Did last night’s plunge catch a lot of people off guard?

The expectation of a rate cut is practically set in stone, so how could the market still drop like this? Don’t worry, let’s start with liquidity.

Here’s something counterintuitive: rate cut benefits are indeed rising, but they've long been fully priced in. Now, players are not only watching the Fed’s 25 basis points, but also wary of the potential “bomb” of a yen rate hike. The result of fighting on two fronts is that the sweet spot of rate cuts has already been mostly hedged away.

Now, let’s look at the weird signals from the bond market. The 1-year US Treasury yield actually went up instead of down—short-term bonds are supposed to be the most sensitive to rate cuts, and with rising expectations, yields should be dropping. This anomaly suggests what? The market’s speculation on a December rate cut may have already hit its ceiling.

Even more bizarre are the long bonds. Yields on 10-year and 30-year Treasuries shot up. If the market really believed in a rate-cutting cycle, funds should be scrambling to lock in long-term yields—so why are they selling now? Clearly, this isn’t trading on a rate-cut logic.

There are two forces at play: one is last night’s PCE data—inflation didn’t rise further but remains sticky, so concerns about future inflation are pushing up long-term yields; the other is the expectation of a yen rate hike—narrowing rate differentials are causing capital to flow out of US Treasuries and back to Japan, and this round of unwinding is sending both US and Japanese bond yields soaring.

The stock market is also showing a split personality. The three major indices are green, and the VIX fear index has dropped to around 15, which looks optimistic. But the Russell 2000 small-cap index is down, suggesting that short-term risk appetite hasn’t truly returned.

Simply put, the core contradiction has changed—from “betting on rate cuts” to “responding to yen rate hikes.” Global capital is being reallocated. For BTC holders, be especially cautious during the Asian session next week, and don’t forget that sudden dump on Monday. When liquidity flips, the market won’t give you advance notice.