Bitcoin and ether dived yesterday to multi-month lows as worries over a possible US recession in the wake of soft data gripped financial markets while US Treasuries were among the day’s winners as investors rushed to safe-haven assets.
Bitcoin plunged 13 percent to US$51,560 (HK$401,282) at one time, while Ether slid 17 percent to its lowest since mid-January at US$2,277.
Crypto markets have gotten a boost this year after the US Securities and Exchange Commission approved an exchange-traded fund to track the spot price of bitcoin and ether.
More recently, bitcoin has fallen alongside other assets including global equities in a broad selloff as investors fear a US recession could be on the horizon, with rising geopolitical worries also weighing. It has lost over a third of its value since hitting a record high in March.
”It’s a big reminder that crypto in general are risk assets and sit at the pointy end of the risk spectrum,” said Tony Sycamore, market analyst at IG.
Bond traders are piling into bets that the US economy is on the verge of deteriorating so quickly that the US Federal Reserve will need to start easing monetary policy aggressively – before its next scheduled meeting – to head off a recession.
Previous worries about the risk of elevated inflation have virtually disappeared, giving way to speculation that growth will stall unless the central bank starts pulling interest rates down from a more than two-decade high. Traders now see a roughly 60 percent chance of an emergency quarter-point cut within one week.
That is fueling one of the biggest bond market rallies since fears of a banking crisis flared in March 2023.
The advance has been so strong that the policy-sensitive two-year Treasury yield tumbled last week by half a percentage point to less than 3.9 percent. It has not been that far below the Fed’s benchmark rate – now around 5.3 percent – since the global financial crisis or the aftermath of the dot-com crash.
The moves extended yesterday, with the 10-year yield hitting 3.7 percent. Bets on more aggressive easing spread to other regions, with German yields falling to the lowest in seven months on the view the European Central Bank will deliver bigger interest-rate cuts.
”The market concern is that the Fed is lagging and that we are morphing from a soft to a hard landing,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “Treasuries are a good buy here, I think the economy will continue to slow.”
Futures traders are pricing in roughly the equivalent of five quarter-point cuts from the Fed through the end of the year, indicating expectations for unusually large half-point moves over the course of its last three meetings. Downward moves of that scale have not been enacted since the pandemic or the credit crisis.
Bond traders have repeatedly misjudged where interest rates have been headed since the end of the pandemic, however, at times overshooting in both directions and caught off guard when the economy bucked recession calls or inflation defied expectations.
At the end of 2023, bond prices also surged on conviction that the Fed was poised to start easing policy, only to give back those gains when the economy kept exhibiting surprising strength.
”The market is overshooting and getting ahead of itself like late last year,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “You need validation from more data.”
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