All Three Major US Indexes Are at Record Highs
US equities blew out to another record high on Monday, led by the Nasdaq with a +1.6% gain and SPX rallying by 1%. Optimism over another supposedly China-US trade deal, bullish positioning into Mag-7 earnings, and expectations of another dovish Fed meeting propelled risk sentiment higher.
Cross-asset vols have also collapsed back close to record lows as investors piled back into risk-on positions, while global equities might also be making significant upside breaks with the Shanghai Composite appearing to break out of a 10yr downward trendline.
Cross-Asset Vol has Collapsed Back to Record Lows as Investors Wasted No Time in Turning Risk-On
Is the Shanghai Composiste About to Break Out of Its 10-Year Funk?
Markets are fully pricing in a 25bp cut in this month and December’s FOMC meeting, and traders are expecting more dovish language from the Fed Chair despite US macro basically in a govt data vacuum for nearly a month now. We expect Powell to suggest that policymaking is becoming trickier without timely economic data, hence justifying the Fed’s earlier base-case of another cut this month, and the prolonged government shut down to bring further downside risks to labour markets.
We don’t expect a lot of new policy guidance to be offered given the data blackout, and the focus to be on how quickly they will end QT (balance sheet reduction) as system reserves have returned to ‘ample’ levels. Market base-case would suggest QT to end in 1Q2026, with risks of a dovish surprise should Powell announce an earlier end to the balance sheet reduction.
Markets are Pricing in a Full Rate Cut in Both the October and December Fed Meetings, in Addition to an Imminent End to Quantitative Tightening as the Fed’s Dovish Policies Continue
Source: Bloomberg, FT
An Easy Fed + a Still Sticky CPI Continues to Support the ‘Debasement’ Narrative and Driving Asset Prices Higher
BTC has rebounded back to the $115K area, albeit with noticeably weaker momentum than equities, with prices basically having treaded water both on a monthly and quarterly basis. BTC implied vol has resumed its downwards trajectory as prices have stabilized, though vol skews are starting to be more balanced with some buyers looking to add top-side given the sizeable amount of long liquidation in recent months.
BTC Back to Range-Bound Market with Falling Implied Vols, With Some Upside Exposures Being Put on Via Skews as Spot Position Turns More Balanced
Source: Bloomberg, SignalPlus
We don’t see a lot of near-term catalysts for crypto prices here with DATs remaining on the back-foot, while ETF inflows have steadied after multi-quarter inflows. A resurgence in upcoming crypto-related IPOs before year-end might bring some FOMO energy back to the market, with price action likely to be sub-dued given the significant PNL damage suffered from the altcoin wipe out earlier this month.
In the meantime, position adoption momentum continues in stablecoins, with payment transaction volumes breaking de-correlating against spot trading volume, suggesting that there’s more capital being brought on-chain without purely going into speculative purposes.
Crypto Adoption Continues Via Stablecoins as Transaction Volumes Have Positively Decoupled Against Pure Trading Activities
Source: Stray Reflections, Artemis
Will a dovish Fed and teflon-stocks save us from an otherwise disappointing Uptober? Hope springs eternal…!