If the Federal Reserve really exits QE, what will happen to cryptocurrencies and other major asset classes?

Currently, the market's interpretation of the minutes of the April monetary policy meeting is still dovish but not as dovish as expected. The final progress depends on the recovery of the US economy.

The views of St. Louis Fed President James Bullard are quite representative. He believes that the time is not yet ripe to discuss reducing bond purchases. Before considering changing policies, we should make sure that the United States has escaped the crisis. The United States has not yet fully reached that state, and it should not do so while it is still in the epidemic. At the same time, he believes that the United States will reach that state in the next few months, when it can begin to consider changing its asset purchase policy. Therefore, the general market view is that the Fed's balance sheet reduction is a direction for the next few years, but in the case of repeated epidemics and before the United States makes substantial progress in its maximum employment and price stability goals, it is unlikely that there will be a policy reversal this year, and the possibility of a major turn in global liquidity in the short term is not high.

The next thing we need to pay attention to is the specific indicators representing the US economic recovery. According to the latest data on May 12, the year-on-year and month-on-month growth rates of US inflation in April improved. The CPI in April increased by 4.2% year-on-year, the highest growth rate since September 2008, which exceeded market expectations and accelerated the recovery of inflation.

The number of initial jobless claims in the United States for the week ending May 15 was 444,000, compared with 478,000 in the previous week and an expected 450,000. The performance of initial jobless claims in the United States exceeded market expectations. Driven by the promotion of vaccination and economic recovery, the job market has improved marginally. Rising inflation and improved employment are important indicators for the Federal Reserve to consider shrinking its balance sheet.

Vaccines are also a very important indicator. CITIC Securities believes that a vaccination rate of 75% or an unemployment rate of 5.4% may trigger the Federal Reserve to discuss reducing bond purchases. The specific signal may be sent at the interest rate meeting in June or July.

Another key variable is the Federal Reserve's overnight reverse repurchase. Since late April, the demand and transaction volume of the Federal Reserve's overnight reverse repurchase agreements have increased significantly. On May 20 and 21, the high growth continued, reaching US$351.121 billion and US$369.046 billion respectively, setting a new high in the past four years, indicating that the current liquidity in the US financial system is in a state of excess liquidity. This indicator will also affect the Fed's pace of reducing bond purchases.

What impact will it have on major asset classes around the world?

First of all, the emergence of virtual currencies such as Bitcoin was born with the introduction of monetary easing policies by major European and American economies after the international financial crisis. It is a byproduct of global capital's pursuit of asset preservation and appreciation and risk aversion. Since the outbreak of the epidemic, major economies such as Europe and the United States have launched large-scale unconventional fiscal and monetary policies to stimulate economic recovery, exacerbating the global liquidity flooding, pushing up global inflation expectations, and greatly increasing the risks of various assets. From this perspective, this round of virtual currency shocks is a microcosm and a warning signal, reminding us of the various huge risks behind the global liquidity flooding. In addition, policy supervision is also an important factor affecting virtual currencies.

For other assets, you can refer to the performance of the Fed before and after the balance sheet reduction in 2013. From May to December 2013, the prices of major assets fluctuated to a certain extent, especially the pressure on bonds and gold assets. The US stock market was in a bull market at the time, but in the upward trend, the S&P 500 index once pulled back for 25 trading days during the first period of May-June 2013, with a drop of 4.7%; the pullback in September during the re-raising phase was 16 trading days, with a drop of 3%; the pullback in January 2014 during the actual withdrawal phase was 12 trading days, with a drop of 4.73%, which is more related to the expectation of the Fed's tightening policy.

From 2013 to 2014, U.S. Treasury bonds fell sharply due to liquidity factors. Gold showed great downward pressure in the early stages when expectations of policy tightening strengthened. Industrial products are closely related to the global economic situation, and the Federal Reserve's monetary policy is not a decisive factor in the trend.

A-shares benefited from my country's relatively light monetary easing in the early stages and were less affected in this round.

Based on historical experience, discussions on and actual withdrawal from QE will still cause obvious reactions in asset markets, but apart from bonds and gold, the overall impact on other assets will be relatively limited.