Goldman Sachs macro master: There are no signs of a shift to safe-haven assets in the U.S. stock market yet; the universe of asset buyers is continuously expanding.

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Liquidity trumps fundamentals—history repeating itself?

Goldman's senior macro trader Paolo Schiavone points out in his latest research report that despite some trending changes in the global bond market, risk assets have not shown signs of switching to safe-haven mode. He believes that an “ever-expanding universe of buyers” is supporting the market, and against the backdrop of liquidity overwhelming fundamentals, chasing risk remains the dominant strategy at present.

Schiavone's analysis shows that major stock indices are still firmly above all key moving averages, and the market has not yet shown clear signals or catalysts that would require a shift to risk aversion. He stated that the current strategy is to “continue to chase risk until the market direction changes.”

Investor sentiment and positioning have become contrarian potential energy; recent broad concerns have led many investors to be underweight, and this very apprehension may become the “fuel” that drives the market up in the event of a reversal.

This view is also supported by the state of market liquidity. Schiavone points out that investors are holding large amounts of cash, with trillions of dollars parked in money markets, indicating that potential buyers are still waiting in line to enter; this slow expansion of buyers remains a positive for the market.

He compares the current market to the situation in 2010–2011, when after the first round of quantitative easing (QE1), the S&P 500 rose 30% in less than a year thanks to abundant liquidity, ignoring weak macro data, as liquidity trumped fundamentals.

Schiavone emphasizes that in an environment where momentum trading is yielding returns, he will continue to chase risk appetite until the trend changes. The biggest risk facing the market remains the Federal Reserve implementing a less aggressive rate cut path than the market expects.

He expects that with the appointment of a new Fed chair, real interest rates will decline, further supporting risk assets. He believes that an ongoing government shutdown would benefit Bitcoin, gold, and Nasdaq trades, which are ultra-long duration plays.

Multiple key catalysts in the coming weeks

The market is entering what Schiavone calls a “calendar compression” phase, with dense events scheduled over the coming weeks, and the market may move rapidly. There are only eight weeks left until Thanksgiving, and this year’s trading window is narrowing.

Schiavone points out that near-term key catalysts include: earnings season led by the banking sector in two weeks; and the next FOMC meeting on October 29.

Schiavone expects the market might see “consecutive rate cuts and accelerating earnings.” In this context, if the US government remains shut down, ultra-long duration assets such as Bitcoin, gold, the Nasdaq index, and ARKK will benefit.

Focus on the “Four Balance Sheets”

From a more macro perspective, Schiavone believes attention needs to be paid to the four balance sheets: those of banks, corporates, consumers, and governments.

Among them, the government balance sheets of Western countries have structurally worsened following the 2008 financial crisis and the COVID-19 pandemic, laying seeds for future currency depreciation.

He notes that the current market environment exhibits some characteristics of a “war economy.” On the one hand, governments lack the political motivation to implement fiscal tightening; on the other hand, there is a global race to “rearm” Western governments.

Schiavone believes that this will benefit precious metals (such as gold and palladium) and equities as inflation hedges, but is negative for long-term bonds. He cites Ray Dalio’s view that in a war economy, bond returns are structurally low.

The yield curve may steepen further

Against the background of a “war economy,” the path of interest rates will not be the same as before.

Schiavone predicts that central banks around the world will cut interest rates aggressively, not just to stimulate growth but also to fund rearmament. Meanwhile, central banks are currently in a quantitative tightening rather than quantitative easing cycle, which may lead to a further steepening of the yield curve.

He warns that central banks may eventually be forced to implement yield curve control (YCC). However, YCC is always accompanied by currency issues, with Japan serving as a “living case study.”

Schiavone also observes that term premiums in the market have not expanded significantly, which is one reason he is currently bearish on the dollar.

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