This week, the realization struck that the 'goldilocks' narrative clashes with the substantial rate cuts anticipated for the next year. Goldman issued a warning, suggesting that justifying more than 75 basis points of cumulative easing without weaker growth might be challenging. While a recession could prompt a more profound easing cycle, placing too much emphasis on that scenario contradicts other asset prices and their central case.
Market dynamics are entering a zone where the rally in US rates could become more challenging unless the growth outlook worsens beyond expectations. Stocks showed mixed performance, bonds were in a state of flux, commodities declined, and cryptocurrencies gained ground. The hope for rate cuts diminished during the week, dropping from 140 basis points in 2024 to 112 basis points.
Macro indicators leaned towards 'soft,' with slight strengthening in 'hard' data. Inflation expectations (survey) and gasoline decreased, services (survey) data increased, and the labor market exhibited mixed signals (weak JOLTS but lower unemployment). Consumer sentiment (survey) surged, and geopolitical risks varied (US pressuring Israel for ceasefire, but military action in Yemen looms).
Regardless of good, bad, or neutral news, the stock market exhibited volatile movements. Small caps and mega-cap tech outperformed, while the S&P managed to close the week in positive territory, unlike the struggling Dow.
The Dow faced selling pressure whenever it tried to turn green for the week. The S&P 500 reached its highest close since March 2022, and the Nasdaq achieved its highest close since January 2022.
'Most shorted' stocks had a tumultuous week, experiencing sharp fluctuations. After a rough start on Monday, the Magnificent 7 stocks rebounded 4.5%, nearing record highs.
Hedge funds found themselves in a tough spot, unable to escape the fallout from Friday's market turmoil. Energy stocks took the biggest hit of the week, while tech and discretionary sectors outperformed.
Regional bank stocks saw a surprising surge, approaching post-SVB highs, despite a record $122 billion utilization of the expensive BTFP bailout facility at The Fed.
In the Treasury market, short-term bonds underperformed, with only the long-bond closing the week higher in price, leading to a significantly flatter yield curve—the most pronounced weekly flattening since Nov 2022, reaching its most inverted state since Sept.
The dollar experienced a notable rally after three consecutive weeks of decline. Cryptocurrencies saw overall gains, with Solana outperforming. Bitcoin and Ethereum each recorded approximately a 13% increase.
Bitcoin reached $44,000, its highest level since April 2022, and Ethereum approached $2,400, its highest point since May 2022. Commodities, however, faced declines, with silver taking a significant hit, natural gas displaying a negative trend, and oil and gold seeing sell-offs. Copper remained the relatively less affected commodity.
Spot Gold retraced to $2,000 during the week, and gold's outperformance pushed the gold/silver ratio back to the upper end of its range for the year. Oil prices rallied, ending a six-day losing streak, finding support at $70, marking five-month lows.
In conclusion, the question arises: Which comes first, the collapse of the equity market or the explosion of global central bank balance sheets?
The speculation leans towards the former, followed by the latter, with both eventually converging before experiencing a melt-up.
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