Weekly Analysis
Chairman Powell was ‘confidently dovish’ in the latest FOMC, and acted aggressively with a 50bp front-loaded cut while still advocating an economic soft-landing. The result was clear – a significant dovish impulse to celebrate the official start of a new Fed easing cycle, with risk markets taking about 12 hours to digest the message before driving equities to new all-time highs. Equities have managed to handle negative September seasonal exceptionally well, and even Trump’s fading polls have done little to discourage the risk-on rally with high-beta sectors such as AI stocks looking to re-accelerate again.
We believe that a 50bp cut at this juncture is ‘unconventional’ based on economic fundamentals alone, so the Fed’s action should be seen as an explicitly dovish signal that markets are right to respect in the near-term. Macro markets are likely to continue on a slow melt-up this week as a base case, with option markets pricing in little risk premium until NFP on October 4th. We do not expect Fed members to ‘rock the boat’ with their upcoming speeches, and the path of least resistance is likely to be up until further notice.
For cryptos, prices have staged a decent recovery with BTC rallying 6% on the week as the correlation with equities (and gold) has returned to 2-year highs. The particular strength of the Altcoin rally is an encouraging sign and might be suggestive of a more impulsive rally in the near term, as long as equity sentiment holds up. BTC spot inflows have resumed somewhat in the past week and might be on pace to make new cumulative highs before the month is over.
In addition, another positive for ETF inflows might come from the SEC’s approval of new ETF options listing. As we have been advocating for a long time, options are a dominant asset class in TradFi and are favored by many institutional players, and its prominence will grow over time in crypto as well.
Looking ahead, the market will focus on a busy docket of Fed speakers who are exiting their communication blackout periods post-FOMC. Particular focus will be on Powell’s comments on Thursday as markets will gauge his reaction to the substantial easing in financial conditions, while the only major US data of note will be Friday’s PCE.
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