The above chart is the most important chart this week. FOMC members turned collectively. It can be said that the Feds December meeting released the clearest signal to cut interest rates so far. The 75 bp cut also exceeded market expectations. After that, from stocks to bonds, non-U.S. Everything from currencies to commodities is rising, but cryptocurrencies are lagging this time around.

Because on December 1, Powell also warned the market that it is too early to guess when to start easing, but in a press release on December 13, he said that the issue of interest rate cuts has begun to be discussed. Therefore, this dovish turn is beyond the market. As expected, the Dow and Nasdaq 100 hit record highs last week, and the SP 500 was only one step away from a record high. The small-cap proxy Russell 2000 surged 5.7% last week and is still more than 15% away from its all-time high.

Market risk appetite has further and significantly strengthened:

Funds are rapidly repairing valuations of real estate, consumer goods, and industrial stocks, and there seems to still be room:

U.S. China concept stock index HXC rose 3%, although A closed lower for the sixth consecutive week;

The U.S. 30-year Treasury bond yield fell below the 4% mark last week from a multi-year high of 5.18% in October, and the 10-year Treasury note fell below the 3.9% mark. Williams and Bostic dampened some market enthusiasm on Friday, but market corrections were extremely limited, underscoring how this Pivot narrative is still ongoing.

Derivatives markets are already betting on benchmark interest rates as low as 3.9% next year, with rate cuts already underway in March. Thats well below the 4.6% rate level shown in the Feds dot plot. Considering that the U.S. economic momentum, financial market performance, job market performance, commercial loan default rate (1.33%), credit default rate (90D 1.3%) and other indicators are all in healthy or even overheating ranges, except that inflation is approaching the target, we I see no reason for the Fed to be in a hurry to cut interest rates after three months.

Moreover, the first interest rate cut cannot be regarded as a true easing of monetary policy, but a preventive adjustment when price pressures are significantly relieved. The overall restriction level will still be maintained. If next years economic growth performance exceeds the Feds 1.5% target, Actual room for interest rate cuts may be extremely limited.

The room for further optimistic pricing seems to have come to an end, and could be a pretty good short-term take-profit point for bond bulls. For the stock market, there may still be some room to rise, mainly given the favorable macro backdrop, mainly the Fed and US economic growth have just reached a very friendly position; secondly, seasonality and capital flows, still in a favorable situation .

But overall the Feds tone last week was still more dovish than the ECB. For example: ECB Governing Council member Madis Muller said on Friday that markets are leading their bets that the ECB will start cutting interest rates in the first half of next year. On Thursday, European Central Bank President Christine Lagarde said the bank had not discussed cutting interest rates at all.

After the meeting, major institutions also lowered their forecasts for the U.S. bond yield curve. Barclays forecast for 10Y U.S. bonds at the end of 2024 dropped from 4.5% to 4.35%, Goldman Sachs dropped it from 4.3% to 4%, and JPMorgan Chase down from 4.3% to 3.65%. We also saw Goldman Sachs directly increase its SPX price target by 8% for the end of next year to 5100

Bank of America predicts that global central banks will cut interest rates 152 times next year:

Jefferies: Seriously overbought

Based on the 14-day RSI, 49% of stocks in the SP 500 are considered overbought (>70). Its rare for more than 50% of the stocks in the SPX to be overheated. This has happened only once since 1990. This situation may be driven by a number of market stop-loss orders. It also usually marks a turning point in the market, and the market may enter a cooling period:

historical data:

• 1-Month Performance: When the SPX overheated more than 30% of stocks, the average one-month performance was down 1.14% (minus 114 basis points) and was negative 53% of the time.

• 3-month performance: The three-month average performance is usually flat, with no significant ups and downs.

• 12 Month Performance: Looking 12 months ahead, the average performance is a positive 12% increase, which is positive 95% of the time.

Money market fund assets fall for first time since October

In the week ended December 13, approximately $11.6 billion had flowed out of U.S. money market funds. Total assets fell to $5.886 trillion from $5.898 trillion the previous week, marking the first net outflow in eight weeks.

Investors have poured $1.4 trillion into money market funds this year, while U.S. stock funds have received just $95 billion in inflows, a disparity

Money market fund assets fell from record highs ahead of quarterly tax day, potentially signaling a shift in flows as the prospect of interest rate cuts next year prompts investors to seek higher returns in other assets.

However, according to analysis by Bank of America Merrill Lynch, the continued large-scale inflow of money fund funds into the risky asset market may have to wait until the fourth quarter of next year, and is historically mostly triggered by the end of economic recession:

Over the past four cycles, inflows into money market funds have continued an average of 14 months after the last Fed rate hike. Considering the last rate hike was in July 2023, this means inflows could continue until September 2024.

Since 1990, outflows from money market funds have begun on average 12 months after the first rate cut, and if this trend continues, outflows would begin in the first quarter of 2025.

Since 1990, all money market fund withdrawals have been triggered by the end of a recession, with the only exception being the soft landing in 2019, when no outflows occurred.

Over the past five cycles, outflows from money market funds have been equal to 20% of prior inflows, implying that approximately $250 billion in cash will be deployed into risk assets, expected from Q4 2024 or 2025 Start of the first quarter.

Fund flow and positions

Deutsche Banks measure of total equity positions rose again this week, moving further into overweight territory (z-score 0.46, 70th percentile), high, but not extreme

Among them, the position level of independent strategy investors is at the 86th percentile, while the position level of systematic strategies is only at the 51st percentile.

Inflows into equity funds ($25.3 billion) also surged to a nearly 21-month high, led by the United States ($25.9 billion), with the largest increase occurring in emerging markets:

CTA’s capital allocation to stocks has finally returned to the normal range, currently at the 39th percentile:

Bank of America’s quantitative tracking believes that the current long positions of CTA funds on the Nasdaq and SP have been excessive, and further buying has been restricted. However, the momentum of small-cap stocks is still expected to be supported in the coming week:

According to Goldman Sachs client trading data, the total leverage ratio increased by 2.4 percentage points last week to 199.1% (100th percentile in the three-year history), and the net leverage ratio increased by 0.9 percentage points to 54.6% (48th percentile) long/short The overall ratio rose 0.2% to 1.755 (25th percentile):

U.S. Treasury bond funds have seen their largest two-week outflows since June 2020. Despite the recent sharp rise in U.S. bonds, it can be seen that the funds that entered the market first may be cashing out:

mood

The Bank of America Bull and Bear Indicator reached its highest level since the bull market began 14 months ago, although it is far from extreme selling territory:

Goldman Sachs sentiment indicator remains at overdone levels for the fifth week in a row:

AAII investor surveys bullish share rises to highest level since July 20

The CNN Fear and Greed Index edged higher, sitting in the >70 greed range, but not touching extreme greed