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Digital Asset Market: Participants in the crypto market remain cautious due to risk, as indicated by the data from Deribit, which shows a preference for short-term puts. The market sentiment has been muted due to a less-than-stellar US NFP report and the anticipated interest rate cut by the Federal Reserve. The options market predicts a potential drop in Bitcoin price to $50,000 or even $40,000. Despite a 3% increase in the past 24 hours, Bitcoin remains lower for September and significantly below its all-time high. Net Inflow into Bitcoin ETFs has been seen after a week-long net outflows.
Macro Economics: China's exports grew at their fastest pace in 17 months in August, providing support for the economy. However, imports failed to impress, indicating weak domestic demand. Analysts believe the export surge may be due to shippers rushing to avoid anticipated tariffs from trade partners. Trade barriers could hinder China's efforts to boost growth. The country's trade surplus with the US widened, leading to concerns about the one-sided trade relationship. Mounting trade barriers from the US and EU threaten China's export momentum. Lower-than-expected imports may not bode well for future exports. Overall, while August's export performance was positive, there are concerns about how long this trend will continue amidst the global economic slowdown and trade tensions.
Equities: The market in September is living up to its reputation as a challenging and choppy month. Oracle's positive comments on AI boosted the hyperscalers, but the rest of the semiconductor group is down. Banks, including JPMorgan Chase and Goldman Sachs, have been trending down and dragging down the market. This has caused concerns about a slowing jobs market and high valuations. As a result, there is a general view that there is no reason to take risks in the market now. Shares of JPMorgan Chase dropped 7% after the bank's president, Daniel Pinto, tempered expectations for net interest income and expenses in 2025. Pinto stated that the current estimate for NII of $90 billion is not plausible due to the Federal Reserve cutting interest rates, and the analyst estimate for expenses of $94 billion is too optimistic. The stock's drop was the worst in over a year. Pinto also mentioned that trading revenue is expected to be flat, up to 2% in the third quarter, while investment banking fees are set to jump by 15%. This aligns with Goldman Sachs' announcement of a 10% decrease in trading revenue due to a tough comparison and difficult trading conditions in August.
The Fed and US Treasury: The Federal Reserve has announced a scaled-back proposal for bank capital requirements after facing criticism from politicians and the banking industry. The new plan would only increase capital levels for big banks by 9%, compared to the initial plan of 19%. It also excludes smaller banks from the stricter standards and will now focus on recognizing unrealized gains and losses. This change comes after the failure of Silicon Valley Bank and concerns that the initial proposal could harm the economy. The Fed is seeking public comment on the new proposal before finalizing it, and it will likely have a significant impact on banks' earnings and ability to give back capital to shareholders. The proposal is part of a global effort to set regulatory capital standards for banks, and the Fed is also considering changes to its significant bank stress tests.This week, the Federal Reserve will receive its last look at inflation readings before its upcoming policy meeting on September 18, which will help determine the size of expected interest rate cuts. The Fed has shifted its focus from fighting inflation to concerns about the labor market, and Friday's jobs report provided little clarity on the issue. The consumer price index (CPI) and producer price index (PPI) readings will play a vital role in the Fed's decision, with economists expecting a 0.2% increase in both measures. Although these readings are not close to the Fed's 2% inflation target, they represent a downward trend in inflation. Markets expect a quarter percentage point reduction in rates, but some economists believe a more aggressive half-point cut may be necessary by November.
Geopolitical: In a significant move, Ukraine has launched a drone attack on Russia's capital city of Moscow and other regions. Both sides have suffered casualties and damage to infrastructure. This ongoing conflict has escalated, with both sides utilizing low-cost commercial drones as weapons. Before this attack, Ukraine has targeted Russia's energy and power facilities. Recent reports on the state of the Ukrainian Armed Forces show multiple challenges, including failed counter-offensives and a mandatory conscription policy. These issues have led to low morale, increased desertion, and communication problems within the UAF. The upcoming Battle of Pokrovsk may be a crucial moment, but if Ukraine is unable to sustain itself for the next few months, the situation will only deteriorate. Proposals have been put forward for a potential ceasefire and withdrawal from Kursk, but it is unlikely that Zelensky will agree to them. The conflict is expected to continue into the following year, and there is a possibility of a significant provocation from Ukraine.
View from our desk
Market sentiment remains tense due to uncertainty surrounding the Fed's upcoming decision, signs of economic slowdown, and the future of the Yen carry trade. Although Bitcoin has rebounded from Friday’s lows and ETF inflows have returned after a period of outflows, the strong options Put bias and other indicators suggest significant downside risks, warranting cautious strategies.
The global economic slowdown is becoming increasingly evident. Rising steel inventories in China, Brent crude dipping below $70, and rising auto loan delinquencies all signal a decelerating economy. The Fed's recent decision to reduce the required increase in bank capital reserves from 19% to 9% addresses short-term concerns but raises questions about long-term financial stability. September continues to prove challenging for the markets.
Looking ahead, the case for further rate cuts by summer 2025 is strengthening. As economic headwinds intensify, we anticipate the possibility of the Fed rate dropping to 3% by the end of Q2 2025 as market conditions increasingly favor additional easing measures.
Happy Trading!
The 1Konto Team
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