Assuming collective overthrow! Market first reaches "stupid level" popular trades

People are rapidly rethinking the various assumptions that have been driving the global financial markets this year. In the bond and currency markets, investors are scrambling to reallocate funds as doubts about the outlook for the U.S. economy continue to grow, leading to speculation that the Federal Reserve may ultimately cut interest rates faster or more aggressively than planned. The catalyst for this change? Weak U.S. consumer spending, which has been evident in a series of disappointing corporate earnings. Meanwhile, shareholders have suddenly begun to doubt whether the massive investments in artificial intelligence by tech companies can yield returns quickly. As a result, investors have been selling stocks of big winners like NVIDIA and Broadcom. Copper and other industrial metals have also reversed their recent upward trend, with the slowdown in the Asian economy and concerns about the U.S. and tech stocks being among the reasons for their decline. Even a report on Thursday showing stronger-than-expected U.S. economic growth in the second quarter failed to truly dispel investors' concerns about the future path. Louis-Vincent Gave, CEO of Gavekal Research, wrote in a note to clients, "It appears that people have begun to unwind those popular trades that have pushed valuations to foolish levels." Torsten Slok, Chief Economist at Apollo Global Management, told clients on Thursday, "If the economy starts to slow down, the speed of the slowdown becomes crucial. A faster slowdown will have negative implications for earnings and increase the likelihood of a downturn in the stock and credit markets." The following are some notable market trends and fundamental assumptions that have changed: Government Bonds In the bond market, the dim outlook for global economic growth is underpinning bets on rate cuts. Fearing that current monetary policy is too tight, investors are rushing to buy short-term bonds before rate cuts are implemented. On Thursday, the yield spread between two-year and ten-year U.S. Treasuries narrowed to just 12 basis points, the closest the market has come to ending the inversion since the mid-2022s, a far cry from the over 50 basis points spread a month ago. While the likelihood of a rate cut by the Fed at the upcoming meeting looks very small, the market is now pricing in a larger rate cut later this year. Key parts of the U.S. yield curve are close to ending the inversion Traders expect a cut of around 25 basis points by September, with about a 20% chance of a larger-than-expected cut. By 2024, the rate cut is expected to exceed 60 basis points. The Japanese Yen has been one of the biggest victims of the U.S. tightening monetary policy over the past two years. The yen has rebounded by about 5% from the lows reached earlier this month, making it the best-performing currency among the G10 so far Investors have long liked to borrow low-yielding yen to fund investments in high-yielding currencies such as the Mexican peso or the Australian and New Zealand dollars, but now they believe that as the gap between the yen and similar currencies narrows, this situation is changing. Stock Market So far this year, the U.S. and European stock markets have been driven by a consensus that inflation is under control, allowing the Federal Reserve to loosen monetary policy later this year to avoid an economic downturn. As of mid-May, the Stoxx Europe 600 index hit a record high, with investors seeing a year-to-date return of 12%. The S&P 500 index hit a series of new highs, led by tech stocks. Now, many investors believe that the Federal Reserve is behind the curve - not only is inflation slowing, but the economy is weakening. As a result, some market observers predict that if the Federal Reserve does not cut rates soon, it may make a policy mistake, and if it stays put, it may have to take more action later on. So far, nearly a third of S&P 500 companies have reported second-quarter earnings, with sales data becoming an increasingly focal point, showing a trend of slowing sales. According to data compiled by Bloomberg Intelligence, only 43% of companies have exceeded revenue expectations, the lowest level in five years. The frenzy around artificial intelligence no longer looks as optimistic. This week, Google parent company Alphabet Inc.'s investment in this technology surprised investors, but there was little to show in terms of revenue. The Nasdaq 100 index has fallen nearly 9% from its record high on July 10, with the benchmark companies losing $2.3 trillion in market value. The index is still up 12% this year, and a survey conducted by Bank of America this month shows that investing in the so-called "seven giants" has been the most crowded trade since investing in growth stocks in October 2020. James Athey, portfolio manager at Marlborough Group, said, "In addition to making the most optimistic forecasts for future growth, earnings, and monetary policy, the valuations of giant tech stocks are becoming increasingly unsustainable. It is inevitable that this extreme situation cannot continue." Metals The growing pessimism about demand and the tech industry has also spread to the metal market. Copper fell below $9,000 per ton for the first time since early April, down about 20% since hitting a record high in mid-May. Aluminum hit a four-month low this week before rebounding slightly. The current change is that investors who used to buy this metal due to concerns about supply shortages and increasing usage in data centers and other areas are now worried about increasing inventories and a weak spot market. Bloomberg macro strategist Cameron Crise said, "In the long-term battle between fear and greed, the former has the upper hand, as many consensus positions have suffered losses this week. All of this represents a collective 'painful journey', where pricing is almost the only important fundamental factor in a situation of significantly reduced investment risk, which is also one of the cyclical events."