A somewhat weaker than expected NFP continued the recent trend of weakening US economic momentum. Unemployment rate rose to 4.05% from the cycle low of 3.43%, with ~150k of the ~200k in new jobs created coming from government and health care in the past month. Prior jobs data were also revised down by 111k over the past 2 months. Wage growth slowed to a 3.9% pace YoY and 3.5% MoM, giving the Fed more encouraging signs that inflation is slowly deflating towards their long-term target. Moreover, with the way crypto prices are trading, should we expect to see a mini-surge in job applicants and downward wage pressures in the months ahead? 🥶
With only a handful of meetings left before the November election, and knowing the Fed’s strong preference to not surprise markets, we should expect to see more forceful tangible from this month’s FOMC to prepare the market for a 25bp rate cut in September.
TradFi assets welcomed the continued ‘goldilocks’ slowdown in econ data, with treasury yields falling 5–10bp across the curve in a bull steepening move. Meanwhile, US equities rallied to yet another record high, led by tech and growth stocks with high beta sensitivity to lower rates. As an aside, just how many times have we said that this year already?
US stocks continue to defy gravity, showing a massive growth divergence to their European peers and even crypto (more on that later) ever since June. Honestly, we are running out of superlatives to describe US equities and have no brilliant insights to add, with a lack of compelling short catalysts on the horizon. Even a far-right gridlock out of France or a Trump-win don’t seem to be able to rattle markets here, especially with the Fed still having ample ammo to ease. Don’t fight the tape.
With Q2 coming to a close, focus will shift towards company earnings over the next month before US markets slow down for the summer holidays. Citi analyst models suggest more positive surprise potential based on management guidance and strong pricing power. Well, there goes another short catalyst!
We had touched on the strong July seasonality before, and so far things are playing out perfectly to script with the market off to a screaming star to start the month. A quick reminder that the first 2 weeks of July has historically been the strongest period for US equity markets, and the entire month of July itself is also a remarkable month. Care to share some love for crypto?
Unsurprisingly, short-interests across both SPX and Nasdaq continue to make new lows at ~7% of outstanding float. Can we get below 5% before the summer is over?
For more extremes, the current period of ‘winner concentration’ in the SPX has surpassed the previous highs in… 1930s. More impressive than the weight is the fact that we managed to keep single stock data going back a century!
With all the being said, it’s probably wise to remember that markets can correct across both “price” and “time”, and topping processes can often take months or even quarters to work out, even if the eventual sell-off might feel like an immediate crescendo. We still don’t see any imminent warning signs of a significant sentiment turn… yet!
Speaking of sentiment turns, what has flipped is the fortune for many crypto tokens, where the majors and top altcoins have seen correction of -20% over the past month, with -10% coming in the past week alone.
The well published sale intention from the German Government, as well Mt. Gox supply unlocks pushed BTC from $65k down to a low of $54 over the course of a week. A lack of positive catalysts and stale long positioning were unable to offset the large selling pressure, leading to painful and dramatic position stop outs across the space.
Substantial long BTC futures liquidation was seen across exchanges, with even spot ETFs seeing substantial outflows on PNL protection. There really wasn’t anywhere to hide with the system-wide carnage.
Furthermore, it was reported that the majority of the price damage took place during the Asia timezone, with Europe and US investors likely seeing some bottom fishing, while Asian-based investors took the brunt of the capital losses from their stretched positions.
At the same time, implied vols across both BTC and ETH have barely budged, as traders appear to be focused on delta position unwinds instead of buying downside protection or being outright short. This movement would appear to be entirely spot led, with traders being caught off guard and focused on risk minimization rather than entering into new positions.
Looking ahead, after a very disappointing ‘altcoin’ season and post-halving price action, there appears to be significant PNL damage across the crypto space, giving little ammo to chase prices back higher from the native ecosystem alone. An unexpected large inflow from the imminent ETH ETF approval might provide a short-term floor for the market, but the position distribution will take time, and we fear that crypto prices might have ‘tread water’ for much of the summer. While a heavily dovish FOMC on Jul 31st might provide some headline support, an equity sell-off (if that ever comes) remains an outside but real bearish risk for sentiment as a whole.
We continue to believe this crypto cycle (and the following ones) will be very different than what crypto natives are used to. The players have changed, the wallets are different, and the rules of the game have changed with TradFi’s entrance.
Stay safe out there friends, it’s likely going to be a long summer.
