The US stock market has experienced its largest fluctuation week since 2019

In the past week, although the US stock market remained flat overall, the market fluctuated like a roller coaster. On Monday, there was a panic sell-off, on Tuesday a retaliatory rebound occurred, on Wednesday it fell again, on Thursday it rebounded due to bottom-fishing sentiment triggered by unemployment data, and on Friday the upward trend continued but at a slower pace.

This week, the stock market and the cryptocurrency market are highly correlated. The media's focus is on the potential recession in the United States and the unwinding of yen carry trades, but these two themes may be exaggerated. The real panic was very brief, and there was no typical situation of selling off all assets during a crisis.

The U.S. stock market has pulled back about 8% from its all-time high, but it is still 12% higher than at the beginning of the year. Considering the rise in bonds, investors with diversified portfolios are less affected by the decline in stock indices. Over the past few decades, there has been an average of 3 adjustments of over 5% and 1 adjustment of 10% each year.

If the stock market declines without a recession in the economy or corporate profits, it is usually temporary, and a good rally often follows. However, due to the pessimism surrounding tech stocks being difficult to reverse quickly, and the recent severe fluctuations causing damage to many portfolios, the volatility may not yet be over in the short term, but the possibility of a significant drop is low. The strong rebound in the latter half of last week is a positive sign.

91% of the companies in the S&P 500 index have released their Q2 earnings reports, with 55% of companies exceeding revenue expectations. There is significant variance in performance across industries, with healthcare, industrials, and information technology performing well, while energy and real estate are relatively weaker.

Analysis of Interest Rate Cut Expectations in September

According to the Taylor rule, the Federal Reserve's target federal funds rate should be around 4%, which is 150 basis points lower than the current rate. The Federal Reserve has reason to quickly adjust its policy to accommodate the current economic conditions.

The market expects that the Fed may cut interest rates by more than 25 basis points in September. On Monday, it was priced in at 63 basis points at one point, and ultimately closed this week at 38 basis points. The market has now priced in an expectation of a 100 basis point cut within the year, with ( four times ).

To support the expectation of a rate cut exceeding 25 basis points for the first time and more than three times within the year, data such as the labor market must continue to deteriorate. Otherwise, this pricing may be excessive. If the data supports it, the market will gradually price in the possibility of a 50 basis point rate cut in September and even a 125 basis point cut within the year.

In the short term, within 2 weeks, the U.S. interest rate market is mainly in a pullback mode after rising. The period of more than 1 month is in a buy-dip mode, as the interest rate cut cycle is bound to begin. The market still needs time to reach a consensus on whether the rising unemployment rate indicates an economic slowdown and potential recession, during which emotions will fluctuate repeatedly.

Cryptocurrency Market Analysis

Cryptocurrency has experienced the sharpest correction since the FTX crisis, with Bitcoin's price rebounding after a drop of over 15%. This correction was mainly triggered by adjustments in the traditional markets, rather than internal events in the cryptocurrency market. The technical indicators are severely oversold, at a level comparable to August 16 of last year.

Retail investors played an important role in this adjustment. In August, the outflow of funds from Bitcoin spot ETFs significantly increased, reaching the highest monthly outflow since the establishment of these ETFs.

In contrast, the risk reduction behavior of participants in the U.S. futures market is limited. The changes in positions of CME Bitcoin futures contracts and the positive basis of the futures curve indicate that futures investors still maintain a certain level of optimism.

Bitcoin fell to around $49,000 last week, close to its production cost. If the price remains at this level or lower for a long time, it could put pressure on miners, which in turn may cause further downward pressure on Bitcoin's price.

Several factors may keep institutional investors optimistic:

• A large financial institution allows its wealth advisors to recommend Bitcoin spot ETFs.
• The liquidation pressure from a certain cryptocurrency exchange's bankruptcy case may have passed.
• The massive cash payouts after the bankruptcy of a certain cryptocurrency exchange may further stimulate demand in the crypto market by the end of the year.
• Both sides of the US election may support regulations favorable to cryptocurrencies.

Capital and Position Situation

Although the stock allocation has significantly decreased in recent weeks, the current stock allocation ratio (46.5%) is still significantly higher than the average level after 2015. To bring the stock allocation back to the average level after 2015, stock prices need to drop further by 8%.

The current cash allocation ratio for investors is extremely low, indicating that funds are more concentrated in stocks and bonds. A low cash allocation may increase the market's vulnerability when under pressure, as investors may need to sell assets to obtain cash, which could exacerbate market Fluctuation.

Recent bond allocations have increased significantly as investors turn to bonds as a safe-haven asset during the stock market correction.

In the recent market fluctuation, retail investors have reacted relatively mildly and there has not been a large-scale withdrawal of funds. The sentiment survey for retail investors remains somewhat positive.

The changes in the Nikkei futures positions indicate that speculative investors have significantly reduced their long positions. The speculative net short position in the yen has basically returned to zero as of last Tuesday.

"Yen Arbitrage Trading" Scale Analysis

Yen arbitrage trading mainly includes three parts:

1. Foreign investors purchase Japanese stocks and short equivalent yen derivatives, estimated scale of about 600 billion USD.

2. Foreign investors borrowed yen to invest in overseas assets, with data from the Bank for International Settlements showing approximately $420 billion at the end of the first quarter of 2014.

3. Domestic investors in Japan purchase overseas stocks and bonds with Japanese yen, totaling approximately $3.5 trillion before adjustment, of which about 60% are foreign stocks.

The total scale of yen arbitrage trading is estimated to be about 4 trillion dollars for these three parts combined. If inflation in Japan forces the central bank to raise interest rates, such transactions may gradually decrease.

Recent Summary of Market Participant Behavior

Different types of investors adjust their strategies based on market fluctuations:

1. Trend-following or speculative investors ( such as CTA ): Recently sold a large amount of previous stock longs and yen shorts.

2. Yen arbitrage trading: Transactions worth $4 trillion have yet to be significantly unwound.

3. Risk Parity Fund: Reduced investment, but to a lesser extent than CTA. The rise in bond prices helps to mitigate losses.

4. Ordinary retail investors: Compared to previous stock market declines, this capital withdrawal is not significant.

Since the end of May, the China-themed fund has continued to see inflows, totaling approximately $3.1 billion.

This week, stock funds have maintained positive inflows for the 16th consecutive week, and even increased compared to the previous week. However, bond fund inflows have slowed down.

The allocation of both subjective investors and systematic strategies has decreased from a higher level to slightly below the average level, marking the first time since last summer's major correction.

The VIX index recorded a historic high in single-day fluctuation, but the actual fluctuation in the stock market is not significant, reflecting an amplification of panic in the derivatives market.

Goldman Sachs clients net sold ETFs for the third consecutive week last week, while individual stocks recorded their largest net purchases in six months, particularly in the technology, consumer staples, industrials, communication services, and financial sectors.

The liquidity of the US stock market is at its lowest level since May of last year.

A certain bank's CTA strategy model shows that in the coming week, CTA funds in the US stock market tend to increase positions, as the long-term trend remains optimistic. In contrast, the Japanese stock market tends to reduce positions.

Upcoming Key Events

• Consumer Price Index ( CPI ): If it meets or is lower than expectations, the impact is limited; if it exceeds expectations, it may trigger a significant reaction.
• Retail sales data: If strong, it may boost market optimism for a soft landing.
• Jackson Hole Meeting: The Federal Reserve is expected to convey a message of support for the market and may mention the tightening of financial conditions.
• A certain semiconductor company's financial report: expected to be released at the end of the month, the market may have a positive attitude towards its performance.