Goldman Sachs Macro Master: There are no signs of a shift to safe-haven assets in the US stock market, and asset buyers are "the universe continues to expand"

Liquidity overwhelms fundamentals, history repeating itself?

Goldman Sachs senior macro trader Paolo Schiavone pointed out in his latest research report that despite some trend changes in the global bond market, risk assets have not shown signs of shifting towards safe havens. He believes that a "growing universe of buyers" is supporting the market, and in the context of liquidity overwhelming fundamentals, chasing risk remains the dominant strategy.

Schiavone's analysis shows that the major stock indices are still firmly above all key moving averages, and there are no clear signals or catalysts indicating a need to shift towards risk aversion. He stated that the current strategy is to "continue chasing risk until the market's direction changes."

Investor sentiment and positioning have become potential reverse energy, with recent widespread concerns leading many investors to be underweight, and this very concern may become the "fuel" driving the market up when a reversal occurs.

This view is also supported by the current market liquidity situation. Schiavone noted that investors are holding large amounts of cash, with trillions of dollars parked in money markets, indicating that potential buyers are still waiting to enter, and this slow expansion of buyers constitutes a continuous positive for the market.

He compared the current market to the situation from 2010 to 2011, when the S&P 500 index rose 30% in less than a year after the first round of quantitative easing (QE1), ignoring weak macro data, as liquidity overwhelmed fundamental factors.

Schiavone emphasized that in an environment where momentum trading is rewarded, he will continue to chase risk appetite until the trend changes. The biggest risk currently facing the market remains the Federal Reserve adopting a less aggressive rate-cutting path than the market expects.

He anticipates that with the new Federal Reserve Chairman taking office, real interest rates will decline, further supporting risk assets. He believes that the continuation of government shutdowns will benefit Bitcoin, gold, and Nasdaq trading, representing a super long-duration trade.

Multiple key catalysts ahead in the coming weeks

The market is entering a phase that Schiavone refers to as "Calendar Compression," where events will occur densely in the coming weeks, and the market may experience rapid changes. There are only 8 weeks left until Thanksgiving, and this year's trading window is running out.

Schiavone pointed out that key catalysts in the short term include: the earnings season led by the banking sector will kick off in two weeks; and the next Federal Open Market Committee (FOMC) meeting scheduled for October 29 Schiavone expects the market may see "continuous interest rate cuts and accelerated earnings." In this context, if the U.S. government continues to shut down, it will benefit Bitcoin, gold, the Nasdaq index, and ultra-long-duration assets like ARKK.

Focus on the "Four Balance Sheets"

From a more macro perspective, Schiavone believes it is necessary to pay attention to the "four balance sheets" of banks, corporations, consumers, and governments.

Among them, the balance sheet of Western governments has experienced structural deterioration after the 2008 financial crisis and the COVID-19 pandemic, which lays the groundwork for future currency devaluation.

He pointed out that the current market environment exhibits certain characteristics of a "war economy." On one hand, governments lack the political motivation to implement fiscal tightening; on the other hand, there is a global race for Western governments to "rearm."

Schiavone believes that this will be favorable for precious metals (such as gold and palladium) and stocks as inflation hedges, but unfavorable for long-term bonds. He cited Ray Dalio's view that in a war economy, the return structure of bonds is structurally low.

Yield Curve May Steepen Further

In the context of a "war economy," the interest rate path will also differ from the past.

Schiavone predicts that central banks will significantly cut interest rates, not only to stimulate growth but also to finance military restructuring. Meanwhile, central banks are in a quantitative tightening rather than a quantitative easing cycle, which may lead to a further steepening of the yield curve.

He warned that central banks may ultimately be forced to adopt yield curve control (YCC) measures. However, YCC is always accompanied by monetary issues, and Japan is a current "living case study."

Schiavone also observed that the market's term premium has not shown significant expansion, which is one of the reasons he is currently not optimistic about the U.S. dollar