Amid a collective slump in global assets, Deutsche Bank reassures the market: fundamentals remain solid, and there are currently no conditions for a large-scale sell-off as seen historically.

Since mid-October, risk aversion has sharply increased, resulting in a wave of cross-asset sell-offs in global markets.

From soaring tech stocks to cryptocurrencies and even gold, almost all asset classes have been affected. The S&P 500 has fallen below the critical support of 6725 points, both it and the Nasdaq have dipped below their 50-day moving averages; Bitcoin has dropped below $90,000, turning its earlier year-to-date gain of over 30% into a loss; spot gold has fallen 6% from its mid-October peak; bonds are also in a declining channel, with the yield on 10-year US Treasuries rising 18 basis points since October 22.

However, according to Chase Wind Trading Desk, a research report published by Deutsche Bank on November 17 noted that despite the recent broad-based cross-asset sell-off in global markets, current macroeconomic and financial fundamentals remain solid and do not yet constitute the prerequisites for a historical, large-scale, sustained bear market.

Macro strategist Henry Allen analyzed in the report that the core driving force of the latest sell-off is the Fed’s clear hawkish shift in recent weeks. At the end of October, Fed Chair Powell questioned the possibility of a December rate cut, followed by several officials making hawkish statements, causing the market’s expectation of a December rate cut to fall to 42%.

The report stressed that although short-term headwinds will persist, the factors underpinning market resilience have not disappeared. Compared to historical large-scale sell-offs, the current market backdrop is fundamentally different, and investors need not panic excessively.

Is the Fed’s “hawkish” shift the culprit?

The report points out that the primary driver of recent market turmoil is the Fed’s hawkish shift. Looking back on several large-scale multi-asset sell-offs in the past decade (2015–2016, 2018, and 2022), a common theme was the Fed taking a tougher stance and turning to rate hikes.

The current sell-off pattern bears some resemblance to history, but is far less severe than previous events. The hawkish tone from the Fed mainly stems from persistently above-target inflation and the lagging effects of tariff policies.

In addition, inflation-leading indicators such as the ISM Services Prices Paid Index remain strong, suggesting inflationary pressures may persist. These factors collectively form the main sources of short-term market pressure.

Correction after excessive rally?

The second reason analyzed in the report is that the market experienced an “unrelenting and unusually fast” rally before the sell-off, with such speed itself unsustainable.

Data shows that in the six months ending in October, the S&P 500’s rolling gain reached 23%, the strongest performance since the post-pandemic rebound in 2020–21.

Unlike the previous post-pandemic rally driven by massive fiscal and monetary stimulus, this rebound has been powered by fading concerns over a US and global economic recession.

Now that a “soft landing” has become market consensus, and positive catalysts such as eased trade tensions have already been digested, a cyclical market correction at historically high valuations is not surprising.

Persistent public finance concerns continue to weigh

The report also mentions that in the post-pandemic era, the widespread and persistent fiscal deficits in developed economies are exerting pressure on various asset classes, including bonds.

For example, UK government bonds faced enormous pressure ahead of the budget announcement; Japan’s 10-year government bond yield reached a new high since 2008 on Friday; even US Treasuries have faced market pressure this year due to Moody’s rating downgrade in May and other events.

This impact is not limited to the bond market, but also transmits to other assets. For example, France’s CAC 40 index has been one of the worst-performing major European equity indices this year, showing the drag that fiscal concerns have on stock markets.

Sound fundamentals; no conditions yet for large-scale sell-off

Despite the above headwinds, Deutsche Bank emphasized that the market’s fundamental backdrop is still “sound.” This sell-off has only pulled the S&P 500 about 3% down from its historic high.

The report lists several key positives: First, since September 2024, the Fed has cut rates by a cumulative 150 basis points, marking the fastest rate cut pace in non-recession periods since the 1980s. Historically, rate cut cycles in a soft landing environment are extremely favorable for risk assets.

Second, the current market debate is focused on the “pace” of future rate cuts, not on whether to “hike rates.” This itself is a positive signal.

Furthermore, easing trade tensions have further relaxed market nerves recently. Overall financial conditions remain loose, and market stress indicators like the VIX and high-yield credit spreads are still below their October highs.

The report concludes that the historical prerequisites for large-scale sell-offs—such as the Fed entering a rate hike cycle, or definite signs of economic slowdown or recession—have not occurred. Even the bursting of the dot-com bubble in 2000 happened against a broader macroeconomic slowdown. Therefore, the core factors supporting market resilience in the short term remain effective.

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The above excellent content comes from Chase Wind Trading Desk.

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