The Overnight Report: Bitcoin Ruins The Rally

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Led by a sharp reversal in Nasdaq, US indices fell sharply to close at the lows of the day, coinciding with Bitcoin's sell-off.

The ASX200 is set to lose yesterday's gains with ASX200 futures pointing to a -1.6%-plus sell-off.

Good Morning,

Post Nvidia results yesterday, the ASX200 rose 105pts or 1.2% to 8,553 with nine out of eleven sectors closing higher.

Miners, tech and banks led the gains, while energy and utilities lagged.

SPI futures are indicating those gains are about to disappear just as quickly on Friday.

For more insights on how weakness in Bitcoin is affecting US and global equities, see comments by Interactive Brokers’ Steve Sosnick below.

What happened overnight, NAB Markets Today Research

US September payrolls data is viewed as dated and an inconclusive indicator but it is the last payrolls report FOMC members will see before the 10 December meeting with October scrapped and November delayed. 

Payrolls growth surprised at up 119k, against the consensus for up 53k. Two-month revisions were -33k, leaving the three-month average near 60k, within estimate of breakeven. Growth in the month was led by construction, which had been declining, healthcare and leisure and hospitality.

While payroll gains were solid, the unemployment rate rose to 4.4%, above consensus for 4.3%. Unrounded, it rose 12bp to 4.4%. The unemployment rate was already close to the FOMC’s median projection of 4.5% in Q4.

Driving the rise in the unemployment rate was a continued uptrend in the number of people unemployed after permanent job loss. More timely initial jobless claims ticked down again to just 220K this week and show little cause for alarm, but continuing claims for the prior week rose to a new cycle high.

The market reaction was modest but took its cue from the rise in the unemployment rate. US yields were around -5bp lower on the data leaving -2yr yields around 3.55%. The 10yr yield was -4bp lower over the day at 4.10%. Pricing for a December cut rose to 40% from 30%. 

A couple of US banking houses dropped their calls for a December cut. Speaking after the data, Hammack said the report was mixed and dated and reiterated her view that policy needs to remain restrictive to lower inflation.

Fed Governor Barr said the Fed needed to be careful and cautious now about monetary policy as he was concerned inflation was still around 3%.

US equities erased earlier gains. The S&P500 fell -1.6% having earlier been up nearly 2%. Nvidia posted strong earnings that affirmed the strength in chip demand after the close yesterday, but a more than 5% gain after hours has turned into a -3.15% decline. 

The Nasdaq was up 2.6% before turning lower around 11am and closed down -2.16% on the day.

While there was no obvious catalyst apart from a return to the concerns about valuations and the extent of AI investment spending that has been a recurring feature of the last couple of weeks, the reversal coincided with a sharp sell-off in Bitcoin.

European bourses were generally higher, with the Euro Stoxx50 up 0.5%, though did pare earlier gains late in the session as US stocks began their retreat from intraday highs.

In currency markets, the USD was little changed against the euro at 1.1537, lost -0.2% against the pound, but was stronger against commodity currencies, helped by the shift down in risk sentiment. The AUD is the weakest of the G10 currencies over the past 24 hours, losing -0.4%. It currently sits around 0.6455 after visiting an intraday low of 0.6436. 

In Japan yesterday, BoJ Board member Koeda gave a speech suggesting the BoJ needs to proceed with interest rate normalisation, pointing to real rates at significantly low levels.

Her comments suggested she is not far off voting for a rate hike, joining two other hawkish members who have previously voted to hike.

Bloomberg reported PM Takaichi is set to unveil the largest spending plan since the pandemic era, including 17.7 trillion yen (USD112b) of spending through a supplementary budget, adding to the 4 trillion yen already budgeted for.

In other news of note, Ukrainian President Volodymyr Zelenskiy said he’s agreed to work on a peace plan drafted by the US and Russia and expects to talk with Donald Trump in the coming days about the proposals.

The plan involves a 28-point proposal that includes demands for Ukraine to cede territory and the removal of sanctions from Russia.

Nvidia to the rescue, Bitcoin spoils the fun, Steve Sosnick, Interactive Brokers

When I sat down to dinner with friends last night, one of them greeted me with “we just avoided a crash, didn’t we?” 

He was of course referring to the positive response to Nvidia’s earnings report yesterday afternoon. Had the data or guidance disappointed, or had Jensen Huang been less strident in his assertions about the lack of an artificial intelligence bubble, a psychologically fragile market could have tumbled. Unfortunately, a slip in a theoretically uncorrelated asset spoiled the morning.

After I began this piece, a troubling phenomenon occurred.  Shortly before 11 a.m. EST, I was on a call, being asked about the rebirth of equity market enthusiasm in the wake of good reports from NVDA, Walmart, and the overdue September jobs data. 

At that point S&P500 was trading about 1.5% higher. My counterpart asked if I thought the rally could continue, and I said while it was possible, I was becoming concerned because bitcoin was once again flirting with the US$90,000 level after rallying earlier in the morning. 

He asked if I really thought that a break in bitcoin could affect the entire US stock market, and I said, “unfortunately, yes.  It’s become such a proxy for speculation that I can’t be the only person using it as a signal”.

For better or worse, I was proven correct almost immediately when SPX gave back more than half its gains in minutes.  Since then, the rout has continued.

As a long-time systematic trader, it tells me that algorithms are acting upon the relationship between stocks and bitcoin. Traders have always sought to find relationships between asset classes, and there are teams of skilled quants who pore through data, both long- and short-term, seeking inputs that guide their decisions.  We called them “leads.” 

The most reliable short-term lead was typically the spread between SPX futures and the index level.  If it moved to a premium or discount, the index would typically follow. 

But it is normal for other factors to influence market psychology in any given day, week, or month.  Those can include bond yields of different tenors, currency pairs, or something completely different, and those have a way of changing from time to time. 

In recent days, bitcoin has become one of the most reliable leads. Note how the moves in bitcoin and futures on the Nasdaq100 line up almost perfectly over both the 2-day and 3-week periods.

While correlation is not causality, that can become the case if traders large and small are using that as a basis for their decision making.

This morning’s stunning reversal is a sign that market psychology has become quite brittle.  If investors were truly enamored with Nvidia’s results and the assurances about the lack of an AI bubble, then by no means would we have succumbed to an algorithmic quirk so quickly. 

We might have seen a bit of a blip lower but carried on nonetheless. 

Instead, we got a complete reversal and then some. 

Meanwhile, because the correlation is being led by Nasdaq, Walmart remains over 5% higher as I type this.  Ironically, that could change.  

Walmart announced it will be moving from the NYSE to Nasdaq, which would then make it eligible for inclusion in Nasdaq.  But with a market cap of about one-tenth that of Nvidia, the megacap techs will continue to dominate the key indices and investor psyche.

Corporate news in Australia

-Crown sells Melbourne Capital Golf Club to the Fox Family for $100m.

-England’s ‘Barmy Army’ is expected to contribute $300m to the Australian economy for the Ashes tour.

On the calendar today:

-NZ Oct Trade Balance

-US Aug Wholesale Trade

-US Sept Earnings

-ADORE BEAUTY GROUP LIMITED ((ABY)) AGM

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FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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