk-on. However, in the second quarter, as the reverse repo is close to exhaustion, fiscal deposits are increasing and the "balance sheet shrinkage" continues, financial liquidity may have an inflection point, and there may be periodic pressure on risk assets. In addition to this, the RSI >70 indicates that the market is overbought. At present, gold and copper are trading in an overbought or near-overbought state.
04
The reflation trade – supply is supported, but it's running too fast
On the one hand, copper and crude oil prices have been significantly supported by low inventories and OPEC production cuts, but on the other hand, credit expansion, which is the basis of the reflation trade, has not arrived. At present, the US government debt continues to break through the ceiling, and the fiscal is likely to shrink in the election year, and the government credit expansion is difficult. Second, a contraction in private credit is also a high probability event at high interest rates. Therefore, if the Fed wants to restart credit expansion, it is a prerequisite for the Fed to start a cycle of interest rate cuts and reduce financing costs, so skipping rate cuts and directly trading demand improvement and reflation in advance is a clear front-runner.
05
The trade of cutting interest rates may gradually become the main line
Since 2022, market interest rate expectations have often had a large "expectation gap". Either over-optimism about interest rates, where expectations of rate cuts turn out to be larger-than-expected rate hikes, such as in 2023, or pessimism about interest rates, which is not necessary for the current period. In fact, the start of this interest rate cut cycle may be more to solve the deep inversion of the interest rate curve and prevent financial risks. Then, the path of interest rate cuts is likely to be: there is no need for "recession" data to support a large rate cut, nor does it mean that "interest rate cuts" will be "continued to be cut" after the start. But there is a high probability that a rate cut trade will come.
06
Deal with interest rate cuts – Treasuries, gold, and stocks are often not bad
Review the last 5 times the Fed raised interest rates last time, and the process of cutting interest rates. U.S. Treasuries are an undeniable certainty, with gold and U.S. equities also performing. At the same time, for a period of time after the interest rate hike, it also showed the characteristics of an increase. But economy-related commodities, especially copper, have performed poorly.
07
Taking history as a mirror - the way the economy lands determines the value of asset allocation
1995 and 2019 are similar years to the present. In 1995, the interest rate cut cycle was also short-lived, with U.S. bonds and gold performing better, and U.S. stocks continued to rise sharply in the wave of the Internet industry. On the other hand, in 2019, after a short cycle of interest rate cuts, economic expectations gradually improved, and US Treasuries and gold subsequently peaked.
08
For A-shares, value repair is the core
Different from the trading logic of global assets, the rise of the A-share market mainly comes from the repair after the "smashing hole", especially the repair of valuation. From the perspective of cost performance, the current valuation repair of the A-share market may not be over. The data shows that the valuation PE (TTM) of most market indices is still in the historical quantile range below 30%.
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