Top trader and hedge fund research head Tony Pasquariello stated that the narrative dominating the market has fluctuated significantly in recent months, yet his fundamental stance remains unchanged: to minimize the risk of asset quality as much as possible and to "stay vigilant amidst the noise of the next month."

Pasquariello mentioned that the dominant narratives in recent months have fluctuated, including: a surge in technology stocks in July, a Value at Risk (VAR) shock in early August, a major move by the People's Bank of China in September, mixed stock performance following the Federal Reserve's rate cut in September, with Nvidia rising by 4% and the small-cap index Russell 2000 falling by 1%. He said that there is no significant implication in this, but it is clear to see an underlying pattern: this is a trader's market, where the risk/reward has been uncertain for three months, yet the S&P 500 index continues to moderately set new highs.

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Pasquariello believes that this is consistent with the basic downside, with the downside tail weakened by rate cuts and a very durable economy, the upside tail limited by recent political and geopolitical suspense, and capital flows favoring the bulls, with price trends indicating that this is a market that continues to be bought into.

Pasquariello mentioned the following key market variables:

U.S. Economic Growth

Pasquariello believes that there has been little progress in this area this week, but he wants to emphasize that Goldman Sachs' U.S. Economic Surprise Index is at its highest positive level in the past six months.

Wall Street Journal mentioned earlier this week that the non-farm employment growth announced last Friday greatly exceeded expectations, and concerns about inflation and the Federal Reserve tightening monetary policy re-emerged. Amid mixed signals, Wall Street has once again begun discussing whether "good news is really good news," and the argument that the U.S. economy will "land softly" has also re-emerged.

Pasquariello pointed out that the performance of the aforementioned Goldman Sachs index is roughly in line with the "soft landing" view and is also reflected in Goldman Sachs' forecast for U.S. GDP growth: an expected growth of 3.2% in the third quarter of this year, 2.1% in the fourth quarter, and 2.8% for the full year.The Federal Reserve

Following last week's heavy blow to the U.S. Treasury market, the interest rate stripping obtained by Goldman Sachs more or less reflects that there will be a 25 basis point rate cut at each of the Federal Open Market Committee (FOMC) meetings of the Federal Reserve in November and December. This is in line with Goldman Sachs' baseline forecast and is likely also the baseline forecast of the Federal Reserve.

Therefore, stock operators can still envision that the Federal Reserve will have an orderly adjustment of the rate cut curve, which is different from a significant rate cut — similarly, Pasquariello believes this is sufficient to support the main trend.

Capital Flows/Positions

Specifically for the United States, there have been no significant changes in recent capital flows — however, there is clearly some ongoing demand within the market (this is the natural law of things).

Looking ahead, what makes Pasquariello nervous is the situation where the trading community, including hedge funds and American households, is now under tremendous pressure. In fact, November and December are the best two months of the year for stock buybacks.

American Consumers

On the one hand, the employment report is undoubtedly good news for American consumers; on the other hand, fluctuations in micro data points are usually accompanied by a decline in stock prices. Pasquariello also acknowledges this tension:This made him feel that he might be more inclined to be optimistic about U.S. consumer spending in the broad market, rather than just focusing on non-essential consumer goods stocks, but he still likes the risk/reward situation in the S&P 500 Non-Essential Consumer Goods sector (S5COND).

U.S. Technology

Pasquariello mentioned two key things. First is the flow of funds: Hedge funds have been selling technology stocks for five consecutive months, bought heavily last week, and then this week they bought technology stock individual stocks and index futures at an even faster pace.

The other thing is that considering the price trends of NVIDIA with Amazon or Microsoft, there is a large degree of dispersion within the technology stocks themselves. Therefore, the NASDAQ 100 index is only 2% lower than its high point. And we are about to enter a crucial third-quarter earnings period.

U.S. Small-cap Stocks

The Federal Reserve has been actively weakening economic growth, China is stimulating the economy, but U.S. small-cap stocks are performing poorly.

Pasquariello believes that the market has clearly demonstrated its strength here - and there are better options available.U.S. Presidential Election

Pasquariello stated that he is aware of many well-informed individuals who hold very strong beliefs about the election outcome, with significant divergences among them. He firmly believes that the election result is akin to flipping a coin on November 5th.

In this scenario, he is curious about how much risk premium will be released after the election. If one observes the S&P volatility term structure, it becomes evident that this tension may persist until the election outcome becomes clear.

Japan

Currently, there is no inflow of international capital into Japan. Investors have become cautious following the volatility shock in August, and it is apparent that there have been better investment options since then. However, the Japanese stock market still performed slightly better this week.

Pasquariello continues to favor well-performing core themes, especially the repurchase basket and defensive stocks, while avoiding significant directional bullish bets on major indices.

Net Zero Carbon Emissions Delay

Pasquariello mentioned that he came across a report proposing a delay in the expected timeline for achieving net-zero carbon emissions, which he found to be the most interesting report he read this week. The report states that it has updated the net-zero carbon emissions expected path introduced in June 2021, reflecting the increase in carbon emissions and coal usage since the energy crisis in 2022. The report now suggests that hydrocarbon assets will have a longer lifespan, with the peak in oil demand expected to occur after 2030, and the demand for natural gas as a transitional fuel will grow until 2050.Finally, Pasquariello mentioned a golden sentence he saw this week, which roughly means that compared to other options, America's extravagance is not necessarily a bad policy. The United States has been overspending for decades, but the private sector continues to expand, innovate, and create companies with a leading market value globally. Therefore, the United States needs to subsidize the baby boomers who are about to retire, rebuild the global supply chain with reliable allies, and invest massively in the existential artificial intelligence (AI) competition. If this plan does not fail, it is fine; if it fails, it will be a disaster.