The US stock market experienced its largest fluctuation week since 2019.

Although the US stock market was basically flat over the past week, the market fluctuated like a roller coaster. On Monday, there was a panic sell-off, followed by a rebound on Tuesday, another decline on Wednesday, a rebound on Thursday triggered by unemployment claims data igniting bottom-fishing sentiment, and continued gains on Friday, although at a slower pace. Throughout the week, the stock market was closely linked with the crypto market, with the focus of the media on the US economic recession and the unwinding of yen arbitrage trades.

In fact, true panic is quite short-lived, and there has not been a typical crisis situation where everything, including bonds and gold, is sold off. The US stock market has corrected about 8% from its historical high, but it is still up 12% from the beginning of the year. Considering the rise in bonds, diversified investors are less affected by the decline in stock indices. Historically, there is an average of three adjustments of more than 5% and one adjustment of 10% per year. If there is no accompanying economic or corporate earnings recession, stock market adjustments are often temporary.

91% of companies in the S&P 500 Index have reported their Q2 earnings, with 55% of those companies exceeding revenue expectations. Although this is below the average level of the past four quarters, it is still above 50%. There are significant differences in performance across industries, with healthcare, industrials, and information technology performing well, while energy and real estate sectors are relatively weaker.

The tech giants delivered solid quarterly earnings reports, with no significant decline in performance. The drop in valuation is mainly due to increased investments in AI. Palantir raised its earnings guidance and emphasized the positive impact of AI, leading to a 37% surge in stock price and sparking discussions in the market about the prospects of AI.

Analysis of September Interest Rate Cut Expectations

According to research from JPMorgan, the Federal Reserve's target interest rate calculated based on the Taylor rule should be around 4%, which is 150 basis points lower than the current rate. This means the Federal Reserve has reason to quickly adjust its policy to accommodate the current economic conditions.

The market expects that the Federal Open Market Committee meeting in September may cut interest rates by more than 25 basis points. This week, the market has priced in expectations for a total cut of 100 basis points in the year, which means four cuts of (. To support expectations for the first cut exceeding 25 basis points and more than three cuts in the year, economic data such as the labor market needs to continue to deteriorate.

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In the short term, the U.S. interest rate market is primarily focused on a pullback after an increase, with a buying-the-dip mode for periods longer than one month, as the interest rate cut cycle is destined to begin. The market still needs time to reach a consensus on whether the rise in unemployment rate indicates an economic slowdown and potential recession, during which sentiments will fluctuate repeatedly.

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Cryptocurrency Market Analysis

The cryptocurrency market has experienced its sharpest correction since the FTX crisis, with the price of Bitcoin dropping over 15% before recovering. This correction was mainly triggered by adjustments in traditional markets, rather than internal events within the cryptocurrency market. The technical indicators were severely oversold, nearing the levels of August 16th last year, when Bitcoin fell from $29,000 to $24,000, followed by two months of volatile consolidation.

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Retail investors played an important role in this adjustment. The outflow of funds from Bitcoin spot ETFs significantly increased in August, reaching the highest monthly outflow since their inception. In contrast, the de-risking behavior of participants in the U.S. futures market is limited, as indicated by the changes in CME Bitcoin futures contract positions and the positive basis of the futures curve, suggesting that futures investors still maintain a certain level of optimism.

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Last week, Bitcoin fell to around $49,000, close to JPMorgan's estimated production cost of Bitcoin. If the price remains at this level or below for an extended period, it will put pressure on miners and may further drive down the price of Bitcoin.

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Several factors contributing to institutional investors' optimism include: Morgan Stanley allowing wealth advisors to recommend Bitcoin spot ETFs, the liquidation pressures from the Mt. Gox and Genesis bankruptcy cases may have passed, cash payments after the FTX bankruptcy may stimulate demand by the end of the year, and both sides of the U.S. election may support cryptocurrency-friendly regulations.

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Capital and Position Analysis

Despite a significant reduction in stock allocation due to price declines and an increase in bond allocation, the current stock allocation ratio of 46.5% is still noticeably higher than the average level after 2015. To return to the average level after 2015, stock prices need to fall by another 8%.

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The cash allocation ratio for investors is extremely low, indicating that funds are more concentrated in stocks and bonds. This may increase the vulnerability of the market when it faces pressure, as investors may need to sell assets to obtain cash, exacerbating market Fluctuation.

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Recently, bond allocations have significantly increased as investors have turned to bonds for hedging during the stock market correction. Retail investors have reacted relatively calmly, with no large-scale withdrawals occurring. Retail sentiment surveys remain moderately positive.

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The changes in Nikkei futures positions indicate that speculative investors have significantly reduced their long positions. As of last Tuesday, the speculative net shorts on the yen have essentially returned to zero.

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Analysis of "Yen Arbitrage Trading" Scale

The yen arbitrage trading mainly includes three parts:

1. Foreign investors purchase Japanese stocks and short equivalent yen derivatives, with a scale of approximately 600 billion USD.

2. Foreign investors borrowed yen to purchase overseas assets, with a scale of approximately 420 billion US dollars at the end of the first quarter of 2014.

3. Japanese domestic investors use yen to purchase overseas stocks and bonds, with a pre-adjustment scale of approximately $3.5 trillion.

The total scale of yen arbitrage trading is about 4 trillion dollars. If inflation in Japan forces the central bank to raise interest rates, such trading may gradually decrease.

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Upcoming Key Events

• Consumer Price Index ) CPI (: If it meets or is below expectations, market reaction may be limited; if it exceeds expectations, it will be a significant issue.

• Retail sales data: If the data is strong, the market may be more optimistic about a soft landing.

• Jackson Hole Meeting: The Federal Reserve is expected to convey a message of support for the market, potentially mentioning the tightening of financial conditions.

• Nvidia earnings report: expected to be released at the end of the month, the market may have a positive attitude towards its performance.