Dovish Fed Meets China's Stimulus: A Perfect Storm for Financial Gains?

1. Digital Asset Market: Crypto traders are not worried about the increasing tensions in the Middle East, as shown by their preference for selling options in the bitcoin and ether market. this is indicative of a bias for low volatility and stability in the market. Deribit, the largest crypto options exchange, has seen a decrease in demand for buying options due to geopolitical events and economic uncertainties. The current situation in the Middle East adds to the already concerning global economic outlook.

   In other news, Israeli police have frozen cryptocurrency accounts associated with the Palestinian militant group Hamas, in an effort to seize funds of the militant group. The police have worked with other agencies and the crypto exchange Binance, which has previously been linked to these types of transactions. Binance has taken down accounts associated with terrorist groups in the past.

2. Macro Economics: China is considering new stimulus measures and increasing deficit spending to counter the effects of a multi-year property downturn and deflationary pressures. These measures include issuing an additional 1 trillion yuan of debt for infrastructure projects and shifting some local government debt to the central government. Wall Street analysts see this as a positive move to stimulate growth and boost demand, while also addressing concerns about local government debt. The stimulus is expected to be announced and implemented in the coming months.

3. Equities: Stocks inch higher on Tuesday as investors hoped the Federal Reserve would pause interest rate hikes. However, concerns over the Middle East conflict kept investors cautious. The Dow Jones Industrial Average and the Nasdaq Composite both gained about 0.2% while the S&P 500 added 0.3%. IMF warned that monetary policy should remain tight, and Treasury yields came off their 16-year peak. Oil prices also fell after rising 4% the previous day. PepsiCo's stocks rose 1.4% after beating Wall Street estimates and increasing its annual earnings forecast. Various Fed officials will be speaking on Tuesday, including Raphael Bostic, Neel Kashkari, Christopher Waller, and Mary Daly.

4. The Fed and the Banks: U.S. Treasury yields dropped following dovish comments from Federal Reserve policymakers, but tensions in the Middle East continued to affect the market. The 10-year Treasury yield decreased after reaching a 16-year high, with Fed officials indicating that increasing long-term yields may impact the central bank's decisions on short-term rates. Traders predict a high probability of no changes to interest rates in November and December. The upcoming focus will be on speeches from several Fed officials throughout the day.

5. Geopolitical: Global markets are rallying, driven by dovish comments from the Federal Reserve and news of potential economic stimulus in China. The impact of the Israel-Hamas conflict is still being assessed by investors. Futures for the S&P 500 and Nasdaq 100 are up, following the solid gains on Monday in US markets. Bond yields in the US dropped, catching up with Monday's global bond rally. The dollar is weaker for the fourth day in a row. There is no major macro data today, with PPI expected tomorrow and CPI on Thursday. Bank earnings are set to kick off later this week.

View from our desk

The recent geopolitical events in the Middle East have had a surprisingly minimal impact on the crypto markets, as evidenced by the stability in options implied volatility. While the freezing of exchange accounts related to Hamas was anticipated, the broader question of how security agencies will handle non-custodial private wallets remains an open issue. Despite these uncertainties, major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) have maintained their stability over the weekend, suggesting that there is minimal downside risk and a strong foundation for a positive trend in the coming week.

In the traditional financial markets, the Federal Reserve's dovish stance on interest rates came as no surprise. Given the current volatility in the geopolitical landscape, any sudden changes in interest rates could exacerbate existing uncertainties. The Fed's decision to maintain stable interest rates is therefore seen as a cautious but sensible approach to avoid adding fuel to the fire in an already tense global situation.

Perhaps more noteworthy is China's announcement regarding a new stimulus package aimed at combating the downturn in the property market and deflationary pressures. While there are varying opinions on Wall Street about China's economic strategies, we believe that the country has a wide range of options and sufficient resources to effectively address these challenges. This development could have far-reaching implications, not just for traditional financial markets, but also for the stability and growth of the crypto space.

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The 1Konto Team

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