Global risk assets are in a frenzy, have they been overbought? What should we buy?

「Global risk assets are in a frenzy, have they been overbought? What should we buy?」

Overnight, there was a big turnaround! In the past, there was a lot of panic, but after the November FOMC meeting of the Federal Reserve, the market became very cheerful. This market, like a June day, was gloomy and rainy not long ago, but overnight, the sun shone brightly.

The core of all this lies in the anchor of global risk asset pricing: the yield on the 10-year US Treasury bond has finally confirmed a peak. As can be seen from the chart below, after the announcement early Thursday morning to continue the pause in rate hikes, the US Treasury yield quickly fell from its high levels. Following the release of the US non-farm payroll data for October on Friday, it reinforced the expectation that the Federal Reserve would not continue to raise interest rates. As a result, the US Treasury yield plummeted again, dropping from 5% to 4.5% in just one week.

 「Chart of the 10-year U.S. Treasury Yield Trend」

The Federal Reserve is finally about to end its fastest rate hike in 40 years. The end of the rate hike means that the 10-year U.S. Treasury yield has peaked, and global risk assets can finally catch their breath. Since 2022, along with the European and American central banks, there has been the fastest round of rate hikes in decades. Yields on European and American government bonds have been rising rapidly, suppressing the performance of global risk assets and intensifying volatility.

In recent times, inflation in Europe has continued to fall, and inflation in the United States is also on a downward trajectory. Moreover, the non-farm payroll data in the United States is significantly below expectations, and the loosening of the job market has ultimately led the Federal Reserve to finally lose the courage and determination to maintain a consistently hawkish stance.

According to the latest expectations of a rate hike by the CME, the anticipated rate cut by the Federal Reserve in 2024 has been pulled back by 100 basis points, and the pressure on risk assets from the rate hike is gradually easing.

「The shift in liquidity expectations has become the new focus of the market!」

Both $ARKK and $LABU  have seen significant performance improvements in the past few trading days, indicating that the market is entering a new phase. In this phase, the favorable impact brought by the decrease in discount rates on the denominator side enhances the gaming opportunities for high beta elastic assets.

Although Yancai is more inclined to invest in leading companies in the investment industry, the rebound of high beta assets is now unfolding, and this phase of the rebound is mainly driven by the decline in Rf (risk-free rate level).

2009-2016: Both earnings and valuations rose, the new economy grew rapidly, the US dollar QE dominated a vigorous bull market for a decade.

2016-2018: Earnings increased, with rate hikes and balance sheet reduction cycles, valuation fluctuations were not significant, and the bull market in US tech stocks continued.

Q4 2018: Late stage of balance sheet reduction, economic recession, declining earnings, significant stock market adjustment.

2020-2021: Epic monetary easing, PE expansion dominated, a vigorous bull market in tech stocks.

November 2021-February 2023: Fed tightening, strengthening Rf, PE decline leading trading, resulting in stock market killing valuations.

March 2023-May 2023: Liquidity crisis, Fed tightening expectations peak, weakening Rf, PE recovery, EPS fluctuations are not significant.