Black Monday: Is this a blip or the start of something worse?

Why you should read this report

• Uncover the three primary factors driving the current market pullback, including a surprising development in cross-border economic markets.
• Gain insights into this week's critical economic data releases and how they could shape market sentiment.
• Peek into Cryptonary's analysis of whether this is a temporary scare or a deeper issue and what it means for crypto.
• Get an insider look at how we are positioning our portfolio in response to these market movements.

Disclaimer: This is not financial or investment advice. You are responsible for any capital-related decisions you make, and only you are accountable for the results. 

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Why is the market pulling back?

The market is pulling back for three main reasons, in our opinion:

1. Growth scare from last week
2. The Yen carry trade unwinding
3.  Iran/Israel conflict

Firstly, the growth scare. This is due to a weaker-than-expected jobs report last Friday. However, the Unemployment rate is still historically low at 4.3%, despite the sharper move up in recent months. Additionally, you had the ISM Services in contractionary territory last month; however, it just came out at 51.4, suggesting it's back in growth territory. This should settle some of the US economy's growth scares. In our opinion, the growth scares aren't really warranted. 

The second is the Yen carry trade. This has been a massive trade from TradFi participants for many years. It works as follows:

• Traders borrow Yen; they borrow Yen as its borrowing cost is very low.
• Traders buy US Bonds or Stocks with that Yen; traders buy an asset (US stocks or Bonds) that yields a much higher return than the cost of borrowing the Yen. 

We're now seeing that as the Fed in the US looks to be beginning an Interest Rate cutting cycle - and Friday's weaker-than-expected jobs data have sped this up - and the Bank of Japan is raising rates, so the rate differential is closing. 

This means that the Yen is appreciating against the Dollar, causing the unwinding of the above trade. US investors now need to sell the US stocks they've bought with the Yen they borrowed. They get back USD, trade it back to Yen, and then pay off the Yen loan. 

In short, the Yen is becoming more expensive to borrow, particularly against the USD, and therefore, traders are closing out this trade, but it causes a sell-off in risk assets. 

The third scare is what looks to be an upcoming escalation from Iran against Israel for the assassinations of key Hamas and Hezbollah leaders. This is warranted, but we don't expect Iran to want to escalate to a full-blown regional war. This should be a short-term scare. 

All in all, the above is a perfect storm for bears in the short term. However, we still see a labour market that is okay for now while the US continues to produce positive GDP prints. 

The issue is that the Fed is now behind the curve and too restrictive. This opens the door for 50 bps of cuts in September and November. I'm thinking of 100-125 bps of Interest Rate cuts by the end of the year. 

Key data this week

This week's key data is the ISM Services, which came out at 51.4. This positive data suggests expansion in Services rather than contraction, i.e., growth. It shuts up the "growth scares" argument for now. 

The second key piece of data is Thursday's Jobless Claims. The market will want to be reassured that there aren't major problems in the labour market, so it will want anything that isn't a high print. 

We also have Fed-speak towards the end of the week. The market will be looking for dovish and reassuring comments from Fed members.

Cryptonary's take

We're mainly watching whether this is just a growth scare or if there is a much deeper underlying problem. 

In our opinion, we think this is just a growth scare. The economy and labour markets will likely be able to continue holding up, and in 8-12 weeks, markets might be substantially higher and not even that far off from their prior highs. 

We see it as likely that the Fed will now make 100-125 bps of cuts this year, and we don't think they'll make an inter-meeting rate cut. This would suggest that the Fed is panicking, and it would really spook the market. So, I (Tom) see little to no chance of this happening. 

Ultimately, there are still risks here, and our bags are down substantially. However, our opinion doesn't change unless the data changes. Price is not the determining factor; it's the data. For now, the data suggests that rate cuts are coming, liquidity is likely to improve, and the US is still seeing growth with a labour market that isn't weak. Of course, we will continue to pay attention to any possible changes. 

Personally (Tom), I have been adding this morning. I am now completely all in with USDT, though. I will look to de-risk slightly on any major move close to the highs to take off some of the USDT I have perhaps somewhat over-risked today just because I think the opportunity is so ripe. 

BTC

In keeping this super simple, today's price action is a huge move. Between $50,400 and $52,800 is a support zone, and even if there are meaningful wicks below this area, if price can close in or above this price zone today, that would be very positive. 

While a move down to $44k can happen, we don't expect it to. Could the wicks at $49k be retested, especially if Iran strikes? Sure. But, assuming the growth concerns don't worsen (we don't expect they will), then we think this is the bottom or very close to it. Hence, we have added some risk today. When Q1 25 comes around, we believe the buys we've made today will be very profitable.

However, it's possible that over the next 2-6 weeks, we see a range-bound market around the lows. But, come October/November, we expect to return to the highs.