<h2>Q1: Why has the market experienced this significant correction? What triggered the &#34;flash crash&#34; in overseas markets?</h2>
Daniel Zhang: This question has been asked of me repeatedly. Since this correction does not have a particularly clear catalyst, everyone is looking for the &#34;culprit.&#34; I believe there are four main factors:
First, the emotional shock from the AI bubble theory. Recently, there has been a lot of talk in the market about this, for example, Michael Burry from &#34;The Big Short&#34; has started shorting Nvidia and bought a significant amount of put options, which has emotionally impacted market confidence.
Second, the hawkish continuation from last week's FOMC meeting. Powell emphasized at the meeting that &#34;there is no commitment to cut rates in December,&#34; which dampened market sentiment and led to a noticeable decline in rate cut expectations. Currently, the market is pricing in a roughly 70% probability of a rate cut.
Third, the ongoing impact of the government shutdown. Because of the government closure, many official data updates are unavailable, but from some high-frequency data, it is evident that the U.S. economy is indeed weakening in the fourth quarter.
Fourth, the uncertainty surrounding Trump's IEEPA ruling. The market is closely monitoring this issue. Many of Trump's tariff actions this year are based on IEEPA, such as the fentanyl tariffs and the reciprocal tariffs on April 2. The Democrats believe this approach is &#34;overreach,&#34; and the Supreme Court will conduct oral arguments on this matter. This legal uncertainty has led some funds to choose to wait and see or withdraw early.
Overall, it is a combination of emotional factors and policy disturbances: AI bubble theory + FOMC hawkish tone + government shutdown + IEEPA ruling, which has formed this resonance adjustment.
<h2>Q2: The liquidity of the U.S. dollar has recently worsened; is this related to the correction in risk assets?</h2>
Daniel Zhang: These are two phenomena that people easily associate with each other, but I believe they are more like parallel lines with no particularly strong causal relationship.
The recent deterioration in U.S. dollar liquidity is mainly due to two reasons:
In the short term, the &#34;passive tightening of fiscal policy&#34; caused by the government shutdown. The government shutdown means that salaries for civil servants and military personnel cannot be paid—money is &#34;collected&#34; by the Treasury but has not been disbursed, which is equivalent to temporarily withdrawing liquidity from the market. Currently, the Treasury's TGA account balance has risen from $850 billion to $1 trillion, and this money is stuck in the account.
In the medium term, the impact of the Federal Reserve's ongoing balance sheet reduction and tight monetary policy. Although the policy rate has decreased from last year's 5.25-5.5% to the current 3.75-4%, it is still above the neutral rate level, indicating a tight state. The balance sheet reduction has also not stopped. At the recently concluded October FOMC meeting, Powell announced that the balance sheet reduction would only stop on December 1, which means that liquidity in the entire narrow dollar market has been tightening until now
In addition, the reverse repurchase scale has almost reached zero, indicating that there is not much idle money in the market. The TGA balance has risen again, and under this dual pressure, bank reserves are under strain—this is actually quite similar to the situations during several liquidity tightenings in 2018-19 and 2022.
In short: The Federal Reserve is shrinking assets, and the Treasury is absorbing liquidity, leading to a tightening of the dollar funding environment. This is also an important backdrop to the current market volatility.
<h2>Q3: The U.S. government shutdown has lasted nearly a month; will it end soon? What impact will it have on the market?</h2>
Zhang Jiawei: The market generally expects that the probability of it ending within this month is over 90%, and it is unlikely to drag on for another full two months. However, there is still uncertainty about whether it will be mid-November or late November.
First, let's look at the political aspect: This is the longest shutdown in U.S. history, with both parties at an impasse. The Democrats believe that the longer the shutdown lasts, the greater the damage to public opinion for the ruling Republican Party; while the Trump camp believes the opposite—he hopes to achieve the goals of &#34;layoffs&#34; and &#34;downsizing the government&#34; through the shutdown. Therefore, both sides feel justified and are unwilling to compromise.
Next, consider the economic aspect: During the government shutdown, civil servants and military personnel do not receive their salaries (on the 1st and 15th of each month), which immediately impacts their consumption capacity. The U.S. household savings rate is very low, with 60 out of every 100 dollars coming from wages and 80 dollars used for consumption. If wages are not paid, it equates to a short-term fiscal tightening and a contraction in consumption. Currently, analysts predict the U.S. GDP growth rate for the fourth quarter to be only 1.1%, and high-frequency consumption data has also shown a significant decline since early October.
Finally, let's look at the liquidity aspect: The shutdown has caused the Treasury's cash balance to continue rising (from 850 billion to 1 trillion). Once the government resumes operations in late November, if this money is disbursed, liquidity will be released again. In other words, this is a &#34;tightening followed by loosening&#34; disturbance, which temporarily suppresses the economy and the market, but will lead to a one-time recovery after the shutdown ends.
<h2>Q4: What do you think about the recent claims of an &#34;AI bubble burst&#34;? Many well-known investors have started toshort**; should we be wary of this?**</h2>
Zhang Jiawei: I think it is &#34;worth paying attention to,&#34; but it has not reached the level of &#34;worth panicking.&#34; You can compare it to Michael Burry in 2006—he shorted subprime mortgages early and had to wait over a year for the crisis to unfold. Currently, there is indeed a trend of bubble formation in AI, but it has not yet reached the most frenzied stage.
Unlike the internet bubble of 2000, the current market is still based on price-to-earnings ratios rather than price-to-dream ratios; valuations may be high, but they have not completely detached from profit logic. We believe that the current AI market is still in the &#34;acceleration phase,&#34; not at the endpoint.
Next year, there will also be Trump's midterm elections, and he is likely to lean towards dual easing of fiscal and monetary policy to stabilize the economy, which means that the policy level will not allow the AI bubble to &#34;burst.&#34; In other words—AI may become even crazier, rather than bursting.
Next year's market theme will still be further valuation expansion, rather than bubble bursting.
<h2>Q5: So you believe the AI bubble will continue next year and is unlikely to experience a real rupture?</h2>
Zhang Jiawei: Yes, we judge that the AI market will still be in a continuation phase next year, and may even become more exuberant. The key is how the bubble is &#34;digested&#34;:
One way is performance realization, using EPS to absorb valuation;
The other way is fiscal and monetary easing to boost liquidity, continuing to support the bubble.
The real risk of bursting the bubble lies in the latter if it raises inflation and forces the Federal Reserve to raise interest rates again, which could potentially replay the scenes of 2021-22. However, looking at the timeline, we believe at least from the first to the third quarter of next year is relatively safe.
<h2>Q6: Can you help us sort out how the factors of dollar liquidity, government shutdown, and the AI bubble will ultimately evolve?</h2>
Zhang Jiawei: It can be divided into three main lines:
First, AI: Ultimately, there are only two outcomes—either performance realization or bubble bursting. In the short term, from the first to the third quarter of next year, the bubble process will continue, and the &#34;arms race&#34; for AI infrastructure is still accelerating.
Second, government shutdown: The market consensus is that it will end in mid to late November. At that time, the Treasury will release funds, pay wages, and restore expenditures, leading to a phased recovery in the economy and consumption. Due to data collection interruptions, the quality of CPI and non-farm data for October and November may be weak, but once the government resumes, economic operations will quickly return to normal.
Third, dollar liquidity: The end of the shutdown + the Federal Reserve stopping balance sheet reduction in December + interest rate cuts will jointly improve liquidity. Currently, the decline in reverse repo balances and limited use of the Standing Repo Facility indicate that liquidity is still within a controllable range. We believe the dollar funding situation is in a &#34;warning but not out of control&#34; state, and it is unlikely to replay the repo crisis of September 2019.
<h2>Q7: Tonight the Supreme Court will debate Trump's IEPA tariff bill, what impact will this have?</h2>
Zhang Jiawei: This is a highly uncertain event. Betting websites predict about a 60%-70% probability that Trump abused IEEPA illegally, but although most justices are Republicans, they may still make a neutral ruling out of institutional independence.
The key is that even if deemed illegal, Trump still has operational space:
Delay execution to give himself a buffer;
Look for alternative clauses (such as Articles 201, 301, 232, etc.);
Push Congress to supplement legislation to &#34;legalize&#34; the tariffs.
Therefore, this event is likely to present a &#34;smooth transition.&#34; From a trading logic perspective, if the ruling finds IEEPA illegal, it theoretically benefits the dollar and U.S. stocks while suppressing gold; however, due to the unclear timeline and numerous alternatives, the short-term market reaction will be more cautious and emotional
<h2>Q8: Overall, how would you rank global asset classes for next year?</h2>
Zhang Jiawei: Our overall judgment is — Trump will fully promote fiscal and monetary easing for the midterm elections. This means:
Gold first. Interest rate cuts exceeding expectations, weakened dollar credit, and lower interest rates — this is a &#34;double hit&#34; for gold.
AI / US stocks second. The dual easing of fiscal and monetary policy supports valuation expansion, allowing for a combination trade of &#34;AI in the left hand, gold in the right hand.&#34;
Commodities third. A loose environment leads to economic overheating, synchronously boosting the valuation of physical assets.
Short-term US Treasuries (2-year) fourth. Prices rise under interest rate cut expectations, but the upside is limited.
Long-term US Treasuries (10-year) fifth. Limited benefits from interest rate cuts, with fiscal deficits and term premiums constraining upward movement.
US Dollar Index weakest. Lower interest rates and damaged credit will lead to a weaker dollar.
It should be noted that the rhythm and structure are not synchronized. In the first quarter of 2026, if Powell does not cut interest rates during his term, the dollar may rebound temporarily, but the overall trend for the year remains weak. The strategy should maintain flexibility and phased allocation.
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Zhang Jiawei from Soochow Securities' macroeconomic team analyzed the reasons for the recent pullback in the US stock market, believing there are four main factors: the emotional impact of AI bubble theories, the continuation of hawkish signals from the FOMC meeting, the effects of government shutdown, and the uncertainty surrounding Trump's IEEPA ruling. He pointed out that market sentiment and policy disturbances jointly led to this adjustment. At the same time, he believes there is no strong causal relationship between the deterioration of dollar liquidity and the pullback of risk assets, which is mainly due to the government shutdown and the Federal Reserve's tightening policies

- The recent market pullback is attributed to four main factors: AI bubble concerns, hawkish signals from the FOMC, ongoing government shutdown effects, and uncertainties surrounding Trump's IEEPA rulings.  
- Dollar liquidity is tightening due to passive fiscal constraints from the shutdown and the Fed's balance sheet reduction, impacting market liquidity.  
- Analysts expect the government shutdown to end by mid to late November, which could lead to a temporary economic recovery as liquidity is restored.

Soochow Securities Co., Ltd. Macro Analyst Zhang Jiawei: Don't rush to short, the US stock market AI trend may be crazier next year