BTC: Will We Hit $100K This Cycle?
Yes, we will. Multiple Macro + Political Tailwinds in 2H24
I. August: Healing from a Turbulent Month
Aug 5 BOJ Hike: Triggers Yen Un-wind
The USDJPY has dropped significantly over the past four weeks from nearly ¥162/$ to around ¥142/$, aligning with our bearish outlook. This sharp decline was triggered by the Bank of Japan’s rate hike and the Japanese government’s intervention to buy JPY on July 11 and 12. While some doubt the effectiveness of forex intervention, we support its ability to shift market trends by altering supply and demand. The recent USDJPY movement echoes similar drops in 1990 and 1998, though it’s notable that such movements haven’t always signaled a long-term trend reversal for USDJPY, unlike EURJPY and AUDJPY, which merits further consideration.
Aug 5 Panic Selling: Global Market Melt-down
BOJ’s surprising hike saw TOPIX -20% in one day — as investors panic sell to cover their positions. Equity markets fell sharply over several sessions due to rising recession risks and concerns that large moves in the yen would trigger broader de-risking. Weaker-than-expected ISM data, rising jobless claims, and disappointing NFP figures painted a gloomier US macro-economic outlook, raising fears of an impending recession. Our economists indicate that rising unemployment and ISM weakness may already signal the start of a recessionary cycle.
In the absence of any true event risk over the weekend, S&P futures dropped nearly 5%, NDX more than 6%, and the VIX surged above 60. FOMC messaging hinted at potential rate cuts in September, and while the earnings season has been mixed, it has not been particularly weak.
Crypto Panic-Selling: ETH hit 2,100 USD
The high leverage in the system, especially among crypto, mega-cap names, contributed to the market’s size and volatility. Notional activity was three standard deviations above the norm, marking the largest volume in the US market for a non-index rebalance day since February 2022. Investor activity was mixed, with S&P bullish positioning down and Nasdaq positioning relatively unchanged despite the volatility. We expect Friday’s large new shorts to significantly impact Nasdaq’s net long status in forthcoming sessions.
Markets Whiplash: Positive Macro Triggers Risk-On
After wiping out leveraged investors, markets whiplash and saw a V-shaped rebound led by Topix. Last week’s positive macro releases fueled a return of bullish investor flows across US indexes, with over $16bn added to the S&P, driving positioning to increasingly extended levels. Nasdaq and Russell 2000 saw moderate increases, and Nasdaq long position losses eased. Positive sentiment spread globally, with nearly all European and Asian indexes seeing rising notional levels. DAX and FTSE turned net positive, while KOSPI and Nikkei saw extended bullish levels. Nikkei flows were the strongest in Asia, while KOSPI reached near three-year highs. In contrast, the China A50 remained bearish, with limited positioning risks.
II. Macro Pivot: Rate Cuts = Super-Cycle
The minutes of the July FOMC meeting reveal that Fed officials were increasingly considering lowering rates even before the recent weaker employment data emerged.
The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.
Developments in inflation and employment since then have only strengthened this dovish stance. The minutes suggest a rate cut at the next meeting in September is highly likely, with the majority of Fed officials supportive of easing policy if the data remained as expected. Chair Powell’s acknowledgment of discussions around a rate cut in July, and several officials supporting a 25 basis points cut at that time, indicate a growing inclination toward a possibly larger 50 basis points cut by September. Officials expressed confidence in slowing inflation due to factors like easing wage growth and consumer resistance to high prices, noting that the risks to inflation have diminished while the downside risks to employment have increased.
The minutes also highlighted concerns about the labor market, with participants noting that further easing could lead to more serious deterioration. This concern has likely intensified following the rise in the unemployment rate and payroll job growth revisions. While August employment data will be crucial in determining the September rate cut’s size, the minutes suggest convincing many officials of a larger 50 basis points cut may not be difficult. Additionally, the balance sheet was briefly discussed, with expectations that balance sheet reductions might end in December if the labor market continues to deteriorate, but could extend through Q2 of 2025 otherwise. The BLS payroll revisions, indicating an 818,000 job reduction over the past 12 months, reinforce the softening labor market, keeping caution high ahead of the September 6 payroll data, which will significantly influence market sentiment and FOMC pricing.
BLS data raises the importance of 6-Sep payrolls. We think that event risk is too low:
Jackson Hole is significant but limited, with labor data next month and July FOMC minutes indicating a “vast majority” support a September rate cut. Chair Powell is expected to signal this likelihood, with inflation and job data determining the cut’s size. Any suggestion of no cut in September is very unlikely and would negatively affect equity markets. Chair Powell probably won’t commit to larger cuts before the August payrolls and another CPI print. While stocks might initially react positively to such dovishness, it would raise concerns about the Fed’s growth worries. Citi US Economics expects Powell to guide toward a September rate cut.
III. US Election: Bi-Partisan Support for Crypto
Republicans: Trump Supporting Crypto
The upcoming US presidential race sees both Republican and Democrat candidates supporting crypto to attract voters, particularly crypto-friendly younger voters. This bipartisan backing is evident in recent cryptofriendly legislation, with notable Democrats like Chuck Schumer and Nancy Pelosi emerging as allies. Candidates are even accepting crypto for campaign funding. In contrast, Trump criticizes Biden’s anti-crypto stance, including efforts to oust Bitcoin mining companies and potential tax hikes, and highlights opposition from the administration and SEC Chair Gary Gensler to the FIT21 bill for regulatory clarity. Republicans are increasingly aligning with the crypto industry, with figures like Trump accepting crypto donations and pledging support for digital asset traders.
Democrats: Kamala Supporting Crypto
Democrats are increasingly embracing cryptocurrency, recognizing the importance of appealing to crypto-enthusiastic voters in a tight race. Democratic presidential candidate Kamala Harris plans to endorse policy initiatives that promote the growth of the cryptocurrency industry, as confirmed by her senior policy advisor, Brian Nelson. During a Bloomberg roundtable at the Democratic National Convention in Chicago, Nelson highlighted Harris’s dedication to supporting policies that enable emerging technologies to flourish. Furthermore, Harris has begun engaging with cryptocurrency executives to better understand and advocate for the industry’s advancement.
