Nikkei/USD FuturesPanjang
Hey mates! What just happened? What happens next?
Why Has the Equities Market Tanked?
Several factors have contributed to the recent decline in the equities market. One significant factor is the impact of the Bank of Japan's (BOJ) actions. Although the BOJ has only recently begun to raise rates, with the overnight rate currently at just 0.25% compared to around 5.5% for dollar rates, its move has triggered substantial turbulence. Specifically, global stock and bond markets, particularly in Japan, are being unsettled by the unwinding of the yen carry trade.
Understanding the Yen Carry Trade
The yen carry trade involves borrowing yen at a low interest rate to invest in currencies and assets that offer higher yields. This trade has been particularly popular due to Japan's historically low rates.
Investors use borrowed yen to purchase higher-yielding currencies and invest in assets like bonds.
The typical annualized returns on dollar-yen carry trades are around 5%, reflecting the difference between U.S. and Japanese rates, with additional gains possible if the yen depreciates.
Recent discussions about potential further rate hikes in Japan and anticipated rate cuts by the Federal Reserve have led to a 13% increase in the yen over a month and reduced the yield gap. This has wiped out the modest gains from yen-dollar carry trades. Consequently, investors with large, leveraged yen carry positions are forced to de-leverage, leading them to sell off other stock and bond holdings. https://www.cnn.com/2024/08/07/business/yen-carry-trade-stocks-nightcap/index.html
Current Market Conditions and Implications
Despite these market upheavals, there are bullish factors to consider. Recent weakening in U.S. unemployment data, coupled with a growing U.S. deficit, suggests that rate cuts might be on the horizon. Additionally, the recession, which many overlook, has already affected debt-intensive sectors of the market. However, sectors with less reliance on debt have not been as severely impacted. The increase in multiple job holdings indicates that high interest rates have had a more nuanced effect.
Furthermore, the Treasury Department's buyback programs, authorized under Section 3111 of Title 31 of the United States Code, play a crucial role. These programs include:
Cash Management Buybacks: Aimed at reducing volatility in Treasury's cash balance, minimizing disruptions in bill supply, and lowering borrowing costs over time.
https://treasurydirect.gov/instit/annceresult/press/preanre/2024/BBPA_20240807174000.pdf
Liquidity Support Buybacks: Intended to enhance market liquidity by offering regular opportunities for market participants to sell off-the-run Treasury securities.
The combination of these programs and the BOJ's likely pause on further rate increases, along with anticipated domestic rate cuts, creates a potentially bullish environment. https://www.wsj.com/economy/central-banking/boj-wont-raise-rates-when-markets-are-unstable-deputy-gov-says-6f4bf962
Moreover, the recession indicators are strong: aside from the ongoing inverted yield curve the Manufacturing PMI is contracting at 46.8, marking its fourth consecutive month of decline. https://www.ismworld.org/globalassets/pub/research-and-surveys/rob/pmi/rob202407pmi.pdf
Any PMI reading under 50 is indicative of contraction.
The PMI also reflects that New orders have also dropped to 47.4. Despite Prices growing for seven months, the overall economic picture shows severe weakness in manufacturing and transportation sectors, with trucking rates at recessionary levels, when including inflationary cost pressures, not seen since 2009. https://www.dat.com/trendlines/van/national-rates
Federal Reserve and Treasury Department Actions
The Federal Reserve's policy of "beyond maximum employment" suggested that job losses were acceptable to combat inflation. However, the Fed's actions often appear reactive rather than proactive. With Treasury Secretary Janet Yellen's announcement of the U.S. Treasury Quarterly Refunding and the planned injection of $300 billion to $1.05 trillion by year-end, the outlook includes both anticipated rate cuts and substantial Treasury market support.
https://treasurydirect.gov/auctions/announcements-data-results/buy-backs/
During the second quarter of 2024, U.S. economic data indicated robust growth in output and labor markets, even as inflation slowed. Real GDP growth accelerated to 2.8% from 1.4% in the first quarter, driven by increased private consumption, business investment, and government spending, particularly in national defense. While payroll job growth slowed and the unemployment rate edged up to 4.1%, it remains historically low. Inflation, measured by the consumer price index, slowed to 3.0% from a peak of 9.1% in June 2022. PCE inflation also approached the Fed's target of 2%, while housing markets showed mixed signals.
Optimal Capital Deployment: Focus on Cryptocurrency
In light of recent market dynamics, the cryptocurrency market presents an intriguing opportunity for capital deployment. Despite the severe downturn in the altcoin market, Bitcoin has shown resilience, bolstered by several positive developments. This includes the resolution of the Mt. Gox distribution issue and the alleviation of selling pressure from the German government. Moreover, a significant catalyst has emerged with the People's Bank of China (PBOC) cutting key interest rates, which could have far-reaching implications for global markets and, notably, for cryptocurrencies. https://www.cnbc.com/2024/07/05/mt-gox-begins-repaying-bitcoin-to-creditors-a-decade-on-from-collapse.html
Catalysts for the Crypto Market
China's Interest Rate Cut:
The PBOC’s recent decision to cut key interest rates is an additional bullish catalyst. China's equity market has felt severe pain.
China just announced a reduction in the seven-day reverse repo rate from 1.8% to 1.7%, alongside improvements in open market operations.
Additionally, benchmark lending rates were lowered: the one-year loan prime rate (LPR) dropped from 3.45% to 3.35%, and the five-year LPR fell from 3.95% to 3.85%.
This action, which precedes any Federal Reserve rate cuts, reflects China's proactive stance to counteract economic weakness and a housing market crisis.
This move signals a potential boost for global growth and could positively impact asset classes like cryptocurrencies.
https://www.nytimes.com/2024/07/24/business/china-rate-cut-markets.html#:~:text=China's%20central%20bank%20on%20Thursday,sharp%20drop%20the%20day%20before.
Current Market Conditions:
The broader global recession, often only recognized in hindsight, sets the stage for a potential economic rebound. Recessions, while challenging, can lead to recovery phases where the economy "catches up" to previous projections. Although recessions vary in duration and impact across different sectors, they often follow cyclical patterns of peaks and troughs. In the current climate, where various sectors experience disparate impacts, capital deployment in sectors poised for recovery could yield significant returns.
K-Shaped Recession and Sector Variability:
The present economic environment suggests we might be witnessing yet another K-shaped recession. This type of recession features divergent recovery paths for different segments of the economy. Some sectors may rebound swiftly, while others may face prolonged struggles. The COVID-19 pandemic-induced recession, for example, displayed K-shaped characteristics, with technology and remote work sectors rebounding quickly, while industries like in-person dining and live entertainment lagged.
In the current cycle, similar divergence is evident. For instance, transportation sector pricing varies significantly even in-sector: international container shipper rates are surging, while less-than-truckload (LTL) rates remain relatively stable, and full-truckload (FTL) rates have sharply declined. Such disparities highlight the importance of identifying sectors and assets likely to benefit from upcoming economic shifts.https://www.cnbc.com/2024/07/17/americas-freight-trucking-recession-over.html
Why Cryptocurrency Could Be the Next Big Opportunity
Given the current economic environment and sectoral variations, the cryptocurrency market appears to be a promising area for investment. Despite recent setbacks in the altcoin market, Bitcoin's stability and recovery potential, coupled with the positive effects of global economic policies, create a bullish outlook for crypto assets. The forthcoming economic recovery phase could see significant growth in the cryptocurrency sector, driven by both institutional interest and broader market acceptance.
For those seeking a solid and reliable investment with long-term prospects, Bitcoin (BTC) and Ethereum (ETH) are currently the top choices. The inflows and education of ETH is only starting, and Bitcoin is only now or soon to be recommended by quality wire houses like Bank of America Merrill Lynch, Wells Fargo, and quality ones like Morgan Stanley. https://www.investopedia.com/morgan-stanley-advisors-can-reportedly-market-two-bitcoin-etfs-to-some-clients-8689594
Specifically, if you’re planning a long-term hold, consider stETH or cbETH, which offer strong potential and stability in the Ethereum ecosystem will picking up that passive staking yield.
For investors with a higher risk tolerance who are looking for potentially significant rewards, I continue to be bullish on Solana (SOL). Solana’s innovative technology and growth potential make it an appealing choice for those willing to embrace volatility for the chance of substantial returns.
For extreme risk-reward scenarios, I highly recommend ONDO. ONDO is at the forefront of revolutionizing financial infrastructure by tokenizing US Treasuries on the Ethereum and Solana blockchains. They offer a US Dollar yield of 5.35% APY and have achieved over half a billion in Total Value Locked (TVL). With investments managed by top-tier bond managers and a team with expertise from firms like BlackRock, Goldman Sachs, Bridgewater, and Millennium, ONDO is a standout in the crypto space.
However, be mindful of ongoing emissions of ONDO tokens, which involve a daily linear unlock of 0.001% of the maximum supply over a five-year period. This feature may impact the market dynamics, so proceed with caution and stay informed.
In summary, for a balanced approach, BTC and ETH (particularly stETH and cbETH) offer stability (relative to the crypto market) and high growth potential. For those seeking higher returns with a tolerance for risk, SOL is a promising option. And for those willing to engage in high-risk, high-reward strategies, ONDO presents an innovative opportunity with significant upside potential.
Good luck, and may your investments bring great success!
So mates, while traditional sectors and markets exhibit mixed recovery prospects, the cryptocurrency market stands out as a potentially lucrative opportunity for capital deployment. With key economic indicators signaling a forthcoming rebound and structural issues in other asset classes, cryptocurrencies could emerge as a leading investment choice in the next economic cycle.
Several factors have contributed to the recent decline in the equities market. One significant factor is the impact of the Bank of Japan's (BOJ) actions. Although the BOJ has only recently begun to raise rates, with the overnight rate currently at just 0.25% compared to around 5.5% for dollar rates, its move has triggered substantial turbulence. Specifically, global stock and bond markets, particularly in Japan, are being unsettled by the unwinding of the yen carry trade.
Understanding the Yen Carry Trade
The yen carry trade involves borrowing yen at a low interest rate to invest in currencies and assets that offer higher yields. This trade has been particularly popular due to Japan's historically low rates.
Investors use borrowed yen to purchase higher-yielding currencies and invest in assets like bonds.
The typical annualized returns on dollar-yen carry trades are around 5%, reflecting the difference between U.S. and Japanese rates, with additional gains possible if the yen depreciates.
- The yen carry trade has its origins in 1999, following Japan's policy rate cut to zero after the burst of its asset price bubble. The scale of this trade is substantial, though not precisely measured.
- Analysts estimate that Japanese banks have about $350 billion in short-term external loans related to yen-funded trades. This estimate likely underrepresents the true scale due to leverage used by hedge funds and computer-driven funds.
- Japanese pension funds, insurers, and other investors have significant foreign investments, with Japan's foreign portfolio investments totaling approximately ¥666.86 trillion ($4.54 trillion) as of March. More than half of this is in interest rate-sensitive debt assets, most of which are long-term.
Recent discussions about potential further rate hikes in Japan and anticipated rate cuts by the Federal Reserve have led to a 13% increase in the yen over a month and reduced the yield gap. This has wiped out the modest gains from yen-dollar carry trades. Consequently, investors with large, leveraged yen carry positions are forced to de-leverage, leading them to sell off other stock and bond holdings. https://www.cnn.com/2024/08/07/business/yen-carry-trade-stocks-nightcap/index.html
Current Market Conditions and Implications
Despite these market upheavals, there are bullish factors to consider. Recent weakening in U.S. unemployment data, coupled with a growing U.S. deficit, suggests that rate cuts might be on the horizon. Additionally, the recession, which many overlook, has already affected debt-intensive sectors of the market. However, sectors with less reliance on debt have not been as severely impacted. The increase in multiple job holdings indicates that high interest rates have had a more nuanced effect.
Furthermore, the Treasury Department's buyback programs, authorized under Section 3111 of Title 31 of the United States Code, play a crucial role. These programs include:
Cash Management Buybacks: Aimed at reducing volatility in Treasury's cash balance, minimizing disruptions in bill supply, and lowering borrowing costs over time.
https://treasurydirect.gov/instit/annceresult/press/preanre/2024/BBPA_20240807174000.pdf
Liquidity Support Buybacks: Intended to enhance market liquidity by offering regular opportunities for market participants to sell off-the-run Treasury securities.
The combination of these programs and the BOJ's likely pause on further rate increases, along with anticipated domestic rate cuts, creates a potentially bullish environment. https://www.wsj.com/economy/central-banking/boj-wont-raise-rates-when-markets-are-unstable-deputy-gov-says-6f4bf962
Moreover, the recession indicators are strong: aside from the ongoing inverted yield curve the Manufacturing PMI is contracting at 46.8, marking its fourth consecutive month of decline. https://www.ismworld.org/globalassets/pub/research-and-surveys/rob/pmi/rob202407pmi.pdf
Any PMI reading under 50 is indicative of contraction.
The PMI also reflects that New orders have also dropped to 47.4. Despite Prices growing for seven months, the overall economic picture shows severe weakness in manufacturing and transportation sectors, with trucking rates at recessionary levels, when including inflationary cost pressures, not seen since 2009. https://www.dat.com/trendlines/van/national-rates
Federal Reserve and Treasury Department Actions
The Federal Reserve's policy of "beyond maximum employment" suggested that job losses were acceptable to combat inflation. However, the Fed's actions often appear reactive rather than proactive. With Treasury Secretary Janet Yellen's announcement of the U.S. Treasury Quarterly Refunding and the planned injection of $300 billion to $1.05 trillion by year-end, the outlook includes both anticipated rate cuts and substantial Treasury market support.
https://treasurydirect.gov/auctions/announcements-data-results/buy-backs/
During the second quarter of 2024, U.S. economic data indicated robust growth in output and labor markets, even as inflation slowed. Real GDP growth accelerated to 2.8% from 1.4% in the first quarter, driven by increased private consumption, business investment, and government spending, particularly in national defense. While payroll job growth slowed and the unemployment rate edged up to 4.1%, it remains historically low. Inflation, measured by the consumer price index, slowed to 3.0% from a peak of 9.1% in June 2022. PCE inflation also approached the Fed's target of 2%, while housing markets showed mixed signals.
Optimal Capital Deployment: Focus on Cryptocurrency
In light of recent market dynamics, the cryptocurrency market presents an intriguing opportunity for capital deployment. Despite the severe downturn in the altcoin market, Bitcoin has shown resilience, bolstered by several positive developments. This includes the resolution of the Mt. Gox distribution issue and the alleviation of selling pressure from the German government. Moreover, a significant catalyst has emerged with the People's Bank of China (PBOC) cutting key interest rates, which could have far-reaching implications for global markets and, notably, for cryptocurrencies. https://www.cnbc.com/2024/07/05/mt-gox-begins-repaying-bitcoin-to-creditors-a-decade-on-from-collapse.html
Catalysts for the Crypto Market
China's Interest Rate Cut:
The PBOC’s recent decision to cut key interest rates is an additional bullish catalyst. China's equity market has felt severe pain.
China just announced a reduction in the seven-day reverse repo rate from 1.8% to 1.7%, alongside improvements in open market operations.
Additionally, benchmark lending rates were lowered: the one-year loan prime rate (LPR) dropped from 3.45% to 3.35%, and the five-year LPR fell from 3.95% to 3.85%.
This action, which precedes any Federal Reserve rate cuts, reflects China's proactive stance to counteract economic weakness and a housing market crisis.
This move signals a potential boost for global growth and could positively impact asset classes like cryptocurrencies.
https://www.nytimes.com/2024/07/24/business/china-rate-cut-markets.html#:~:text=China's%20central%20bank%20on%20Thursday,sharp%20drop%20the%20day%20before.
Current Market Conditions:
The broader global recession, often only recognized in hindsight, sets the stage for a potential economic rebound. Recessions, while challenging, can lead to recovery phases where the economy "catches up" to previous projections. Although recessions vary in duration and impact across different sectors, they often follow cyclical patterns of peaks and troughs. In the current climate, where various sectors experience disparate impacts, capital deployment in sectors poised for recovery could yield significant returns.
K-Shaped Recession and Sector Variability:
The present economic environment suggests we might be witnessing yet another K-shaped recession. This type of recession features divergent recovery paths for different segments of the economy. Some sectors may rebound swiftly, while others may face prolonged struggles. The COVID-19 pandemic-induced recession, for example, displayed K-shaped characteristics, with technology and remote work sectors rebounding quickly, while industries like in-person dining and live entertainment lagged.
In the current cycle, similar divergence is evident. For instance, transportation sector pricing varies significantly even in-sector: international container shipper rates are surging, while less-than-truckload (LTL) rates remain relatively stable, and full-truckload (FTL) rates have sharply declined. Such disparities highlight the importance of identifying sectors and assets likely to benefit from upcoming economic shifts.https://www.cnbc.com/2024/07/17/americas-freight-trucking-recession-over.html
Why Cryptocurrency Could Be the Next Big Opportunity
Given the current economic environment and sectoral variations, the cryptocurrency market appears to be a promising area for investment. Despite recent setbacks in the altcoin market, Bitcoin's stability and recovery potential, coupled with the positive effects of global economic policies, create a bullish outlook for crypto assets. The forthcoming economic recovery phase could see significant growth in the cryptocurrency sector, driven by both institutional interest and broader market acceptance.
For those seeking a solid and reliable investment with long-term prospects, Bitcoin (BTC) and Ethereum (ETH) are currently the top choices. The inflows and education of ETH is only starting, and Bitcoin is only now or soon to be recommended by quality wire houses like Bank of America Merrill Lynch, Wells Fargo, and quality ones like Morgan Stanley. https://www.investopedia.com/morgan-stanley-advisors-can-reportedly-market-two-bitcoin-etfs-to-some-clients-8689594
Specifically, if you’re planning a long-term hold, consider stETH or cbETH, which offer strong potential and stability in the Ethereum ecosystem will picking up that passive staking yield.
For investors with a higher risk tolerance who are looking for potentially significant rewards, I continue to be bullish on Solana (SOL). Solana’s innovative technology and growth potential make it an appealing choice for those willing to embrace volatility for the chance of substantial returns.
For extreme risk-reward scenarios, I highly recommend ONDO. ONDO is at the forefront of revolutionizing financial infrastructure by tokenizing US Treasuries on the Ethereum and Solana blockchains. They offer a US Dollar yield of 5.35% APY and have achieved over half a billion in Total Value Locked (TVL). With investments managed by top-tier bond managers and a team with expertise from firms like BlackRock, Goldman Sachs, Bridgewater, and Millennium, ONDO is a standout in the crypto space.
However, be mindful of ongoing emissions of ONDO tokens, which involve a daily linear unlock of 0.001% of the maximum supply over a five-year period. This feature may impact the market dynamics, so proceed with caution and stay informed.
In summary, for a balanced approach, BTC and ETH (particularly stETH and cbETH) offer stability (relative to the crypto market) and high growth potential. For those seeking higher returns with a tolerance for risk, SOL is a promising option. And for those willing to engage in high-risk, high-reward strategies, ONDO presents an innovative opportunity with significant upside potential.
Good luck, and may your investments bring great success!
So mates, while traditional sectors and markets exhibit mixed recovery prospects, the cryptocurrency market stands out as a potentially lucrative opportunity for capital deployment. With key economic indicators signaling a forthcoming rebound and structural issues in other asset classes, cryptocurrencies could emerge as a leading investment choice in the next economic cycle.
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