Crypto markets have erased all gains from last Friday’s post-Jackson Hole risk-on rally. Rate cuts remain on schedule for September, with a 25 basis point (bps) reduction anticipated as a bullish non-event. Meanwhile, the likelihood of a 50 bps cut, which could have a bearish impact, has slightly decreased to 34.5% from 36% last week. The market is currently pricing in a 25 bps cut in September, another 25 bps in November, and a 50 bps cut in December.
In US equities, the S&P 500 Equal Weight Index has rebounded more quickly than the traditional S&P 500, indicating smaller caps are outperforming the “Magnificent 7”— a pattern typically seen during rate-cut cycles. Crypto has historically maintained a strong positive correlation with small caps, so if this trend holds, crypto could outpace traditional risk assets.
Funding rates have remained nearly flat or slightly negative due to a leverage wash-out, resulting in neutral positioning. We anticipate a return to net long positions towards the end of summer if the USD 58,000 level holds. In the options market, front-end volatility continues to be aggressively sold, particularly on the call side, with skew favouring puts up to the 29NOV24 expiry; only the December expiry shows a preference for calls.
As we approach next week’s non-farm payroll report, we expect market volatility to continue its downward trend as positioning adjusts for potential Fed rate cuts.
We believe any pullbacks in equities and crypto will be short lived. With Powell and the Fed poised to begin a rate-cutting cycle, increased liquidity is expected to lift risk assets higher. We are on the verge of a significant shift in monetary policy.
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