The situation has changed dramatically in a few days.

After listening to the speeches of many central bank and Federal Reserve officials on the timing of interest rate cuts, coupled with the further escalation of risks brought about by geopolitical conflicts, the risk market was hit by a sudden chill.

The SPX fell 1.5% (92% of its components were down, with every sector in the red) as safe-haven buying flooded into Treasuries and the dollar, while cryptocurrencies suffered losses of over 10%, with BTC recovering about half of its losses yesterday after plunging from Friday’s $69k to $59k.

After a series of unfriendly inflation data, last Friday’s economic data was still not so friendly. China’s trade data was seriously below expectations (exports -7.5% vs expected -1.9%, imports -1.9% vs expected +1.0%), while the University of Michigan’s consumer confidence survey (current situation and expectations indexes fell short of expectations, and inflation expectations unexpectedly rose) showed some signs of “stagflation”.

The technical outlook for the major indices turned decidedly negative, with China's CSI 300 challenging its 200-day moving average and failing to break out to the upside, while the SPX came close to breaking below its 200-day moving average for the first time since the fourth quarter.

According to JPM, current (traditional) investor cash allocations have returned to a decade low, when fiat deposit interest rates were still as low as around 0%. 2.5 consecutive quarters of gains have prompted investors to fully invest or even go “all-in” in high-beta investments, leaving the market with little buffer to face further stock sell-offs.

That being said, according to JPM research, the current SPX trajectory is fairly similar to what it has been like since the end of previous rate hike cycles, assuming the economy doesn’t fall into recession. Of course, the key assumption is that the economy doesn’t fall into recession, which thankfully still looks like the case.

Back to geopolitics, the situation is undoubtedly still highly volatile. It is worth noting that while U.S. Treasury yields and stock prices have risen in the past few trading days, spot gold has also risen. This situation is relatively rare. It is as if gold has learned that tensions are about to escalate and has become a target of safe-haven buying, while other asset classes have been caught off guard.

Speaking of safe investment moves, BTC (disappointingly) failed to hold on to its “digital gold” narrative, with over $1 billion in leveraged futures longs being ruthlessly liquidated as BTC prices plummeted more than 10% in minutes, and on-chain DEX also saw its largest long liquidation in more than a year.

While prices eventually recovered somewhat (thanks to some signs of de-escalation in the US), the damage to crypto’s technicals was already done, with technical charts showing a downside breakout, while alt-coins were also hurting significantly, with the top 20 coins seeing weekly losses between 20-30%, while ETF inflows also began to slow.

As the old trading adage goes, events themselves rarely directly cause sharp price moves, but they do reveal the current positioning and risk buffers of market participants. Let's see how we can recover from this setback, as we have repeatedly emphasized, risk management is always key, and the winners are usually those who can hold out to the end.