In recent economic developments, the minutes from the Federal Reserve's meeting unveiled a noticeably hawkish tone, intensifying expectations for interest rates to remain highAs a result, U.STreasury yields continued their relentless climb, leading to a significant downturn in major asset prices, with the Nasdaq 100 index bearing the brunt of the correctionBy the end of trading on August 17, the index had seen three consecutive days of declines, totaling more than 3.2%. This marked a troubling trend as investors reevaluated the landscape in the face of rising borrowing costs.

The Atlanta Fed's GDPNow model, on the early morning of August 17, raised its forecast for the U.S

economy's third-quarter real GDP growth to a robust 5.8%. At first glance, this appears to be a positive signal of economic strengthHowever, it simultaneously heightens pressure on the Federal Reserve to consider more aggressive rate hikesBy the same date, the yield on 10-year U.STreasuries surged to 4.3%, hitting levels not seen since October of the previous year, while the actual rates reached heights not observed since 2009. In tandem, the two-year Treasury yield surpassed 5%. In this context, the dollar index has experienced a four-day rally, closing around 103.45. This week's sell-off reflects a growing caution among investors regarding the state of the economy and equity marketsThe critical question now is whether this recent retreat is a healthy correction or a warning sign of deeper issues ahead.

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Treasury Yield Surge Affects Markets

Market Trading Logic Begins to Disrupt

The minutes released in the early hours of August 17 indicated a potential need for rate hikes to contain inflationFederal Reserve officials expressed that in their view, additional rate increases may be required to tackle ongoing inflation concernsThe Nasdaq again led the markets into decline, with commodity markets, notably oil prices, exhibiting signs of fatigueThe Fed's July meeting minutes instilled a sense of panic among tradersThe dollar index traded near 103.2, just under the critical 200-day moving average of 103.3, poised for a possible technical rebound.

The minutes revealed that within the Fed, a significant number of members expressed concerns about inflation and the possibility of needing more stringent monetary policy measures

"With inflation still well above the long-term target and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could necessitate further tightening of monetary policy."

Moreover, the minutes suggested that the Federal Reserve anticipates a slowdown in economic growth and a potential rise in unemployment ratesHowever, recent economic indicators remain uncertain on these frontsGDP growth averaged over 2% in the first half of 2023, with a forecast of 5.8% growth for the third quarterEmployment growth has shown strength, as evidenced by the July unemployment rate holding steady at 3.5%, its lowest level since the late 1960s.

Additionally, participants noted early signs of easing price pressures, as both the July CPI and core CPI showed signs of slowing

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The next policy meeting is scheduled for September 19-20, and before that, August's CPI data and employment report will be released, potentially indicating further signs of inflation retreatWhile most institutions do not foresee additional rate hikes in the year, the robust economic data coupled with tightening labor conditions extending wage inflation, and the Fed's resolute commitment to fight inflation, creates an environment where future rate dynamics could disrupt the market further.

In this environment, previous trading logic has begun to unravelThe persistent and unexpected surge in U.STreasury yields has exacerbated volatility in financial markets, functioning as an anchor for the pricing of major assetsThe rise in yields can be traced back to Fitch's downgrade of U.S

Treasury debt, which began on August 10. During that time, both Treasuries and the stock market experienced significant fluctuations, as investors weighed the news of soft inflation data against disappointing results from a 30-year Treasury auctionAhead of the bidding deadline, the Treasury sold $23 billion of long-term bonds at a yield of 4.189%, slightly above market levels, with new bonds carrying the highest coupon rate since June 2011.

Following that event, the pace of rising yields did not stopAs of August 18, the yield on 10-year U.STreasuries approached 4.3%, while the two-year yield broke the 5% barrier.

Notably, renowned hedge fund manager Bill Ackman publicly shared that he is shorting 30-year U.S

Treasury bonds, projecting that long-term inflation rates will hover close to 3%, rather than the Federal Reserve's target of 2%.

U.SStocks Retreat Amid Accumulating Bull and Bear Tensions

But the likelihood of a continuous large drop seems low

With soaring bond yields over the past two weeks, U.Sstock markets have seen heightened volatility, aligning with previous warnings.

Currently, regarding the S&P 500 index, considering the market has risen over 30% since its October lows and over 20% since March, it is improbable to see a similar return behavior in the second half of the year

While the upward trend since last October appears to be structurally driven, this recent rebound has failed to retest the highs of March, let alone reach all-time highs, posing a worrying signal for bullsThere may still be many waiting bears on the sidelines who could seek to reengage if prices continue to fall.

Large speculators reached record-high net short positions in S&P 500 futures in early JuneThis indicates that prices must either crash to validate their positions or they will be forced to cover, potentially amplifying a reboundThe latter scenario has materialized in recent months with the market up 9.4% since JuneHowever, traders remain net short, albeit having significantly reduced their positions by around two-thirdsThis suggests that many shorts may look to join the trend if prices continue to ease.

From a technical perspective regarding the S&P 500, prices closed below the trend support line and at the day’s low on Tuesday

If market sentiment continues to be fragile, bears may seek to establish stop-loss orders above Wednesday's highs, placing targets slightly above the support region around 4300 pointsHowever, experiences indicate that markets rarely follow a straight path, and bears may also consider waiting to observe if prices can rebound toward the resistance area of 4490 to 5000 points before seeking short positions.

Michael Burry, known for his warnings during the 2008 mortgage crisis and for profiting massively from credit bets, made large bets on June 30 against the S&P 500 and Nasdaq 100 ETFs, with a notional value of $1.6 billionBurry's Scion Asset Management holds 200,000 put options on the SPDR S&P 500 ETF Trust as protection against a market retracement, indicating concerns about the risk of seemingly safe index funds holding significant positions in overvalued stocks like Nvidia and Tesla.

Burry has been sounding alarms regarding stocks and bonds for some time, claiming that we are in the midst of the "largest speculative bubble in history," predicting "the greatest market crash ever" in the summer of 2021. He later admitted that his timing had been premature.

Overall, our assessment suggests that although U.S

stocks have recently entered a technical bull market, the likelihood of a sustained downturn remains low, primarily due to low institutional positioning and the ongoing resilience of the U.Seconomy.

Specifically, Bank of America data indicates that retail investors have not significantly increased their positions in the stock market, with global institutional investors also adopting a relatively cautious stance regarding equities compared to bonds, suggesting that we are far from reaching a peak where everyone is engaged in discussions about stocks.

Moreover, the probability of a recession in the U.Shas been nearly eliminated, supported by declining inflation and a still-strong job market

Inflation has decreased from approximately 9% in June 2022 to about 3% in June 2023, signaling a reduced likelihood of drastic rate hikes from the Fed, which may ease the pressure of rising interest rates on stock valuationsRecent data also show that U.Sconsumer confidence remains strong, with the University of Michigan consumer sentiment index rising from a low of 50 in June 2022 to 71.6 in July this yearThis data is critical since "consumption" accounts for about 70% of the overall U.SGDP.

Gold Prices Face Short-Term Challenges in Rebounding

Key Focus on Two-Year U.STreasury Yield

Gold prices began to correct sharply due to rising real U.S

Treasury yields and the rebound of the dollarOn Tuesday, strong retail sales data for July reinforced the market's view that the U.Scould experience a soft landing or even a "no landing" scenario, reigniting concerns that the Federal Reserve may need to continue rate hikes.

On August 17, spot gold prices fell below $1900, reported around $1893. Earlier in the week, gold first dipped below its 200-day simple moving average since December of last year, maintaining a downward trend that has plagued AugustOn Wednesday, gold prices briefly sank below the $1900 threshold before rebounding, but the minutes from the Fed meeting further impacted gold prices.

Moving forward, keeping an eye on the two-year U.S

Treasury yield could prove beneficial, as the yield differential has recently supported the dollar, affecting dollar-denominated assets like gold, which provides virtually no yieldRecently, the two-year yield failed to sustain a breakthrough above the 5% mark on Tuesday, exacerbating the challenges of the prior breakthroughs in March and JulyThis raises the question of whether we have already seen the peak in Treasury yields, given the nominal rates are unable to significantly rise.

If this holds true, it implies we might see some suppressed assets gaining breathing room in the short term, including gold and even currencies like the yen and the Australian dollarHowever, from a technical standpoint, given the strengthening dollar and rising yields backdrop, we remain uncertain whether gold prices have hit a bottom.

As previously noted in June, the $1900 to $1912 region is a critical level for bulls, due to significant trading volumes in that range during March's rally