Market Update: A sea of red
- The Federal Reserve maintains current rates
- Japan experiences worst crash since 1987
- The impact on the digital assets market
- Market Outlook
The Federal Reserve maintains current rates
On the 31st of July, the Federal Reserve (Fed) decided to maintain the current 5.50% interest rate, which was in line with market expectations. While financial markets were mostly at ease, this changed as the latest economic figures were published on the first and second of August. First, the U.S. employment claims came in higher than expected, while the ISM Manufacturing PMI dropped significantly, both indicating that the U.S. economy is contracting faster than anticipated. This led investors to think that the Fed may be behind the curve in easing rates, causing traders to price in an even greater chance of a 50-basis-point cut in September, versus the previous consensus of 25 basis points.
These concerns intensified when the non-farm employment change (the change in the number of employed people during the previous month, excluding the farming industry) and the unemployment rate came in worse than expected. Some investors referred to the various figures as a “dumpster fire.” This significantly altered the outlook for interest rates, with investors currently expecting rates to drop by 125 basis points, ending at 4.25% in December 2024. Many investors now believe that the U.S. is moving towards a recession, with some Goldman Sachs analysts foreseeing a 25% chance. This has caused a ripple effect around the world, particularly in Japan, which was hit hard, as the U.S. remains the world’s leading economic power.
Japan experiences worst crash since 1987
Over the past decade, Japan’s central bank maintained a very dovish monetary policy, holding interest rates at -0.1%. This allowed investors to carry trade in yen, borrowing yen at a low interest rate at home and purchasing assets in another country with higher returns, such as overseas equities and bonds. However, Japan is moving away from this monetary policy as it increased its rate to 0.25%, causing the yen to rally rapidly and potentially impacting equity markets. Furthermore, as U.S. markets and Japanese markets are quite intertwined, the fear of a U.S. recession combined with a rallying yen caused the Japanese stock market to fall. From August 1st to Monday the 5th, the Nikkei, the important stock index of Japan, dropped over 20%, the worst crash since Black Monday in 1987. Moreover, markets across Asia were hit, with South Korea, Taiwan, Australia, Hong Kong, and China losing 10.5%, 8%, 3.8%, 2.6%, and 1.3% in their main indexes, respectively.
The impact on the digital assets market
Fear of a possible US recession, falling Asian financial markets, and rising tensions in the Middle East following the assassination of a Hamas official on Iranian territory, with Iran almost certainly attacking Israel in the coming week, have significantly impacted the digital assets market. Currently, digital assets are considered risk-on assets, and as investors adopt a more risk-off approach, many are exiting their positions. On Sunday, August 4th, Bitcoin was priced at approximately $60,000 before dropping to around $49,000, a decline of 19.8%, and then recovering to about $52,000. Ethereum experienced a similar decline, falling from around $2,900 to $2,100, a drop of 27.8%, while other altcoins experienced drops of over 40%. This caused over $1 billion in liquidations across the overall digital assets market.
The digital assets market is now largely awaiting the reaction of U.S. markets, which are currently holding relatively steady compared to other financial markets. However, the question remains: for how long? In the coming weeks, macroeconomic conditions will be the primary driver of the market. Most investors will be focusing on the Federal Reserve and whether they will call an interim meeting for a possible intervention or allow the market to continue to push inflation to the 2% benchmark.
Market Outlook
With Bitcoin's recent decline, the industry has finally moved past the sideways trend that started after reaching a new all-time high in March this year. The current market trend shows funds flowing back into Bitcoin, with altcoins, including ETH, seeing significant shifts. Although the BTC/ETH ratio is currently favoring Bitcoin, which may seem challenging in the short term, it's actually setting the stage for altcoins to shine. The Fear and Greed Index currently indicates fear in the market, reflecting cautious sentiment among investors. While some bearishness is expected in the near future, the long-term outlook for altcoins is increasingly positive.
We still anticipate Bitcoin's dominance to reach around 60%, a target that seems more imminent. Once this level is reached, we expect a trend reversal, with Bitcoin's dominance declining and the altcoin market outperforming Bitcoin. This shift could mark the beginning of a new phase, where diverse altcoins gain momentum and attract more attention from investors.
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