Sophia’s Thoughts On Yesterday’s Market Crash
A weaker-than-expected jobs report and the unwinding of carry trades triggered a significant market sell-off. Is a recession around the corner or is this just temporary market turbulence?
These are Sophia's Thoughts:
The cryptocurrency market faced turbulence this week due to macroeconomic data and global economic news, with Bitcoin dropping significantly following a weak U.S. jobs report and a massive sell-off in Japanese markets.
Key drivers of market turmoil include the unwinding of the Yen carry trade, recession fears stoked by a weak U.S. jobs report, and escalating geopolitical tensions in the Middle East.
Despite the recent market crash, our analysis suggests that the downturn may be temporary, driven by an overreaction by the part of investors.
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🚀 Last week’s market performance
The market sold off drastically this week falling 21.4%, marking one of the largest corrections of the cycle. Bitcoin (BTC) fell substantially as well, losing 19.2%. The worst performing coin was Pendle (PENDLE), which dropped an astounding 44.0% over the week. The best performing coin was UNUS SED LEO (LEO) which stayed neutral at 0% price movement, amidst the broader market sell off.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
⁉️ What Happened?
This past week was turbulent for the cryptocurrency market as it digested macroeconomic data and global economic news. On Friday, the U.S. released a weaker-than-expected July jobs report, revealing higher unemployment numbers. This announcement sent shockwaves through the market. Bitcoin's price dropped from around USD 65,000 to approximately USD 62,000 by U.S. market close.
Over the weekend, Bitcoin's decline continued as market participants digested the economic data. By Sunday, the price had fallen to around USD 60,000. The situation intensified when the Japanese market opened on Monday. Bitcoin experienced a sharp sell-off during this session, briefly plummeting to a low around USD 49,000, its lowest level since February, before beginning to rebound. The sell-off was not only concentrated in crypto. The SP500 is down nearly 8% from its highs, and Japan's stock market experienced its worst one-day sell-off since 1987 on Monday, plunging over 12%.
The crypto market's turmoil was further exacerbated by the unwinding of the Yen carry trade, following a recent interest rate hike by the Bank of Japan. This policy shift increased borrowing costs and strengthened the Yen.
What is the Yen Carry Trade? (The Wall Street Journal)
Unwind of massive Yen-funded carry has room to go, analysts say (Reuters)
BOJ Under Fire For Rate-Hike Timing After Japan Market Meltdown (Bloomberg)
Why unwinding of Yen carry trades can rattle global financial markets (Economic Times)
🗣️ What are people saying?
The recent market turmoil has been driven by several key factors, including the unwinding of the Yen carry trade, recession fears, and geopolitical tensions in the Middle East. The carry trade, an investment strategy where investors borrow in currencies with low-interest rates like the Yen to invest in higher-yielding assets, has been significantly impacted by the Bank of Japan’s (BOJ) unexpected rate hike to 0.25%. The rate hike was the largest since 2007 and marked a shift from years of ultra-loose monetary policy. It caused the Yen to surge, leading to forced liquidations of carry trade positions. "The Yen’s 7.5% surge over the past week has pummeled carry traders," reported Chelsey Dulaney from The Wall Street Journal. The ripple effect of this strategy reversal has contributed to the broader sell-off in risk assets, including cryptocurrencies.
Recession fears were further stoked by the unexpectedly weak U.S. jobs report, which showed slower hiring and a surprising rise in unemployment to 4.3%. This data triggered a sell-off in the stock market as investors worried about the potential onset of an economic downturn. Ben Casselman of The New York Times noted: "An unexpectedly weak jobs report on Friday — showing slower hiring in July, and a surprising jump in unemployment — triggered a sell-off in the stock market as investors worried that an economic downturn might be underway after all." The fear of a possible recession has undeniably contributed to market instability.
Geopolitical tensions in the Middle East have also played a role in the current market environment. The assassination of Hamas leader Ismail Haniyeh in Tehran has escalated tensions between Iran and Israel, raising concerns about potential wider regional conflicts. CNN reported that Iran’s Supreme Leader Ayatollah Ali Khamenei vowed to retaliate, further unsettling the global markets. The heightened uncertainty surrounding these geopolitical developments has led to increased pressure on risk assets.
🧠 Sophia's Intelligence
Yesterday's market crash caught Sophia, our crypto intelligence bot, by surprise. At the start of the day, Sophia had envisioned a rally after the poor performance of the crypto market over the weekend. Indeed, since the crypto market reached a 4-week high on July 21 and started a slow correction afterwards, Sophia's intelligence suggested that valuations were coming in line with fundamentals while sentiment continued to provide a lift. Sophia's intelligence signaled a bullish period rather than a downturn.
Sophia continued to defy market developments and was bullish today. And, this call appears to be correct. The crypto market has bounced back slightly, with Bitcoin gaining 2%. Overall, it is our conviction that the downturn is temporary and unjustified by crypto-specific and macroeconomic fundamentals.
Second, the fears of a US recession that spooked the market over the weekend also appear unfounded. The US unemployment rate did rise in the last month. But it remains at 4.3% – a level that is below the critical value of 5% below which many economists consider an economy to operate at full employment. And the unemployment rate remains at levels near historic lows going back to the 1970s.
Third, inflation in the US has been moderating in the US. The last inflation report showed US inflation at 3%, only one percentage point away from the Fed's target 2% rate. And the market now overwhelmingly expects that rate cuts will begin in September and may occur several times this year. We view lower interest rates as a catalyst for another crypto bull run. That's because investors flock to high-risk-high-return assets when the yields on safe assets, which are driven by interest rates, are low.
Finally, we believe that the concerns of the unwinding carry trades are not as significant as they may appear. If Japan continues to raise interest rates, it will put pressure on many speculative trades that relied on cheap money in Japan to invest in risky securities (like cryptocurrencies). This may imply that many positions will be closed out or liquidated, putting downward pressure on financial markets. However, the amount of money at stake in carry trade transactions is comparatively small. The value of the cross-border liabilities denominated in Japanese Yen is USD 1.55 trillion. That's about half the market cap of Apple. Of course, there is possibly leverage and the USD 1.55 trillion can command a multiple of this value in assets. As a result, the unwinding of carry trades may be an important risk factor for global markets going forward. However, we do not view this as the make-or-break for crypto right now. There are bigger issues playing out right now, like the Fed's next steps on interest rates or the outcome of the upcoming election in the US.
Volatility has returned to the crypto market. While the turbulence of the last couple of days may have caught some investors by surprise, big ups and downs are common in the crypto market. The best move for investors right now is to remain patient, weather out the storm, and rely on research and intelligence to make informed decisions.
First, Sophia's analysis of the drivers of individual cryptocurrencies suggests that coins are not currently overvalued. If anything, Sophia's intelligence suggests that there is more room to grow given the strong sentiment that continues to be expressed in social media and online platforms. Do you want to stay up-to-date on the latest crypto intelligence? Use the offer code ILxYOU to join Indicia Labs for free.
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