SignalPlus Macro Analysis: US stocks show rebalancing signals during decline and recovery, ETF inflow data is disappointing

Original title: "SignalPlus Macro Analysis Special Edition: Intermission"

Original author: SignalPlus

Despite a turbulent start to the market last week, U.S. stock index futures returned to the previous week's closing price on Friday, which was the level before Monday's plunge. U.S. Treasury yields actually rose slightly, but are still far below July levels. Is all this turmoil just a false alarm?

Going down, we can see a more obvious rebalancing trend, with high-priced stocks performing poorly, and the equally-weighted SPW index outperforming the market-cap-weighted SPX index for the fifth consecutive week. This week, the market will focus on corporate earnings, especially the consumer sector, to confirm whether the trend of slowing consumer spending can be confirmed by corporate earnings data.

The unexpected drop in first-time unemployment claims last week helped boost market sentiment. There is not much important economic data this week except PPI/CPI, but the Fed is currently paying special attention to the situation in the job market, which may temporarily weaken the market's attention to inflation data. Negative supply shocks from tariffs, energy prices and immigration restrictions may push price data up unexpectedly, but these upward momentum will likely be offset by weak wages and a sharp slowdown in housing prices, bringing inflation back to the Fed's long-term goal (economists predict that the core CPI will increase by 0.18% month-on-month). In addition, Fed officials Goolsbee and Daly also tried to downplay recent panic, saying that the market "overreacted" to the July employment report, a view that was also confirmed in the past week.

That said, given the severity of forced liquidations and losses at the beginning of last week, we expect the market to be defensive and the counter-trend rally to be limited, at least until the Jackson Hole meeting. In addition, as the often-cited "Sahm Rule" approaches triggering, investors may need more hard economic data to confirm whether the economy is about to enter a hard landing, and this recession indicator has a strong record of predicting asset price performance despite limited data.

Looking at the market structure again, the weakening of internal liquidity has also become a headwind for risk sentiment in the short term. Despite the recent easing of the People's Bank of China, global central bank liquidity is actually in a state of withdrawal, and banks' excess reserves and reverse repo balances have continued to decline in recent weeks. In addition, as dealers' risk appetite retreats, secondary liquidity in the US market has fallen to its lowest level of the year and is unlikely to recover to a large extent until at least the fourth quarter. JPM estimates that three-quarters of global carry trades have been closed, and risk funds may need a longer cooling-off period and re-evaluation before they can start larger-scale risk trades again.

Speaking of carry trades, the situation in Japan seems to have changed radically, and the lower USD/JPY may bring an early end to the hawkish stance of the Bank of Japan. The Bank of Japan has been accused of triggering the de-risking chain reaction last week, so their committee will be forced to take a more cautious approach to further rate hikes, especially when the exchange rate may depress inflation in the coming months. In fact, the Deputy Governor of the Bank of Japan, Uchida, recently made the following clarifications:

"In view of the extremely volatile developments in domestic and foreign financial and capital markets, the Bank of Japan needs to maintain an accommodative monetary policy at the current policy rate for the time being" "The Bank of Japan will not raise the policy rate when financial and capital markets are unstable" "The upside price risk from rising import prices has been reduced accordingly as the depreciation of the yen has been corrected"

These strongly suggest that the Bank of Japan will return to a mildly dovish stance for the foreseeable future.

Back in the US, while August is light on macro events, the VIX is likely to remain elevated, and individual stocks are expected to see more dramatic price movements around quarterly earnings results. Focus will be on companies such as Walmart and Home Depot to assess consumer buying power, with higher frequency credit card data already showing weaker retail sales in July, and traders should pay particular attention to the performance of consumer sectors (such as the XRT ETF) relative to the overall index for more signs of further declines in consumer sentiment.

For recession risk, different macro asset classes are showing different "forecasts" based on historical trends, with US Treasuries and commodities being the most "forward-looking" while stocks and credit are unconcerned about a hard landing.

In crypto, risk sentiment remains challenged, with BTC being hurt the most by “yen carry trade unwinding” based on two-year correlation data, again showing crypto as a frontier risk asset like the leveraged Nasdaq, and we expect prices to continue to fluctuate with the ups and downs of overall risk sentiment, rather than any “diversification” argument.

In terms of technical signals, on-chain data from 1 3D and Glassnode shows that BTC’s cost has fallen below its short-term and 200-day moving averages, with little support above the “real market average” (the grand average of all on-chain acquired prices) of about $47K, which is the reference point for the mean reversion model.

In addition, the on-chain MVRV ratio (market capitalization vs. realized market capitalization) has fallen below its 1-year average, suggesting that the decline may continue, and JPM's traditional momentum indicator has reached a similar conclusion.

Overall, recent inflows into ETFs have been disappointing, especially for ETH, which has seen a net outflow of $400 million since the product launched on July 24. In fact, Bloomberg data shows that almost all of BTC's price action since January has occurred during U.S. ETF trading hours, while all of the cryptocurrency's gains this year have occurred in "non-trading hours" (i.e., Asian hours), as the market has effectively pre-empted the New York open.

People who study the market for a long time will realize that this is the same as the stock market, that is, all the "fun" happens before the New York opening, and if you only trade during the "US trading hours", the index performance will usually be flat.

So, is this story telling us to buy at the US close and sell at the open? As always, we are not providing any investment advice here, we can only suggest that our Asian readers should sleep well at bedtime and do not need to "stay up late" to trade during the US hours.

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