What a difference a few days makes.
After listening to numerous central bankers and Fed speakers pontificating on the timing of the next rate cut, risk markets were interrupted by a sudden winter chill and further escalation of geopolitical conflicts.
SPX sold off by -1.5% (-92% down day, every sector in the red), treasuries and USD saw a flight-to-quality bid, and crypto suffered >10% losses with Bitcoin cliff-diving from ~$69k on Friday to $59k yesterday, before recovering about half of its losses.
Following a few days of uncooperative inflation data, last Friday ended the week with further unfriendly data prints via a big miss in Chinese trade data (exports -7.5% vs -1.9% expected, imports -1.9% vs +1.0% expected), and well as some ‘stagflationary’-like U-Mich sentiment data out of the US (miss in current conditions and expectations, upside surprise in inflation outlook).
Technical price action has turned decidedly more negative across major equity indices, with China’s CSI 300 testing and failing the break the 200D MA on the upside, while the SPX is on the cusp of breaking its own 200MA for the first time since Q4.
The sudden risk-off comes at a time when (tradfi) investors’ cash allocations are back at the decade lows, according to JPM data, back when fiat was still paying a 0% deposit interest. 2.5 quarters of relentless rallies have forced investors to be fully-invested, or even ‘all-in’ in high beta investments, leaving markets little buffer against any further equity sell-offs from the current levels.
With that being said, assuming the economy doesn’t fall into a recession, the current SPX trajectory is similar to the moves following the end of prior hiking cycles, based on JPM’s study. The key assumption, of course, is a case of non-recession, which still thankfully appears to be the case in the current US economy.
Back on the geopolitical front, while the situation is obviously still highly fluid, it’s interesting to note that spot gold was rallying the last few sessions despite a rise in treasury yields and equity prices, a rare occurrence for sure. It was as if the precious metal had knew something about the rising tension and staged an extended flight-to-quality bid while other assets were caught pretty flat-footed into Friday.
Speaking of flight to quality, one asset class that (disappointly) didn’t hold is Bitcoin’s ‘digital gold’ narrative, as BTC prices collapsed over 10% within the span of minutes as >1bln of levered long futures were mercilessly liquidated across all the large centralized exchanges. On-chain DEXs also reported the largest long liquidations seen in well over a year.
While prices have recovered somewhat (with some signs of de-escalation communique out of the US), the technical damage to crypto has been done with charts breaking bearishing to the downside. The damage to alt-coins has been high as well, with 20–30% weekly drawdowns across the top-20 names, just as the pace of ETF inflows have also slowed recently.
As an old trading saying goes, events themselves rarely are rarely the cause for sharp price actions, but they do reveal the positioning and risk-buffer of current participants. Let’s see how we manage to pick ourselves back up from this latest speed-bump. As we have been saying over the past month, risk management is key, and the winners are usually the ones who can simply stay alive the longest. Hang in there everyone.
