SignalPlus Macro Research Report (20240118): Risk aversion sentiment spreads in financial markets, cryptocurrency market volatility decreases

Yesterday, led by Europe and the UK, the asset market finally significantly adjusted its expectations for easing policies. First, the UK's inflation data unexpectedly rose for the first time in 10 months, causing the 5-year UK government bond yield to jump by 23 basis points, the most severe change since the LDI crisis in September 2022. At the same time, the FTSE 100 index fell by 1.8%, with a year-on-year CPI growth of 4%, which is twice the Bank of England's inflation target. The market pricing implied the probability of a rate cut in May rapidly dropped from 80% to 55%.

The European Central Bank followed suit, with President Christine Lagarde stating that interest rates in the Eurozone may be lowered in the summer rather than in spring, which is inconsistent with current market pricing. Lagarde commented at the World Economic Forum that the ECB would need to wait until "late spring" to obtain the necessary information to make a decision on rate easing.

Next, Federal Reserve Governor Waller stated that although the U.S. is "close" to the Fed's 2% inflation target, there should be no rush to cut rates until it is confirmed that lower inflation can be sustained.

Waller said in an online discussion organized by the Brookings Institution, "The key is that the economy is performing very well, which gives us the space to act cautiously and methodically. We can look at the data results and see if the current progress can be sustained."

"What we least want to see is a reversal after we start cutting rates. We really want to see evidence that the current progress… continues in the actual data and inflation data. I believe it will."

In response to market expectations for easing policies starting in March, Waller's comments are among the strongest from Fed officials in recent weeks.

In terms of economic data, retail sales were unexpectedly strong, with a month-on-month increase of 0.6% in December, and a 0.4% increase excluding automobiles, equivalent to a year-on-year increase of 5.2%. Strong department store sales (from -2.5% to +3%) and general merchandise sales (from -0.2% to +1.3%) contributed to the better-than-expected growth. Meanwhile, the control group (excluding building materials, auto parts, and gasoline sales) also performed strongly, growing by 0.8%, far exceeding the expected 0.2%.

These factors collectively pushed the 2-year U.S. Treasury yield up by 13 basis points, while the results of the $13 billion 20-year Treasury bond issuance were not ideal, with a tail of 0.9 basis points and a bid-to-cover ratio of 2.53. The SPX fell by as much as 1%, mainly dragged down by interest rate-sensitive sectors (real estate -2%, utilities -1.5%) and high beta growth stocks (down 2.4% on the day). The probability of a rate cut in March has fallen back to around 58%, after reaching over 80% last week.

Risk aversion is not limited to the U.S.; the Chinese/Hong Kong stock markets also faced a similar bloodbath at the Asian open. Disappointment over China's economic growth and policies led to a nearly 4% drop in the Hang Seng Index. The lack of clear incentives in the medium term greatly suppressed market sentiment, and the technical outlook appears to be deteriorating. Brokers warned that the automatic redemption of securities and callable bull and bear certificates could lead to further declines in the Hang Seng Index. Additionally, an increasing number of local reports indicate significant real estate losses and bank loan impairments in Hong Kong, and local regulators may soon be forced to take liquidity intervention actions to prevent the situation from worsening.

In the cryptocurrency space, according to Bloomberg's estimates, GBTC saw outflows of about $1.2 billion in three days, while other nine spot ETFs saw inflows of $1.9 billion, with a net inflow estimated at $800 million. The newly launched Bitcoin spot ETF had a total trading volume exceeding $9.7 billion in its first three days, with GBTC accounting for over 52%. The spot price has remained stable around $42,500 over the past week, and the inflow of funds may take some time, with short-term price movements likely depending on overall risk sentiment and the market's repricing of Fed policies.