Why did the market "fall" instead of "rise" when the Fed released "Liquidity"?

On the surface, it seems to be a divergence between policy and market trends; in reality, the market focus has shifted from "Liquidity easing" to "economic downturn risks"—the fall in US stocks reflects concerns about the economic outlook, while the rise in gold is a pre-pricing of risks and policy shifts.

1. Why is the "stop balance sheet reduction" beneficial, yet the US stock market does not respond positively?

Fed Chairman Powell hinted that the reduction of the balance sheet may stop in the coming months, which is a signal to release liquidity. However, the Nasdaq, which is mainly composed of tech stocks, fell instead, primarily due to three points:

1. The policy signals are interpreted as "economic warnings": Powell explicitly mentioned "weak labor market" and "increased risks of job downturn"; the underlying message understood by the market is that the Fed is preparing for easing in advance, precisely because the economy may need more support, which directly raises concerns about the economic fundamentals.
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2. Risk aversion overshadows liquidity benefits: The uncertainty in the global trade situation has intensified again, leading funds to withdraw from risky assets like stocks and shift towards traditional safe havens like gold, further suppressing the performance of the U.S. stock market.
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3. Concerns over the "AI bubble" intensify selling: Bank of America’s October fund manager survey shows that the "AI stock bubble" has become the biggest tail risk in the market. With increasing uncertainty in the macro environment, high-valued tech stocks naturally become the preferred target for fund selling.

2. Stop the balance sheet reduction: A passive "Liquidity Defense War"

The actions of the Fed and the Treasury seem contradictory, but in fact, they are a liquidity-level "hedging game:"

- The Treasury's "draining": To maintain government operations, the U.S. Treasury needs to spend funds from the Treasury General Account (TGA, which can be understood as the "national treasury"), a process that directly consumes reserves in the banking system, equivalent to withdrawing liquidity from the market.
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- The Fed's "liquidity injection": In response to potential liquidity tightening, the Fed has signaled a "halt to balance sheet reduction", essentially stopping the recovery of liquidity from the market to offset the impact of the Treasury's "drainage".

It is evident that stopping the balance sheet reduction is not an active easing stimulus, but rather a passive defensive strategy - this action precisely confirms that market liquidity may face pressure, which in turn reinforces investors' cautious sentiment.

Three, why does gold "shine brightly"?

Under the dual drivers of economic uncertainty and expectations of policy shifts, the logic for the rise of gold is clear and solid:

1. Easing expectations reduce holding costs: The market generally expects the Fed to cut interest rates again in October, which will lower the opportunity cost of holding gold (a non-yielding asset); at the same time, stopping the balance sheet reduction is interpreted as a turning point for the liquidity environment, providing double benefits to support gold prices.
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2. The demand for hedging continues to increase: Global trade tensions and concerns about economic downturns are continually driving funds into gold in search of "safe haven," directly pushing gold prices higher.
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3. Weakening dollar amplifies gains: Following Powell's dovish speech, the dollar index fell in response, while gold, priced in dollars, became "cheaper" for holders of other currencies due to the weakening dollar, further stimulating purchasing demand.

It is precisely for this reason that, against the backdrop of large funds flowing into safe-haven assets like gold, the cryptocurrency sector and other areas with stronger risk attributes experiencing a fall seems quite logical.

4. Summary: The core logic chain of the current market

1. Bad news is bad news: The movements of the Fed and the Treasury have made the market clearly sense the signs of economic cooling, with "economic downturn risks" replacing "Liquidity easing" as the core focus of the market.
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2. Risk assets under pressure: Due to concerns about economic prospects and corporate profits, investors are selling stocks (especially overvalued tech stocks), leading to weakness in risk assets such as U.S. stocks.
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3. Benefiting from safe-haven assets: The combination of "bad news" in the economy and expectations of policy easing has jointly pushed up the prices of safe-haven assets like gold, forming a pattern of "fall in risk assets and rise in safe-haven assets."