❗️Market Recovery? or Dead Cat Bounce?

Good Morning!

Markets rebound after sharp selloff, but recovery may be premature. Financial markets are on a wild ride! The Nikkei surged 9%, nearly erasing Monday's 12.4% plunge, with European and U.S. futures following suit. Central bankers' reassurances sparked the turnaround, but skeptics warn we're not out of the woods yet. Keep an eye on junk bond spreads and the Treasury yield curve for potential warning signs.

In today’s email:

• Rebound: Markets rebound sharply. Recovery? or dead cat bounce?

• Bitcoin: Bitcoin around $55k

• Rate Cuts: Markets betting on a 50bps rate cut soon

• Gold: Strong despite market turbulence

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THE BIG IDEA

Recent data rekindles recession fears, challenging the 'soft landing' narrative

The U.S. economy is sending mixed signals, leaving investors and analysts puzzled about its trajectory. July's weak employment report, featuring a post-pandemic high jobless rate of 4.3%, has reignited recession worries. This unexpected turn has shaken the markets, with many now questioning if the Fed has kept rates too high for too long.

Despite these concerns, some indicators still paint a resilient picture. Q2 GDP growth hit 2.8% annualized, double Q1's rate and in line with pre-pandemic averages. The services sector is showing strength, with key indices pointing to continued expansion. Inflation, the Fed's primary concern, is cooling and approaching the 2% target.

However, job market signals are flashing warning signs. Hiring has slowed significantly, and the unemployment rate's steady rise is approaching levels that historically precede recessions.

SAHM Rule

The "Sahm rule," which has never been wrong in predicting downturns, suggests we're "uncomfortably close" to a recession.

Other concerning trends include rising household debt delinquencies, especially among credit card borrowers at their limits. Economic data has consistently underperformed forecasts, as reflected in Citigroup's "Surprise Index" nearing a two-year low.

If a recession does materialize, the response might differ from 2020's all-out fiscal and monetary interventions. The Fed has more room to cut rates, starting from the current 5.25%-5.5% range. However, high government debt levels could limit fiscal stimulus options.

As the economic landscape remains uncertain, all eyes are on upcoming data releases and the Fed's next moves, with hopes of avoiding a hard landing still alive but increasingly challenged.

MARKETS AT A GLANCE

TOP NEWS

Japanese stocks lead global market rebound, but caution remains

The Nikkei surged over 10% Tuesday, leading a recovery in Asian markets after Monday's brutal sell-off. Wall Street and European futures also point up. Fed officials' reassuring comments and a strong U.S. ISM services report helped soothe nerves. However, analysts warn this might be a brief respite rather than a full recovery. The yen retreated slightly, while Treasury yields and oil prices ticked up.

Yen carry trade unwind continues to shake markets, with potential for further volatility

The recent market rout, triggered by recession fears and a surprise Bank of Japan rate hike, may not be over. Investors are still unwinding massive yen-funded trades used to finance stock purchases. While some see buying opportunities emerging, others warn of a "serious collapse" ahead. The full extent of these positions remains unclear, adding uncertainty to market outlook. Expect continued volatility as this complex unwinding plays out.

Trump's bitcoin stockpile plan sparks debate in crypto community

Trump's recent proposal to create a national bitcoin reserve has ignited discussions in the crypto world. While some see it as a potential price booster, others worry about reduced liquidity and government control. The U.S. already holds over 200,000 bitcoin from seizures. Questions remain about management and purpose of such a reserve. Regardless, crypto's prominence in campaign rhetoric signals its growing political importance.

CRYPTO

Veteran trader Peter Brandt sees similarities between current Bitcoin decline and 2016 bull run

Bitcoin's recent 26% drop since the April 2024 halving mirrors the 27% decline after the 2016 halving, which preceded the 2017 bull run. While some analysts warn of further drops, others like Tim Kravchunovsky suggest crypto may recover faster than traditional markets, similar to 2020. Bitcoin has already shown signs of recovery, reclaiming $56,000 after falling below $50,000.

Yen carry trade collapse triggered crypto market crash

The Bank of Japan's recent rate hike sparked a surge in yen value, making yen-denominated loans costlier for traders. This led to a massive sell-off in crypto markets, with Bitcoin and Ethereum plunging 18% and 26% respectively. Over $1 billion in leveraged positions were liquidated. However, the market may rebound as traders reduce leverage and yen exposure, with potential rate cuts on the horizon.

Polymarket sees major bet on Fed rate cut amid market downturn

Decentralized prediction platform Polymarket has a $1.44 million bet on the Federal Reserve cutting interest rates by September 2024. Users estimate a 58% chance of a 50+ basis point cut. This comes amid broader market turmoil and expert opinions that rate cuts may be necessary to avoid recession. Polymarket saw record trading volume of $387 million in July, driven largely by U.S. political event predictions.

US spot Bitcoin ETFs see significant outflows amid market turbulence

US spot Bitcoin ETFs experienced $168.4 million in net outflows on Monday, with Grayscale's GBTC leading at $69.12 million. This coincided with major crypto and global market turbulence, triggered by Middle East tensions and weak US economic data. Despite the downturn, spot Ethereum ETFs saw net inflows of $48.73 million, led by BlackRock's ETHA. Bitcoin has since recovered to $55,524.

GOLD

Gold outlook remains positive despite recent market turbulence

Market volatility led to currency gains and bond yield declines, affecting gold prices. Disappointing US jobs data shifted expectations to significant Fed rate cuts. Gold's bullish trend persists, with support at $2410 and resistance at $2450 and $2483. The ISM services PMI report is a key focus for investors. Ongoing unwinding of carry trades and economic indicators will be crucial in shaping gold prices this week.

Chinese company launches 'Gold ATMs' for efficient precious metal trading

Kinghood Group unveiled automated gold exchange machines in Shenzhen, processing various gold items within 30 minutes. The global version debuted at the 2024 China Gold Congress, attracting international interest. While China's gold production rose slightly, consumption dropped 5.61% in H1 2024. The machines aim to address market changes, though some users criticize high service fees. Gold prices reached $2,459.32 per ounce as of Friday.

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