Monday's Markets Update (October 7, 2024)

08 Oct 2024 by rate3

On Monday, equities tumbled as investors now assign a 95% chance of a 25 basis point cut in November. Globally, crude oil climbed to a six-week high, while steel prices reached their highest level in three months, as the dollar remained elevated due to the rising threat of global conflicts. Meanwhile, BTC and ETH stayed unchanged from their post-drop levels of approximately $62K and $2.4K amid a lack of corporate investor interest driven by political uncertainty.

Details

Consumer credit increased by $8.93B in August, following an upwardly revised $26.63B jump in the prior month, and below market expectations of a $12 billion rise. Consumer credit increased at a seasonally adjusted annual rate of 2.1 percent. 1Y trend: "Up" (Fed)

Crypto

Elon Musk believes Polymarket could more accurately predict the presidential election than traditional polling. He recently gave a speech supporting Trump, who is leading Harris (51 to 48) in the polls according to Polymarket. (source)

World Markets

Retail Sales in the Euro Area increased 0.80 percent in August MoM. 1Y trend: "Up" (EC)

Currencies

The dollar index held around 102.5 after surging half a percent in the previous session following a stronger-than-expected jobs report (254K vs. 140K expected), while the unemployment rate fell to 4.1% from 4.2%. Markets now see around a 95% chance of a more modest 25 bps rate cut in November. 1Y trend: "Side"

Commodities

WTI crude oil futures climbed to $77.1 per barrel, a six-week high, as tensions in the Middle East escalate. Investors are focused on whether Israel will respond to last week's Iranian missile attack. 1Y trend: "Side"
Steel rebar futures surged 7% to CNY 3,420 per tonne in the last session of September, the highest in three months, amid an improved construction input outlook after key Chinese cities relaxed home-buying curbs. 1Y trend: "Side"

Comment: Macro&Crypto

Macro:
In the long term, service-side inflation, which had initially cooled down until May and June—alongside commodity-side inflation that decreased due to adjustments in supply chains following post-enclosure and downward pressure from the Fed and other central banks—has begun to re-accelerate. This resurgence is largely attributed to high employment levels, driven in part by political factors and increasing societal pressure on both politicians and corporations.

Simultaneously, the markets, which consistently reached all-time highs over the past year, are now starting to decelerate. The media narrative has also shifted; it has transitioned from discussions of "stagnation, which we will avoid due to Fed easing" to more recent commentary asserting that "the Fed was too early to declare a victory parade." This indicates that we may be entering a period of stagflation, which is likely to last until major geopolitical conflicts are resolved (at least partially) and we re-enter the time of open (might be "semi-opened") and low-tariffs markets. However, as it looks at the moment, it may take decades for all these geopolitical issues to be sorted out.

Therefore, we are facing an extended period of slow transition toward a stagflation regime globally. During this time, the Fed and other financial regulators may be compelled to alternate between periods of quantitative easing and tightening. In an inflationary environment (stagflation = inflation + stagnation), where markets are flooded with liquidity, stock prices may rise, but this growth is expected to be highly volatile. Investors will find themselves caught between disappointing corporate earnings reports—due to shrinking market shares for most companies—and rising profits for a select few large corporations that leverage their scale to maintain higher rate of growth and lower prices.

Crypto:
As for cryptocurrency markets, they are also positioned for growth. Investors in developing countries may seek refuge from inflation, while corporate investors are likely to park excess cash in cryptocurrencies.

We still anticipate that the Nasdaq will decline to the range of 15,000 to 16,000 at some point over the next year, followed by a recovery fueled by government stimulus. Regarding BTC, a correction to $50K may accompany the Nasdaq's drop or be triggered by political factors, such as a DEM victory in the elections. However, inflationary pressures are likely to drive BTC prices up again, potentially reaching new highs within the next 2-3 years.

As for other cryptocurrencies, their pricing is heavily influenced by political factors, with 80-90% of their trading volume originating from the USA. The continuation of a DEM government could pose significant challenges for many local crypto companies.

We remain cautiously optimistic about ETH, expecting it to rise to $5K to $8K within the next 2-3 years, as well as SOL, which we believe could increase by 2-3 times during the same period. Aside from BTC, we suggest maintaining a portfolio allocation of 20% in SOL and ETH and 80% in cash over the next 4-6 months. This strategy will allow us to assess the political landscape before starting to accumulate assets again.