Look who’s back?
As we mentioned in the summary of last Thursday’s FOMC meeting, Chairman Powell exhibited a confident dovish stance during the last FOMC meeting, taking proactive measures by cutting interest rates by 50 basis points while still advocating for an economic soft landing. The result is clear: this is a significant dovish stimulus, marking the official beginning of a new round of easing by the Federal Reserve. The risk markets took about 12 hours to digest this information before pushing the stock market to new historical highs. Where is the anticipated economic recession?
The fixed income market remains relatively stable, with yields holding steady; however, a trend of steepening of the structural curve has begun to emerge. Yields on 2 to 5-year maturities have remained at year-to-date lows post-rate cut, while 10 to 30-year yields have risen amidst improved risk sentiment and inflationary concerns. Key core PCE data will be released this Friday. Although others may hold different views, we believe that, from an economic fundamentals perspective (the Atlanta Fed’s GDP growth forecast remains around 3%, the job market is still solid, and inflation remains above 2%), a 50 basis point rate cut at this time is an “unconventional operation.” Therefore, the Federal Reserve’s actions should be seen as a clear dovish signal, and the market has ample reason to respond in the short term.
So, what could derail the rally? Ultimately, it returns to the hard data that the Federal Reserve has been hinting at. The crux lies in 1) the extent of the slowdown in the U.S. labor market and 2) the pace of CPI deceleration. Both currently favor the Federal Reserve unless the economic situation can prove the market wrong. In other words, this rally will be “presumed innocent” until a significant slowdown occurs that even the Federal Reserve’s easing policies cannot remedy.
For the U.S. stock market, an aggressive rate cut in the context of a soft landing with no apparent downside risks can only mean that the stock market will again reach new historical highs, as was the case last week. The market has successfully navigated September’s negative seasonal factors, and even Trump’s declining poll numbers have failed to halt the rebound in risk assets. High-beta sectors (such as AI stocks) are set to accelerate again. Similar to the bond market, economic data remains crucial, and investors may maintain a buy-on-dips strategy in the final month before the elections. Finally, technical indicators show that the SPX index has upward momentum, warranting attention in the short term.
In the cryptocurrency sector, with the correlation to stocks (and gold) returning to a two-year high, BTC prices rebounded significantly last week, rising by 6%. BTC’s movement has once again aligned with the 3x leveraged Nasdaq index. However, there is potential for more volatile movements in cryptocurrency in the short term, especially as altcoins performed very strongly last week. Even the heavily criticized ETH managed to rise by 11% over the past week without any new developments. We believe that as the Federal Reserve’s “dovish pivot” eventually becomes market consensus, this rebound may continue.
The strong rebound of altcoins is an encouraging sign, and as long as stock market sentiment remains positive, there is potential for more rebound momentum in the short term. Over the past week, inflows into BTC spot ETFs have shown signs of recovery, likely set to reach a cumulative new high by the end of this month. Will this price rebound save ETH ETF inflows? We believe the answer depends on whether the stock market can peak again before November, and the market has already begun to benefit from the Federal Reserve’s dovish shift.
Another positive factor for ETF inflows may come from the U.S. SEC’s approval of ETF options listings. As we have long emphasized, options are one of the mainstream asset classes in TradFi and are favored by many institutional investors; thus, the entry of options into the cryptocurrency market and their widespread application in the future is merely a matter of time.
Speaking of the importance of options, the TradFi market will see over $4.3 trillion in U.S. stock options expiring this week. Almost everyone is now a volatility trader, making activity in index options particularly lively. After the month-end expiration, will investors engage in more call option operations? Is it time to buy some out-of-the-money BTC call options? It is essential to keep a close eye on this area.
Next, the market will focus on a series of speeches by Federal Reserve officials. Three officials will speak on Monday, six (including Powell) on Thursday, and two more on Friday. The market will pay particular attention to Powell’s remarks on Thursday to assess his response to the significant easing of financial conditions, while the only noteworthy U.S. economic data will be Friday’s PCE data.
Overall, the fundamental situation in the macro market continues to show a slow upward trend, with the risk premium in the options market pricing relatively low ahead of the non-farm payroll data release on October 4. We expect that Federal Reserve officials will not “disrupt the status quo” in their upcoming talks, and the most likely market trend will still be upward.
Wishing all readers successful trading, and please be cautious when going against the Federal Reserve!
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