AI Meme Coin Mania Fuels Solana’s Unstoppable Rally
Digital Asset Market: Solana's SOL continues to outperform Bitcoin and Ether as blockchain activity on the network continues to boom. The latest trend, or fad, of artificial intelligence (AI) agents pumping meme coins is also predominantly based on the Solana network, with AI bots promoting these tokens on social media. As a result, Solana's price hit record highs against competing protocols, such as Ethereum. Solana's network revenue and active user count have also reached all-time highs. The increase in network revenues has also led to a decrease in SOL token inflation, with 15% of newly issued tokens being burned. Meanwhile, open interest on SOL futures has climbed to over three million SOL in the past four days, indicating a spike in leverage and long positions. Overall, speculation and bullish sentiment continue to drive Solana's performance in the market.
Macro Economics: According to a report from the Federal Reserve Bank of New York, banks have been extending and hiding the losses from commercial real estate mortgages due to the pandemic, which could lead to potential risks for the financial system. The sector has been facing pressures and a slow recovery, and some banks have been avoiding writing off capital by extending the maturity of these troubled loans. As a result, it has become harder to issue new CRE loans, and there is a risk of significant losses materializing in a short period. Weaker capitalized banks are more likely to extend loan terms, and the recent Fed rate cuts could bring some relief to CRE lending. However, reports from Moody's and Goldman Sachs suggest that there is currently no evidence of a credit crunch in the CRE market, even as it is clear that lending is growing much slower.
Equities: Stocks took a beating on Wednesday as doubt regarding potential rate cuts weighed heavily on investors’ minds. At the same time, big names like Boeing and Tesla highlighted a busy earnings day. The Dow Jones Industrial Average fell approximately 400 points, or almost 1%, while the tech-heavy Nasdaq Composite led the decline with a 1.6% drop and the S&P 500 lost over 0.9%. This recent stall in the stock market's rally is attributed to the ongoing debate over when the Federal Reserve will make interest rate cuts over the next year. This uncertainty has led to a decline in bond prices, causing the 10-year Treasury yield to rise to 4.24%, a level not seen since July. As a result, the 30-stock Dow Jones Industrial Average fell sharply, making it the worst day for the index in over a month. The S&P 500 and Nasdaq also saw significant losses. The current turmoil in the market is attributed to various factors, including recent economic data and concerns about potential fiscal deficits. Even popular mega-cap stocks, such as Apple, Netflix, and Amazon, were under pressure, with Apple experiencing its worst day since August. McDonald's also saw a significant decline of over 4% after an E. coli outbreak was linked to their Quarter Pounder burgers. Overall, the market is pulling back as the recession risks continue to rise.
The Fed and US Treasury: The US Treasury market is experiencing a surge in 'term premium’, an indicator of market risk. This is due to factors such as the upcoming Presidential election, fiscal risks, and potential tariff policies, which could lead to higher inflation. This has led to a bond market selloff and pushed the 10-year Treasury yield to its highest since November. The term premium measure turned positive last October and peaked in 2020, but it has been rising recently as the selling pressure in the market has increased. This has been triggered by a strong employment report and a forecast of the economy expanding at a 3.4% pace for the third quarter, raising questions whether the Feds will cut rates ambitiously next year.
Geopolitical: Oil prices dropped as US crude inventories showed a higher-than-expected build and the Biden administration worked towards a cease-fire in the Middle East. West Texas Intermediate and global benchmark Brent fell, and the spread between WTI's two nearest contracts decreased, indicating a potential supply glut. However, persistent geopolitical risks helped prevent a further drop in prices. Nigeria's plan to defer some crude cargoes may provide support for prices. Overall, oil prices have fluctuated in October due to uncertainties in the Middle East, and the recent killing of a Hamas leader may bring the conflict closer to resolution.
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View from our desk
We have observed higher-than-normal selling activity of USDT at our desk, which often signals investors exiting the crypto markets following profit-taking. Bitcoin (BTC) has declined from $69.5K earlier this week to $65K today, further suggesting that profit-taking is underway. Additionally, USDT has traded below par over the past few days, and the selling pressure persists.
The likelihood of two additional Fed rate cuts this year appears increasingly doubtful. Based on recent inflation, employment, and growth indicators, we do not expect the Fed to deliver another 50 bp cut this year. Looking ahead, we are also skeptical of seeing a 3.5% Fed rate by the summer of 2025, as the Fed must balance inflation risks, support for the commercial real estate market, and the need to spur residential development.
Today's roughly 1% drop in the equities market is not particularly significant as we head into the earnings season. We anticipate more positive earnings reports overall, with fewer downside surprises than we experienced today.
Happy Trading!
The 1Konto Team
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