Global Markets Fall on First Monday of August

Headlines

• The Nikkei Index fell over 12% on Monday due to the unwinding of the yen carry trade, this was the largest slide for the index since 1987.
   
• The yen-carry trade had cascading effects on global markets elevating the Volatility Index to highs of 65 before market open on Monday.  
   
• Investors have been allured by US bond markets with long and short-term yields falling dramatically.  
   
• Bitcoin saw a selloff this week but has shown resilience to rise 16% since the drawdown.
   
• Ripple Case is Over: Fined $125 Million and Issued SEC Injunction.

News by Sector

Crypto

• As global markets fell on Monday, Hong Kong's ETF market saw $30.8 million in inflows, the largest day since their debut.  
  
   
• Solana launched Ethena’s USDe stablecoin on the network which will allow Solana users to transact USDe across applications in the ecosystem.
  
   
• The IMF has explored methods and strategies for managing fiscal and financial risk related to crypto with the El Salvadoran government.  
  
   
• The SEC v. Ripple case has reached its conclusion, Ripple Labs must pay $125 million in penalties for improperly selling XRP, which is less than the $2 billion sought by the SEC. The case, closely watched in the cryptocurrency sector, initially accused Ripple and its executives of raising over $1.3 billion through unregistered sales. 

Forex

• The dollar fell to the $102.145 support level but rebounded higher and is sitting near $103.19.
  
   
• Members of the Fed have argued that the low nonfarm payrolls data does not necessarily mean the US economy is faltering, however the overwhelming evidence has shown that rate cuts are needed at the next meeting.  
  
   
• Asian currencies are expected to continue strengthening against the dollar, albeit in a more sustainable manner, as the yen-carry trade unwinds over the next few weeks.  

Equities

• Bullish investors are buying the dip on US tech stocks after this week's sell off.  
  
   
• The Nikkei has bounced back rising 11% to $34,800 after falling as low as $31,230.
  
   
• The VIX, which tracks the stock market's expectation of volatility based on S&P 500 index options, recorded its highest close since October 2020.
  
   
• Recession fears and the unwind have erased around $6 trillion from global stocks in the last 3 weeks.  

Chart Analysis

S&P 500

• If we look at the S&P 500 since the pandemic, we can see that it has been extremely bullish.

   

• The first bullish sentiment came from the Fed cutting interest rates to near 0% which was followed by a correction in the market as Fed Chair Jerome Powell stated that inflation was in fact real and not “transitory”.  

   

• As the Fed raised interest rates this resulted in the yen-carry trade as investors took advantage of the interest rate differentials by borrowing cash for 0% in Japan and deploying these funds into the US stock market.  

   

• Now that the BoJ has raised interest rates and alluded that more will follow, we are seeing an unwind in the carry trade which means that investors will need to start pulling out of the underlying positions where they deployed this capital.  

   

• If the unwind continues we can expect these first 2 support levels to be hit.

1. $5,020
2. $4,722 

Bitcoin

• Bitcoin fell to a low of $48,900 during the correlated sell-off.  
• RSI touched 30 as the digital asset was massively oversold.
• However, the breakout from the trend was short lived and it has since retraced back higher.  
• The digital asset has displayed sturdiness and is trading near $57,000 at the time of writing.  

EUR/USD

• EUR/USD has been trading within an asymmetric triangle since 2023.  
   
• If the bond market attracts more attention from investors during this period of uncertainty, we may see yields fall further and the dollar follow suit.  
   
• This will push EUR/USD higher, and a breakout of this triangle could result in a push for the $1.1243 resistance level. 

Gold

• Gold has been trending higher since April this year, consistently setting new all-time highs as global markets react to uncertainty. 
   
• This week's sell-off did not have a major impact on the precious metal and it behaved detached from the market volatility which flooded global markets.  
   
• In times like these we expect to see bullish momentum for safe-haven assets, particularly gold, however that has not been the case.
   
• The asset continued trading within range and has slightly bounced off the 50-day EMA showing a neither bullish nor bearish response to the unwind of the carry trade.