To The Moon

Keypoints： U.S. stocks, U.S. bonds, and gold: The Jackson Hole annual meeting revealed the divergence of global central banks and the uneven pace of the global economic cycle. U.S. bond yields soared to new highs in 2008 and parted ways with gold prices. A Paradigm shift is quietly kicking off, but the recent wave of selling in US stocks has weakened. The attractiveness of U.S. debt may decline, and gold will shine brightly. $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $Gold - main 2312(GCmain)$ $iShares 20+ Year Treasury Bond ETF(TLT)$ ASIA STOCKS: Chinese markets have long understood stamp duty cuts and their implications. The sentiment boost from this stamp duty cut may not last long, but the policy intent behind it should not be taken lightly. $HSI(HSI)$ After the COVID-19 pandemic, the current economic cycles of various countries are uneven, and the interest rate gap between China and the United States has widened to a record. The Jackson Hole Annual Meeting became famous not only because of its leisurely view at the beginning of its establishment, which attracted fishing enthusiast Paul Volker, but also because the Ben Shalom Bernanke, former Federal Reserve chair once announced a fairy operation of two rounds of quantitative widths at a meeting. At this meeting, Powell still emphasized that he will continue to focus on taming the inflation "tiger". At the same time, the risk of deflation in China is imminent. As a result, the U.S.-China interest rate differential has widened to one of the widest levels on record. Meanwhile, US 10-year Treasury yields soared to their highest level in 15 years (Chart 1). Chart 1: The spread between US-China long-term bond yields has widened to the widest in history, and offshore RMB and Chinese stock markets are under pressure. Source: Bloomberg, Grow Research Historically, the interest rate differential between China and the United States has been closely related to the RMB exchange rate. As interest rate differentials widen, pressure to depreciate the renminbi is mounting (chart 1). Such yield differentials explain both the volatility of the offshore RMB exchange rate and the direction of China's stock market for as long as we have data records. For foreign investors, exchange rate gains and losses are part of their return on investment. Last week, the central bank issued 950 million yuan of bonds in the offshore market to absorb excess yuan liquidity. This policy combination once again implies that around 7.30 should be the cyclical low point of the real effective exchange rate of the RMB in this cycle (Chart 2). Chart 2: The RMB real effective exchange rate is near cyclical lows and deviates from the trend of foreign reserve accumulation. Source: Bloomberg, Grow Research Paradigm shift: Gold shines as U.S. debt is challenged Cross-asset price action suggests that a market paradigm shift is quietly underway. A sudden divergence in prices that have moved in tandem in the past shows exactly this. For example, after the Jackson Hole annual meeting, the yield on the 10-year U.S. Treasury bond soared to a new high since mid-2008, and has surpassed the peak in late October last year. While rising long-term bond yields have been negative for gold prices in the past, gold prices have remained resilient this time around, hovering near record highs (Chart 3). Chart 3: Gold prices are starting to diverge from US bond yields. Source: Bloomberg, Grow Research This divergent departure in the correlation between two important asset prices signals a paradigm shift. Judging from Fitch's downgrade of the U.S. sovereign rating, the status of U.S. debt as the pillar of global risk-free interest rates seems to be being challenged. Gold, the cornerstone of perpetual credit for thousands of years, is starting to shine again. China's stock market stamp duty reduction, what to do? In fact, in the past two weeks, there have been rumors about the reduction of stamp duty in the market. Now that the management has spoken, the good news is coming. Chart 4: Leveraged trading is showing a weakening of risk appetite. Source: Bloomberg, Grow Research Having said that, the market is well aware of the many benefits of reducing stamp duty. After all, the market has already heard the news and is aware of the short-term impact of stamp duty reduction on stock prices-once it is lowered, stock prices will be boosted in the short term. However, leveraged trading as a percentage of total volume continued to retreat from recent highs. Historically, the indicator has been an effective indicator of market sentiment and has tended to lead the market by up to three months. Therefore, although the previous rumors of stamp duty reduction failed to boost the market, and the sentiment boost after the news is implemented may be short-lived, its policy signal should not be underestimated.