To The Moon

After Powell's speech, The US stock market suddenly broke out in an inexplicable carnival, This makes the previous bullish bettors earn a lot of money. The market seems to only believe its own expectations, but doesn't care what Powell is saying at all. This trend of treating neutral news as good is very rare, and probably can only appear at the end of the year when liquidity is not abundant.

When we take stock of Powell's speech last night, we will find that compared with the beginning of November, the new information only acknowledges that the previous monetary policy has made substantial progress, but immediately turns the conversation around and says that the current slowdown policy needs more evidence to prove that inflation has peaked and demand is slowing down continuously. And reiterated that high interest rates will be maintained and the end point will be higher than expected.

What's the difference between these words and the beginning of November?

But despite this, the market only believed what they were willing to believe, and started the so-called carnival after the doves spoke. The Nasdaq futures rose by more than 4 percentage points, almost fusing.

In fact, last night's surge was supported by a pessimistic Fed economic Beige Book, which made it clearer  that economic pessimism rose again, growth slowed down, and inflation may remain stable or moderate further development. Look at the reaction of the interest rate futures market, and the expectation of the end of next year's interest rate hike has dropped the most in nearly a week

​The expectation of interest rate cut next year (green) has also been greatly improved

However, if we pull out the monthly curves of these two expected trends, you will find that although the market expectations are swaying greatly, they have never deviated from the region before and after the Fed meeting in early November.

​It can be said that the expected trajectory of the market for interest rates remains basically unchanged

But some traders who are afraid to miss out can't wait any more.

Before Powell spoke last night, someone had put out a sky-high price of 36 million to bet that the S&P year-end level at the end of December would be above 4175, which was the boldest bet in the options market recently. Due to last night's surge, the potential yield of this bet is over 150% overnight.

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​The same bet was made in the options market last night. According to Bloomberg, someone bought 7,000 S&P 500 call options last night, with an exercise price of $4,150 and a contract cost of $21.6. Others sold a lot of put options on the S&P 500 during the rally and at the same time Buy call options...

Inflation, the biggest factor that suppressed the rise of global stock markets for a long time in the past year, is really slowly loosening?

No matter what the real situation is, However, the market has indeed bet on such a prospect with real money: as the US economy slows down and demand weakens, China is gradually opening up the global supply chain under the expectation of reopen, and the driving force for the Federal Reserve to raise interest rates in the future has gradually faded, followed by the bottoming out of the stock market and the gradual recovery of economic demand.

But on the contrary, we feel that all the current market trends,It is likely to be an illusion. This too bright prospect is not the real development direction of the world economy in the future

A major change from the US bond market

Today's sharing, The most important information is not from the above options market, but from the pessimistic changes in the US bond market. Unlike the previous large bets that the US dollar will fall sharply next year, more than 3 billion US dollars of funds do not seem to be optimistic about the continuous decline of US bond yields. When the US bond market just moved to the bottom, they chose to withdraw from the bond market.

On Monday, more than $3bn withdrew from the $36bn ishares iboxx investment-grade corporate bond ETF, the largest single-day outflow since its inception

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​The outflow scale accounts for about 8% of the overall market value. The depth of the US Treasury market (measured by the number of bidders to counterparties in Treasury trading) has fallen by about 60%, which is the same as during the previous crisis in 2008.

However, it is precisely when liquidity is constantly withdrawing from the US bond market that global bond prices have rebounded under the stimulus of weakening expectations of future tightening

​The rebound of this global bond index is the biggest in two years, but the withdrawal of large funds has given the bond market a big question mark:

You know, the fixed income market is no more volatile than options, The bets in the options market are only temporary changes, while the fluctuation range of fixed income is small and the income cycle is long. Their bets are often the market trend for a period of time. For example, now, when many bond market funds do not keep up with the rising bond market price, can the decline in US bond yields really continue?

From the change of 2-year US bond yield, the top shape is already very obvious

And after Powell's speech last night, the price of 2-year US bond yield futures has fallen below the 50-day moving average, which seems to be going back to the position below 4% yield. The dollar also reached its mid-November support level after plunging last night

The expected trend of raising interest rates shows that the possibility of raising interest rates by 75 basis points in December has plummeted, basically locking in the position of 50 basis points, and the probability of raising interest rates by 50 basis points in February next year is only 45%.

The current interest rate ceiling is 4%. Assuming that the next two interest rate hikes are 50% and 25%, the interest rate ceiling should also be 4.75%, which is much higher than the current 2-year US bond yield.

Once again, the dove-induced volatility has gone too far.

If the Fed wants to keep pressure on inflation, Then the upper limit of the current benchmark interest rate should be at least higher than the inflation rate, so that the real interest rate is greater than 0, while the current real interest rate is only-1. 14%. Obviously, there is still a long way to go to raise interest rates, and after the real interest rate is higher than the 0 axis, the upper limit of the interest rate corridor should be kept about 3 percentage points different from the real interest rate before reaching the end point:

According to the popular algorithm in the market, if we want to reduce the inflation rate in the United States from 8% to the target position of 2%,The nominal interest rate should be increased to at least 6%. And the impact of recession is likely to arrive less than 6%, so do you think it is a bit abnormal for the market to be so optimistic about the slowdown of interest rate hikes?

What's more, every time the bear market bottoms out, the P/E ratio of S&P is below 20, and now the valuation is still above 28.

Is it a bit too risky to bet on the market turning over now? What 's your opinion about it?

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