SignalPlus Macro Analysis Special Edition: Market Bubble

According to Bloomberg, as market enthusiasm continues to soar, the S&P 500 index, Nasdaq index, Dow Jones Industrial Average, and Russell 2000 index all reached historic highs within the same week, marking the 26th occurrence of this phenomenon in the past 100 years. Meanwhile, investment-grade credit spreads have narrowed to their lowest level since 1998, with the index only 0.72% higher than the yield on government bonds during the same period, providing almost no protective buffer if the economy truly deteriorates.

In terms of geopolitics, there are significant signs of improvement in U.S.-China relations: a preliminary agreement on TikTok has been reached, and Trump spoke with Xi Jinping to confirm ongoing progress in trade negotiations. The two leaders also pledged to hold a face-to-face meeting during next month's APEC summit in South Korea, marking the first summit meeting since the G20 summit in 2019. These developments have boosted risk sentiment, particularly as emerging market stocks performed strongly, and even the Bank of Japan signaled plans to (gradually) reduce its ETF holdings, coinciding with the Tokyo Stock Price Index reaching a historic high.


Risk sentiment indicators remain in extreme territory but have eased slightly since late summer, although the impact on stock prices has been limited. Risk appetite continues to be driven by a loose monetary environment, with current financial conditions still at historically loose levels, primarily due to the recent dovish shift in the Federal Reserve's policy.


This week, the data front is relatively light, with market focus shifting to speeches by Federal Reserve officials—17 speeches are scheduled for this week, with the highlight being Powell's remarks on Tuesday. Newly appointed Fed Governor Milan has clearly reinforced the dovish stance, stating, "We have not seen tariffs lead to substantial inflation… U.S. core goods inflation is not significantly different from other regions… and the federal funds rate is still far from neutral…"

Although the divergence between the stock and bond markets is not new—where the stock market pricing suggests a near-zero probability of recession while the fixed income market pricing reflects a nearly 50% probability—the differences in their performances during the Fed's easing cycles remain insightful.

If the Federal Reserve can successfully achieve a soft landing, U.S. stocks typically perform well around the first rate cut and often outperform global equities. In contrast, bond performance is markedly different, with a clear front-loading of yields, and yields often rise again during periods of economic stability. The dollar's movements show no clear pattern, as exchange rate fluctuations are more easily influenced by the combined effects of capital account and current account flows; however, it is certain that the Trump administration's expectations for a weaker dollar are more pronounced this time.


This week, there are not many highlights in the market. Macro assets have successfully escaped the seasonal weakness of September/October, with the proportion of U.S. households' stock allocations approaching an astonishing 50%, indicating a continued deepening of financialization in the U.S. economy. Volatility remains low, and hedging costs are cheap, with no significant catalysts in the short term.

Cryptocurrency performance was flat last week, with the exception of Binance's BNB, which reached a historic high due to the successful launch of several tokens (such as $ASTER), while mainstream coins generally declined. On the other hand, the Dogecoin ETF (DOJE) successfully launched last Thursday, and a wave of meme coin-themed ETFs may be on the horizon in the coming months.

BTC/ETH ETFs saw slight inflows, but overall volatility and momentum trading remain sluggish. DAT premiums have rebounded slightly but are still at year-to-date lows. It is expected that the market will maintain a range-bound fluctuation in the short term, and cryptocurrency performance may lag behind gold and stocks. Wishing you successful trading.