Sell everything! The storm of US bonds spreads, and assets such as stocks and commodities are suffering from a wave of sell-offs.

According to the information obtained from the Zhongtong Finance APP, the market sentiment has quickly changed this week, with sell-offs occurring in the market for US Treasury bonds, stocks, and credit, resulting in heavy losses for the bulls.

The US stock market experienced its first decline in four weeks, with the S&P 500 index falling by more than 2% this week. Dragged down by lower-than-expected Apple sales and a surge in US bond yields, the Nasdaq 100 index dropped by 3%, marking the largest weekly decline since March. The RPAR Risk Parity ETF, which measures cross-asset performance, fell by 2.3%.

The epicenter of this storm is the long-term US government bonds, which have declined partly due to the US Treasury issuing bonds in a larger scale than expected by the market, coupled with Fitch downgrading the US credit rating, drawing attention to the deteriorating fiscal outlook in the US.

The US Treasury bond ETF with a maturity of over 20 years (TLT) fell by more than 3% this week. Last month, the fund attracted $4.8 billion in new capital, the second-highest inflow on record.

Major ETFs tracking investment-grade bonds, high-yield credit, and commodities also experienced declines this week, indicating a widespread sell-off of assets. This is in stark contrast to the situation in July when cross-asset classes saw synchronous gains for two consecutive weeks.

Widespread sell-off of assets

The vulnerability of the market can be seen from Deutsche Bank's stock positions and stock options. The bank's stock positions reached an 18-month high in July, while in terms of stock options, the degree of neglecting protective hedging has reached unprecedented levels.

Scott Rubner, Managing Director of Goldman Sachs, said, "If the market starts to decline, given the recent emergence of new long positions, a significant drop is possible." Fitch has already taken action.

He also stated that a round of programmatic selling may be one of the reasons for the stock market reversal on Friday afternoon. According to his model, quantitative traders who allocate assets based on trends or volatility signals are prepared to sell in the coming weeks after price fluctuations widen and market momentum weakens.

Market Over-Optimism

"The market has already priced in a lot of positive factors and has become overly optimistic in an environment that remains uncertain and with economic slowdown," said Michael O'Rourke, Chief Market Strategist at Jonestrading. "The recent market is filled with speculation. Fitch's downgrade is an excuse to sell stocks."

Investors took a defensive stance at the beginning of this year, but they were attracted by the market rebound, and now they lean towards being bullish. Their unusually high risk appetite is most evident in the valuation multiples of stocks relative to bonds, despite corporate profits declining by three-quarters. Since the turn of the century, investors have mostly sought higher returns from high-risk assets. But this year has been different. In July, the expected return rate (inverse of the price-to-earnings ratio) of the Russell 1000 Index was 4.8%, lower than the 5.4% yield of investment-grade corporate bonds. Morgan Stanley strategist Andrew Sheets found that this situation has only occurred 2% of the time in the past 20 years.

Similarly, Morgan Stanley's data shows that mid-cap stocks had a return rate of 6.4%, lagging behind the 8.3% yield of high-yield bonds. Sheets also noted a mispricing in real estate and leveraged loans.

Sheets said, "Capital structures seem to be turning upside down across various asset classes." "This inversion in capital structures indicates that growth expectations have changed significantly since the beginning of this year."

The bullish sentiment has driven the S&P 500 Index up 28% from its low point in October last year. Sonia Meskin, Head of U.S. Macro at Mellon Investment Management, said that the bull camp has grown stronger while economic uncertainty remains. The situation this week serves as a reminder that potential downside risks may arise if inflation rises or economic growth slows.

She stated, "This could be a technical or positioning issue, just needing a mild catalyst." "The market is not prepared for a reacceleration or stubborn core inflation, nor has it digested the tail risks of credit spreads potentially facing challenges in a prolonged period of high interest rates."