Riding the Wave: Will the Fed Cut Rates Amid Global Market Turmoil?
Digital Asset Market: Bitcoin investors faced a volatile weekend as prices dropped to $49,500 by early Monday before rebounding to around $56,000. Whales took advantage of lower prices to increase their holdings, while small investors sold off in panic, according to blockchain analytics firm IntoTheBlock. Wallets holding between 1,000 and 10,000 BTC showed confidence, consistently increasing their holdings during the dip. In contrast, wallets with less than 1 BTC saw the most substantial decrease in holdings. U.S.-listed spot Bitcoin ETFs recorded $168 million in net outflows on Monday, primarily from Grayscale's GBTC, Fidelity's FBTC, and 21Shares/Ark Invest's ARKB, while others showed modest inflows or flat performance. Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, noted that these outflows only represented 0.3% of the total assets under management in the ETFs, with BlackRock's $18 billion IBIT experiencing no net outflows, indicating a stronger market position than expected.
As crypto prices slide, Jump Crypto is liquidating hundreds of millions of dollars worth of assets, mainly ether, according to blockchain data. Arkham Intelligence shows Jump Crypto's addresses have seen $300 million in inflows and $80 million in outflows to exchanges like Coinbase and Binance since August 3. Jump has been redeeming over $500 million worth of Lido's wstETH into ether since July 25 and still holds $130 million in staked ether, with nearly $200 million unstaked entering exchanges. This follows the departure of Jump Crypto's President, Kanav Kariya, amid a U.S. CFTC investigation. Despite Ethereum being up 45% year-to-date, DeFi-related tokens are hit hard, with The Block's DeFi index down nearly 18%.Macro Economics: Private job growth slowed in July, with companies adding just 122,000 jobs, the slowest pace since January and below June's revised 155,000, as reported by ADP. Economists had expected a gain of 150,000 jobs. Wage growth for those staying in their jobs increased by 4.8% year-over-year, the smallest rise since July 2021, indicating the labor market's alignment with the Federal Reserve's efforts to slow inflation. Following the report, stock futures gained, and Treasury yields fell. Additionally, the Labor Department reported that the employment cost index rose by 0.9% in Q2, below expectations, further supporting the likelihood of a September rate cut. Job growth was concentrated in trade, transportation, and utilities, while professional and business services, information, and manufacturing sectors saw declines. The South led regional job gains with 55,000 new jobs. The ADP report precedes the Labor Department's upcoming nonfarm payrolls count, which is expected to show a July job growth of 185,000.
Equities: A wave of dip buying spurred a rally in stocks after a $6.5 trillion selloff, with all major groups in the S&P 500 rising and mega caps leading gains. Hedge funds bought tech stocks, causing the VIX to experience its largest plunge on record. Markets calmed following a period of volatility driven by weak economic data, underwhelming tech results, and seasonal trends. Treasury yields rose as haven demand waned, and traders moderated expectations for deep Federal Reserve rate cuts. Despite recent declines, historical data shows that market corrections are a normal part of bull markets, encouraging investors to remain patient and stay invested. Major stocks like Nvidia, Disney, and Caterpillar saw significant gains, and blue-chip firms issued over $6 billion in bonds, pushing yearly volume past $1 trillion. Volatility may persist, but experts believe the secular bull market will continue as easier monetary policy takes hold, emphasizing the importance of long-term investment strategies.
The Fed and US Treasury: The Federal Reserve is at a critical juncture, facing the challenge of averting a recession or repeating past mistakes of delayed action. Chair Jerome Powell and his team must navigate this turbulent climate carefully, as Wall Street has experienced significant volatility recently. Steven Blitz of TS Lombard suggests a recession by year-end is likely if the Fed does not implement a half-point rate cut in September. The market is pricing in this cut and anticipates aggressive easing to follow, reducing the Fed’s rate significantly by the end of next year. Despite a weak July jobs report and growing recession fears, an emergency rate cut before the September meeting seems unlikely. However, Powell's upcoming speech in Jackson Hole is expected to outline the Fed's easing strategy. Economists like Joseph LaVorgna advocate for swift and substantial rate cuts, while others, like David Rosenberg, argue the Fed's actions indicate a severe economic downturn is looming. Goldman Sachs recently adjusted its recession forecast to 25%, noting the Fed's capacity to cut rates and restart quantitative easing if necessary. The situation remains fluid, with the Fed's decisions crucial in shaping the economic outlook.
Geopolitical: As tensions rise due to an expected Iranian attack, officials in the US-led coalition have warned Israel to avoid escalating the conflict into an all-out war. Following the assassination of Hamas leader Ismail Haniyeh in Tehran, Iran has vowed retaliation, raising concerns of widespread unrest. Hezbollah has also threatened action from Lebanon, while the US moves military assets closer to Israel and engages in intensive diplomacy to de-escalate the situation. The White House briefed President Biden and Vice President Harris on military support for Israel and efforts to mitigate tensions through a ceasefire-hostage release deal between Israel and Hamas. Amidst these developments, Western diplomats are working to reassemble a coalition to counter potential Iranian aggression. So far, their attempts to limit escalation appear to be working.
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The current volatility in global markets has increased the likelihood of not only a 25bps Fed Funds rate cut in September but also the possibility of a 50bps or even 75bps cut at the next meeting due to increased global financial stress. While historically, markets react positively to such easing, it risks masking continued underlying economic deterioration, setting the stage for a potential recession and additional cuts as we approach the election and inauguration in January.
Crypto markets reacted strongly to the Japanese market downturn and Yen appreciation, evoking memories of the Covid crash of 2020. Although this event resembles a financial flu rather than a viral contagion, the violent move likely shook out weaker investors, allowing stronger holders to accumulate larger positions at significant discounts. Notably, Jump Crypto is suspected of winding down its desk following President Kanav Kariya's resignation in June, contributing to the extra pressure Ethereum experienced during the sell-off.
Our overall view is that markets will remain choppy in the near term, with frothy equity valuations having room to mean revert and potentially correct further. However, Bitcoin ETF flows were surprisingly robust yesterday, suggesting that the $49,500 level could serve as a strong support and potential bottom for Bitcoin prices. This resilience in ETF inflows indicates a growing investor confidence in Bitcoin's long-term value, even amidst broader market volatility. Additionally, we've observed increased Bitcoin purchase demand across our desk, with both institutional and retail investors taking advantage of the current price levels to strengthen their positions. We expect this trend to continue, supported by positive sentiment and the anticipation of further market recovery, ultimately driving Bitcoin toward fresh all-time highs in the coming months.
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The 1Konto Team
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