SignalPlus Macro Analysis Special Edition: Intermission

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

Upon further investigation, a more apparent rebalancing trend can be seen, with high-priced stocks performing poorly. The equal-weighted SPW index has outperformed the market-cap weighted SPX index for the fifth consecutive week. This week, the market will focus on corporate earnings reports, especially in the consumer sector, to confirm whether the trend of slowing consumer spending can be substantiated by corporate earnings data.

Last week, the number of initial jobless claims fell more than expected, which helped boost market sentiment. This week, aside from PPI/CPI, there isn't much important economic data. However, the Federal Reserve is currently paying special attention to the employment market, which may temporarily weaken the market's focus on inflation data. Negative supply shocks from tariffs, energy prices, and immigration restrictions could push price data unexpectedly higher, but this upward momentum is likely to be offset by weak wages and a significant slowdown in housing prices, bringing inflation back to the Fed's long-term target (economists predict a 0.18% month-over-month increase in core CPI). Additionally, Fed officials Goolsbee and Daly have also attempted to downplay recent panic, stating that the market has "overreacted" to the July employment report, a view that has been confirmed over the past week.

That said, considering the severe forced liquidations and losses early last week, the market is expected to remain in a defensive state, with counter-trend rebounds likely to be limited, at least until the Jackson Hole meeting. Furthermore, as the frequently mentioned "Sahm Rule" approaches its trigger, investors may need more hard economic data to confirm whether the economy is about to enter a hard landing. Although data is limited, this recession indicator has a strong predictive record for asset price performance.

Looking at market structure, the weakening of internal liquidity has also become a resistance to risk sentiment in the short term. Although the People's Bank of China has recently eased policies, global central bank liquidity is actually in a state of withdrawal, with excess reserves and reverse repo balances at banks continuing to decline in recent weeks. Additionally, as traders' risk appetite diminishes, the sub-liquidation in the U.S. market has dropped to its lowest level of the year, and a significant recovery is unlikely before the fourth quarter. JPM estimates that three-quarters of global arbitrage trades have been closed, and risk capital may require a longer cooling period and reassessment before large-scale risk trading can resume.

Speaking of arbitrage trading, Japan's situation seems to have undergone a fundamental change, as the decline of the dollar against the yen may prematurely end the Bank of Japan's hawkish stance. The Bank of Japan has been blamed for triggering last week's de-risking chain reaction, so their committee will be forced to adopt a more cautious attitude towards further rate hikes, especially in light of the possibility that exchange rates may suppress inflation in the coming months. In fact, Bank of Japan Deputy Governor Uchida recently clarified the following points:

• "Given the extreme volatility in domestic and international financial and capital markets, the Bank of Japan needs to maintain an accommodative monetary policy at the current policy interest rate for the time being."

• "When financial and capital markets are unstable, the central bank will not raise the policy interest rate."

• "As the depreciation of the yen has been corrected, the price upside risks from rising import prices have correspondingly decreased."

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

Back in the U.S., although there are fewer macro events in August, the VIX index may remain elevated, and stock prices are expected to fluctuate more dramatically around quarterly earnings results. Focus will be on companies like Walmart and Home Depot to assess consumers' purchasing power. High-frequency credit card data has already shown a softening in retail sales in July, and traders should pay special attention to the performance of the consumer sector (e.g., XRT ETF) relative to the overall index for further signals of declining consumer sentiment.

Regarding recession risks, different macro asset classes are showing varying "predictions" based on historical trends, with U.S. Treasuries and commodities being the most "forward-looking," while stocks and credit seem indifferent to a hard landing.

In the cryptocurrency space, risk sentiment continues to face significant challenges. According to two years of correlation data, BTC has been most adversely affected by "yen arbitrage trade closures," further demonstrating that cryptocurrency movements are akin to leveraged Nasdaq indices as frontier risk assets. We expect prices to continue to fluctuate with overall risk sentiment rather than any "diversification" arguments.

In terms of technical signals, 1 3D and Glassnode's on-chain data show that BTC's cost has fallen below its short-term and 200-day moving averages, with almost no support above the "real market average" (the total average of all on-chain acquisition prices) around $47K, which serves as a reference point for mean reversion models.

Additionally, the on-chain MVRV ratio (market cap vs. realized cap) has fallen below its one-year average, indicating that the upcoming decline may persist. JPM's traditional momentum indicators have also reached similar conclusions.

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

Long-term market observers will realize that this is similar to the stock market situation, where all the "fun" happens before the New York opening. If one only trades during the "U.S. trading hours," index performance typically remains flat.

So, does this story tell us to buy at the U.S. close and sell at the open? As always, we do not provide any investment advice, but we can only suggest that our Asian readers get a good night's sleep during their sleeping hours and not "stay up late" to trade during U.S. hours.