Crypto Assets 'lying flat', US bonds 'reviving': Is the market waiting for the FOMC or a bigger storm?

Original author: SignalPlus Chinese

Reprinted: Daisy, Mars Finance

Due to the easing of rhetoric from the U.S. government regarding its tough trade policies, the SPX index ended last week with its first nine consecutive gains in over 20 years, and has recovered all the losses since the Liberation Day crash.

Both China and the United States are continuing to take steps towards restarting trade negotiations and easing relations. Recently, both sides have made adjustments to their trade departments and negotiators. The Chinese side stated: "The U.S. has recently actively conveyed messages to the Chinese side through relevant parties, hoping to engage in talks with us." In response, the Chinese side expressed that "an assessment is currently underway."

Bloomberg's latest survey shows that the market generally believes the Trump administration will ultimately respond to market changes, despite previously attempting to blame issues left by Biden. The market thinks that the government has reached a "pain threshold" where it is willing to pause its tariff offensive.

In addition to releasing positive signals in trade, last Friday's non-farm payroll report was unexpectedly strong, further boosting market risk appetite and marking the end of a week of robust economic data. This indicates that despite negative sentiment in the market, the fundamentals of the U.S. economy remain solid. In April, 177,000 new jobs were added, and the unemployment rate held steady at 4.2%, temporarily alleviating concerns about the economy heading into recession. However, the true impact of tariff policies may not be reflected until the data for May and June.

In addition, based on the average pullback levels during past economic slowdowns, the implied probability of a recession given the current stock market rebound is only about 8%, significantly lower than the estimates by economists or the levels implied by the fixed income market.

In the fixed income market, the yield curve has flattened and has returned to the levels seen in February. The market expects the likelihood of a rate cut in June to be only about 30%, with an expectation of only about 3 rate cuts for the entire year.

On the other hand, recent actual inflation data has continued to decline, coupled with central banks in multiple countries releasing positive signals to maintain their positions in U.S. Treasury bonds, which has restored normalcy to the U.S. bond market.

In terms of cryptocurrency, the overall volatility in the past week has been low, with prices remaining stable. Although BTC briefly recovered to the 96k level, it subsequently faced short-term profit-taking pressure. The volatility curve is flattening, indicating a lack of clear direction in the market for the future, while the actual volatility has fallen back to its lowest point of the year.

If there are no significant changes in macro assets, we expect cryptocurrency prices to continue consolidating in the short term, and may maintain a bullish tendency in the medium term.

In the past two weeks, although the scale has not been large, the inflow of funds into ETFs has continued to be positive, with a cumulative net inflow almost exceeding the peak earlier in the first quarter.

Looking ahead, with SPX successfully recovering the decline after Liberation Day, the "easy" part of the rebound has been achieved, and prices have re-entered the technical resistance zone. Historically, "bear market" rebounds (if this counts) are the most unstable and irrational for observers. However, this rapid rebound has also triggered some positive divergence signals, which may drive prices back to January's highs.

We expect that this week's FOMC meeting will not have a significant impact on the market, and currently, there is no clear directional judgment; price movements may be as unpredictable as flipping a coin. Ultimately, it will still depend on the performance of corporate profit growth, which will further depend on economic realities and the subsequent impact of tariffs.

So far, the situation is quite good, with first-quarter profit growth expected to be close to a year-on-year increase of 13%, nearly double the initial expectations at the beginning of the earnings season, and it will be the second consecutive quarter of double-digit growth.

If we have to make a choice, we believe that the market's "pain trade" still points to further price increases. After all, most observers are still fixated on the argument that the tariffs are a "done deal, irreversible." However, it is important to note that the "dead cat bounce" in a bear market should not be taken lightly!