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In the first week of 2024, the global stock and bond markets ushered in a sea change, setting the worst start in two decades. The S&P 500 ended its nearly 20-year winning streak for the first time, accumulating 152%。At the same time, U.S. Treasuries and corporate bonds also posted their biggest weekly declines since October. According to statistics, the global bond and ** markets have lost more than $3 trillion in market value at the start of 2024, making it the worst start on record.
This "Week of Horror" is due to two main factors. First, better-than-expected jobs data cooled market expectations for interest rate cuts, while the Fed minutes did not "hit investors' optimism further" as the market expected. Secondly, as early as a few weeks ago, there was already a phenomenon in the market called "front-running interest rate cut trade", that is, investors bet on the possibility of interest rate cuts in advance, and this trading strategy is the "hidden danger" of the market this week. This also means that excessive optimism in the market is an important driver of the emergence of the stock and bond markets.
In this "frightening week", the global market value has evaporated by about $2 trillion, and the market value of the bond market has also increased by $1 trillion. All major U.S. ** were seen, with small-cap and the Nasdaq falling the most, with the Nasdaq falling by 325%, the biggest weekly decline since March 10. The Nasdaq 100 and Russell 2000 are each up 309% and 375%, respectively, ended the cycle of continuous gains. In addition, seven major technology stocks, including Apple, Microsoft, Alphabet, Meta, Amazon and Nvidia, have collectively wiped off more than $400 billion in market value this week, and their shares have almost reversed their December gains.
In the bond market, Treasury yields of all maturities were ** this week. The yield on the 10-year Treasury note recovered to 4%, and the yield on the 30-year Treasury note rose by 16 basis points, the second-largest increase since 2011The 2-year Treasury yield** was 135 basis points, the largest increase since 2005. The emergence of this series of data once again shows that the expectations of interest rate cuts in the past few months have been overly optimistic, and the market's concerns about rising interest rates have reared.
Looking back over the past few months, we can see that the market's stock and bond surge is due to this. In November last year, the Federal Reserve signaled a rate cut, and the market expects a rate cut in March next year, which stimulated the stock and bond markets, especially **further** to record highs. According to data compiled by JPMorgan Chase, in November last year, some hedges** began to turn bullish, while since the end of October last year, shorts** have sharply covered in numbers, hitting a new high since 2018. This series of actions has led to a flood of interest rate cut expectations, and a large number of positions in the market overlap with each other, creating liquidity problems.
Market analysts believe that the pressure on the market this week comes from overheated data to suppress interest rate cut expectations, and investors' overly optimistic sentiment is the key factor driving the market. Michael Bailey, director of research at FBBedPartners, told **: "Investors were complacent and looking forward to a hat-trick of lower inflation, solid job growth and earnings growth. Shut up some bulls this week. Alanruskin, chief international strategist at Deutsche Bank, also said: "There is a desire to seize the so-called big changes and get out of a situation where interest rates are no longer rising. I think it's reasonable, but the market is ahead of its time. "These views illustrate the overheating of investor expectations on rate cut expectations and the gradual return of the market to rationality.
In addition, two analysts at Guotai Junan, Zhou Hao and Sun Yingchao, also said that the front-running interest rate cut deal has shown fatigue after two months. This series of front-running behaviors has brought pressure on liquidity, and at the same time, the negative interest rate spread of long-term bond trading has become more significant, and the liquidity of the entire market has begun to tighten.
Various data show that there is a certain correlation between the market performance at the beginning of the year and the market trend throughout the year. According to Deutsche Bank strategists, the S&P 500 has risen an average of 11%, while if the same period **, the average increase for the year was 112%。This means that the performance of the beginning of the year is indicative of the market trend throughout the year.
Guotai Junan analysts believe that there are three events worth paying attention to at the end of January. The first is the Fed's first interest rate meeting in 2024, which will be held on January 31, and the Fed may recalibrate its rate cut expectationsThis was followed by the US Treasury's refunding plan, also published on January 31, which is related to the February-April bond issuance planFinally, the release of US GDP data for the fourth quarter of 2023, which is expected to be released on January 25, is an important indicator of future rate cut expectations and rate cut trades. These events will become an important "weather vane" for the market and deserve investors' close attention.
The dramatic changes in the global equity and bond markets at the beginning of the year have surprised and disappointed investors. The global market value has evaporated by about $2 trillion, and the market value of the bond market has also increased by $1 trillion. It was the worst start in two decades, and it dealt a critical blow to investors who were optimistic and confident because of the surge in stocks and bonds at the end of last year.
The market's ** is mainly due to overheated interest rate cut expectations and overly optimistic investor sentiment. The front-running rate-cutting trading strategy has caused the market's positions to overlap, causing liquidity problems. Market disappointment over better-than-expected jobs data and Fed meeting minutes further dampened investor optimism.
While a bad start to the year doesn't necessarily mean that the full year will be unfavorable, it does deserve investors' attention. There will be a number of important events in the coming weeks, including the Federal Reserve's interest rate meeting, the US Treasury's refundingplan and the release of US GDP data, which will be the "weather vane" for the market.
In the face of market volatility, investors need to remain calm and rational and make reasonable decisions based on their own risk tolerance. The market is risky, and investors need to be cautious.
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