In Markets
Stocks and crypto markets took a dramatic dive on Monday. While there are growing fears of a recession in the US as unemployment rises – and even talk of emergency rate cuts – the primary catalyst appears to be the worst one-day plunge on Japan’s Nikkei index since Black Monday in 1987, amid the violent unwinding of the Japanese Yen carry trade (see below). News also emerged that Berkshire Hathaway sold more stock in Q2 than any other point, a sure sign legendary investor Warren Buffett believed a correction was on the way. Tensions in the Middle East are again at boiling point, with Iran poised to attack Israel. The crypto market cap has shed A$770B (US$500B) in a week to A$2.95T (US$1.92T), and Bitcoin plunged sharply to around $A77K ($49.8K), while Ethereum dropped 17% in just a few minutes on Monday. As of this morning, markets had bounced a little, and Bitcoin finished down 15% for the week to trade around A$85,370 (US$55,881), while Ethereum was down 24% to trade at A$3,839 (US$2,487). Everything else reversed by double figures, including Solana (-24%), XRP (-16%), Dogecoin (-21.8%), and Cardano (-21.9%). The Crypto Fear and Greed Index is at 17 or Fear, having fallen from 74 or Greed last week.
From the IR OTC Desk
Last week’s Bank of Japan (BoJ) interest rate decision has caused panic in risk assets. At their July meetings, the BoJ raised the underlying cash rate from -0.10bps to +0.25bps (the highest rate in 15 years. In addition, the BoJ outlined a plan that would see monthly bond purchases halve to 3 trillion Yen (circa US$19.6bn) by the start of 2026. This monetary policy decision appears to be a line in the sand from the BoJ, ensuring a rapid end to the persistent depreciation of the JPY. The timing, however, has been called into question following a more positive outlook to inflation, which looks to have peaked in January 2023 at 4.30%, to a June 2024 rate of 2.80%. Cheap Japanese borrowing in JPY versus USD cross-currency basis carry trade positions have been quick to unwind. The unwind of these trades appears to have caused the broader market dislocation, with Japanese equities having their worst-ever day since the crash of 1987.
In the US, the labour market now looks to be turning quickly (based on the month-month change in the unemployment rate). Last week’s US employment data included JOLTs job openings – which fell from 8.23 mil in May to 8.184 mil in June; the Employment Cost Index (ECI) – which fell from 1.1% in Q1 to 0.9% in Q2; the US unemployment rate – which moved up from 4.1% in June to 4.3% in July; and finally the US Average Hourly Earnings (AHE) – which moved down from 3.8% in June to 3.6% in July-all indicators highlighting a softer labour market and slower wage growth.
The movement in the US unemployment rate has prompted many economists to declare the US is now on the cusp of a recession, if not already in a recession. The forward indicator is referred to as the ‘Sahm Rule’ named after Federal Reserve economist Claudia Sahm. The Sahm rule indicates a recession when the 3-month moving average of the unemployment rate increases by 0.5% or more relative to its low point in the previous 12 months. The Sahm Rule is now on the recession border. With the next US Federal Open Market Committee meeting so far away (18th September 2024), monetary policy relief appears a long way away. In the meantime, we watch credit conditions carefully.
Today, the Reserve Bank of Australia (RBA) convened for their August meeting in Australia. With Q2 Trimmed Mean Inflation printing at 3.9% (YoY) relative to 4% (YoY) in Q1, the RBA was under limited pressure to increase the cash rate – particularly following this week’s events. In their statement today, they highlighted: The short-term interest rate market expects the RBA to cut the cash rate by 25bps at their November meeting. In Australia (AEST)
- Tuesday 2:30pm AU Interest Rate Decision
In the US (AEST)
- Tuesday 12:00am US ISM Services PMI (July)
In NZ (AEST)
- Wednesday 08:45am NZ Employment data/Labour Cost (Q2)
In China (AEST)
- Wednesday 1:00pm CN Balance of Trade (July)
- Friday 11:30am CN Inflation Rate (July)
On the OTC desk, we have been working hard to find the best sources of liquidity for customer orders. In general, during times of heightened volatility, liquidity can significantly reduce, causing market spreads to increase. This reflects a rapid change in credit conditions.
The speed of the flow has been indicative of market liquidations – this can be specific to leverage cryptocurrency trading as well as cross-collateral trading. History has shown times of high levels of correlation between US equities and cryptocurrencies. It would also make sense that the sudden change in JPY funding costs rapidly affects cryptocurrencies in line with other high-beta risk assets. This can be quickly reversed through monetary policy and liquidity accommodation. We continue to monitor both these inputs closely.
In stable coins, while market conditions have been relatively volatile for the product, all aspects of trading have remained open and liquidity sound. This has certainly been the case for USDC and USDT. These times of uncertainty usually slow the trading activity of alts – as spreads widen. Trading activity in BTC, ETH, SOL, USDC, and USDT have increased, however, in line with the increase in market volatility.
For any further information, please feel free to reach out.
In Headlines
Jump and the Yen carry trade
Crypto markets started selling off in earnest on Sunday as news emerged that Jump Trading had been moving US$315M (A$483M) of staked Ether to crypto exchanges. Selling crypto on a low liquidity Sunday is indicative of forced selling and led to rumours Jump was getting out of market making, blowing up, or needing to pay a big fine to the CFTC (its President stepped down five weeks ago amid reports of an investigation). But perhaps it just foresaw the market crash. However, Mads Eberhardt, a senior crypto analyst at Steno Research, believes Jump (like everyone else) was urgently trying to cover margin calls as the Yen carry trade unwound. For years, funds have been borrowing Japanese Yen at close to zero interest, to lend or invest in other markets with higher interest rates. But the Bank of Japan just raised rates, which caused the Yen to appreciate, and now all the funds are frantically selling stocks and crypto at firesale prices to meet margin calls or exit positions. Other market makers also sold a ton of ETH, including Wintermute, which sold 47K ETH, and Flow Traders (3,620 ETH). Jump also owns a lot of Solana.
Pay off the debt with Bitcoin says Trump
Pro crypto Presidential candidate Donald Trump has raised the possibility of paying off America’s eye-watering government debt with Bitcoin. Trump previously promised to keep any seized Bitcoin in a stockpile. “Who knows, maybe we’ll pay off our US$35 trillion (A$54T) debt by handing them a little crypto check, right? We’ll hand them a little Bitcoin,” he said. “If we don’t embrace it, it’s going to be embraced by other people. You know it’s a massive thing already. Did you read it’s bigger than any company in the world already… we might as well be the leader.” In related news, Republican Senator Cynthia Lummis introduced her bill to set up a Federal US Strategic Bitcoin reserve, and a second meeting between crypto leaders, Democrats, and White House officials was arranged but has reportedly now been postponed.
Morgan Stanley to offer Bitcoin ETFs
Morgan Stanley has become the first major Wall Street bank to open up Bitcoin ETFs to its wealthier clients. It told its army of 15,000 financial advisors that it would allow them to put clients into BlackRock and Fidelity’s Bitcoin ETFs starting Wednesday this week. Last week, the Bitcoin ETFs saw a net outflow of US$80.4M (A$123.4T) but have taken more than US$17.5B (A$26.9T) in inflows to date. The Grayscale Bitcoin Mini Trust also launched last week and is already in the top 10% of all new ETF launches this year for inflows. While Monday’s inflow/outflow figures are not yet available, the Bitcoin ETFs did a whopping US$5.09B (A$7.8T) worth of volume on Monday as markets melted down.
Ethereum ETFs looking more positive
As foretold last week, the Ethereum ETFs have been speedrunning what happened with Grayscale Bitcoin ETF outflows. There have been US$2.1B (A$3.2B) billion in outflows from Grayscale’s ETHE so far (around 23% of the fund). Outflows are starting to lessen, however, with two net inflow days last week. However, the ETFs finished up with a cumulative outflow for the week of US$169.4M (A$260M).
Independent Reserve CEO on APAC Digital Asset list
Adrian Przelozny, CEO of Independent Reserve, has been named at number 27 on the prestigious Blockchain APAC DA List. The list recognises the most influential figures in Australia’s digital asset landscape. Notable entries in the top 10 included ASIC chair Joseph Longo at No.1 and Treasurer Jim Chalmers at No.2, Drew Bradford, CEO of Catena Digital (8), and Lisa Wade, CEO of DigitalX (10).
Ethereum’s cross-chain plans for L2s
Ethereum creator Vitalik Buterin has acknowledged that L2 scaling has not led to a seamless user experience. “We want an Ethereum world which includes the Layer 2s, to feel like Ethereum and not feel like 34 different blockchains. Right now, we don’t have that yet,” Buterin said. He’s called on devs researching account abstraction to prioritise improving interoperability between L2s and said that the proposed ERC-3370 and ERC-7683 standards would help simplify cross-chain transfers. ERC-3370 is a proposal that would add a human-readable prefix to addresses to help prevent errors with cross-chain txs. ERC-7683 is a proposed token standard that allows users to specify the desired outcome of a tx rather than the specific steps needed to achieve it.
Where to from here?
Economist Alex Kruger argues the “debacle is obviously macro-driven, rather than crypto-specific” and argues that “a financial crisis mainly driven by a cascade of levered Japanese speculators is a much better alternative than a financial crisis driven by the US entering into recession.” Bitwise CIO Matt Houghan meanwhile argues that history suggests the crypto plunge is a buying opportunity, pointing to the 2020 Covid crash, which he called the “best buying opportunity in a decade.” Of course, contagion may still continue, so that’s not financial advice. History also suggests August is the worst month for Bitcoin returns, with an average loss of 7.82%. But in the long term, the future looks bright. Prior to the crash, Jan Van Eck, CEO of the eponymous US$107 billion (A$164B) asset manager, said that rate cuts and quantitative easing could see Bitcoin rally to US$350K (A$537K) – both of which are now more likely following the turmoil. Van Eck’s research team has also said that if major central banks adopt Bitcoin as a reserve currency, Bitcoin could skyrocket to US$2.9M (A$4.4M).
Lisa Wade joins the Independent Reserve podcast
The latest Independent Reserve Crypto & Bitcoin Podcast features a conversation between hosts John Toro and Lee Eaton, and Lisa Wade, CEO of DigitalX. In this episode, Lisa shares her extensive experience in both traditional and blockchain finance. She covers a wide range of topics including the Australian Bitcoin ETF, converting real-world assets into digital tokens, and the positive impact of investment. Watch the full episode on YouTube or listen to it on Spotify.
Until next week, happy trading!
