Fed Rate Cut Expectations Rise, Financial Markets Diverge: Crypto Under Pressure, Gold Hits New HighBitcoin (BTC), cryptocurrencies, and broader financial markets were broadly under pressure in early trading on Friday, with some analysts attributing the decline to profit-taking after a rally fueled by the Japanese yen early last week. However, spot gold continued its stellar run, breaking through $2,500
Fed Rate Cut Expectations Rise, Financial Markets Diverge: Crypto Under Pressure, Gold Hits New High
Bitcoin (BTC), cryptocurrencies, and broader financial markets were broadly under pressure in early trading on Friday, with some analysts attributing the decline to profit-taking after a rally fueled by the Japanese yen early last week. However, spot gold continued its stellar run, breaking through $2,500.31 to hit a new all-time high shortly after the US market opened.
Friday's close was the most significant price change of the week, with gold poised to hit a fourth consecutive record high on Friday. The rapid rise in asset prices was fueled by positive data releases, including strong retail sales figures and another decline in weekly jobless claims.
"Coupled with the positive inflation data earlier this week, this gave investors every reason to return to the markets," said David Morrison, senior market analyst at TradeNation. "This data is exactly what the Fed needs to cut rates next month."
"Inflation continues to decline towards the 2% target, while the labor market is in a 'Goldilocks' state," he added. "Unemployment has increased, providing some relief from tightness in the sector but not enough to scare the horses by raising concerns about an impending recession. This also means that the market has returned to pricing a 25 basis point rate cut in September, rather than the panicked 50 basis points that were predicted earlier this month."
Morrison noted, "We also saw significant volatility in US Treasuries yesterday." "Yields spiked as investors sold bonds and reinvested in stocks, indicating a strong rebound in risk appetite, and sentiment towards the stock market is once again positive."
He warned, "But this should also be a warning sign that this sharp turnaround could be a bit overdone." "Nothing goes up in a straight line forever. However, the Nasdaq 100 and S&P 500 are now up 13% and 9%, respectively, from their August 5 lows. These gains could be enough to entice early buyers to take some decent profits."
While the stock market has seen a decent bounce, it is now facing profit-taking, while the cryptocurrency market remains struggling. Bitcoin dipped as low as $56,122 overnight, amid ongoing concerns that the US government is preparing to sell 10,000 Bitcoins on the open market.
"The positive sentiment in the stock market has not yet spread to cryptocurrencies due to selling pressure," said Alex Kupcsikevich, senior market analyst at FxPro. "The Crypto Fear & Greed Index dropped by two points to 27 (fear). Thursday's positive recovery in the stock market coincided with selling in Bitcoin and Ethereum, with lows near $5,600 and $2,500, respectively, on Thursday, following reports of new Bitcoin sales from US government wallets. The start of Friday brought positive results, with these cryptocurrencies gaining over 2.5% since the day began."
He pointed out, "Despite early gains, the technical outlook for Bitcoin remains bearish, with further price declines more likely." "One important fundamental factor remains the sales from US government wallets. In addition to the natural effect of increased bulk supply, psychological effects must also be considered, leading buyers to wait for the sell-off to end or to speculate on the risk of tightened regulation."
Recession Concerns Weigh on Cryptocurrencies
"This week, the market remains in a range-bound state as mixed economic data continues to sway investor sentiment," said analysts at RyzeLabs. "On Tuesday, the Producer Price Index (PPI) came in below expectations, leading to predictions of a 50 basis point rate cut and triggering a brief bounce."
"However, Wednesday's Consumer Price Index (CPI) showed that inflation fell to 2.9%, marking the first time overall inflation has dipped below 3% in 40 months," they said. "Despite this, market reactions were muted, as this decline was largely anticipated. Growing concerns that the fall in inflation could signal stagnant growth and economic weakness have exacerbated fears of a recession."
The analysts noted, "Market participants are still divided on whether the recent unwinding of Japanese yen carry trades is a one-off shock or a sign of larger unwinding to come." "While a 25 basis point rate hike has reduced the attractiveness of carry trades, the interest rate differential remains, suggesting that asset managers may continue to borrow yen while hedging currency risk."
They also highlighted "a growing tolerance in the market for external supply inflows." They said, "This week alone, we saw several significant moves: the 10,000 BTC from the US government-controlled Silk Road wallet, the 789.5KETH from the Plustoken wallet, the $2 billion Mt.Gox BTC from the BitGo wallet, and the $150 million ETH from the JumpTrading wallet."
They noted, "On a more optimistic note, global liquidity levels are rising, driven by an increase in collateral values in July."
Ryze analysts concluded, "US net liquidity, previously constrained by the April tax season, is now improving, with the Treasury General Account (TGA) at a cyclical high of $750 billion." "With the clear positioning after last week's risk-off event, low leverage is limiting downside moves, while rising liquidity is a positive sign for the market."
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