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

Original author: SignalPlus Chinese

Reprint: Daisy, Mars Finance

Due to a softening of the U.S. government's remarks on its tough trade policies, the SPX index closed last week with its first nine consecutive gains in over 20 years, recovering all 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 us through relevant channels, hoping to engage in talks with us." In response, the Chinese side indicated that "an evaluation is currently underway."

A recent Bloomberg survey shows that the market generally believes the Trump administration will ultimately respond to market changes, despite previously attempting to blame Biden's inherited issues. 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, the non-farm payroll report released last Friday was surprisingly strong, further boosting market risk appetite and marking the end of a week of robust economic data. This shows 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 remained at 4.2%, temporarily easing concerns about an impending economic 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%, which is much lower than the estimates of economists or the levels implied by the fixed income market.

In the fixed income market, the yield curve has flattened and has fallen back to the levels of February. The market expects only about a 30% chance of a rate cut in June, with an estimated total of only about 3 rate cuts for the year.

On the other hand, recent actual inflation data has continued to decline, coupled with many central banks signaling a positive outlook for maintaining their positions in U.S. Treasuries, which has restored normalcy to the U.S. bond market.

In terms of cryptocurrency, the overall volatility in the past week has been minimal, 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, while the actual volatility has fallen to its lowest point of the year.

If there are no significant changes in macro assets, we expect cryptocurrency prices to continue to consolidate in the short term, with a possible bullish tendency in the medium term.

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

Looking ahead, with SPX successfully recovering the drop after Liberation Day, the "easy" part of the rebound has been realized, and prices have re-entered the technical resistance zone. Historically, "bear market" rebounds (if this counts as one) 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 the highs of January.

We expect that this week's FOMC meeting will not have a significant impact on the market, and there is currently no clear direction to judge; the price trend may be as unpredictable as flipping a coin. Ultimately, it will return to 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 an annual increase of 13%, nearly double the initial expectations at the start of the earnings season, and it will be the second consecutive quarter of achieving double-digit growth.

If a choice must be made, we believe that the market's "pain trade" still points towards a further price increase. After all, most observers are still fixated on the rhetoric 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 underestimated!

Source: Mars Finance