On the Margin Newsletter: Is the Fed concerned about this market unwind?

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Welcome to the On the Margin Newsletter, brought to you by Casey Wagner and Felix Jauvin. Here’s what you’ll find in today’s edition:

• Betting markets say the Fed is headed toward an emergency rate cut, we say otherwise.
• Crypto stocks are back in the green. Here’s what’s fueling the rebound.
• VP Harris has a VP pick. We break down his crypto track record.

We’re looking for feedback from our On the Margin listeners and readers. Share your thoughts here.

Surprise! No surprise rate cut yet

This week, panic hit markets to such a degree we saw the third-highest print of the VIX index ever:

Though odds have waned, traders began to price in a 60% probability of an inter-meeting FOMC cut within the next week.

Much of the discourse has been sifting through whether this downturn in markets has been caused by market structure dynamics — such as position unwinds — or a fundamental shift of the macroeconomic landscape.

Discerning which dynamic is driving markets is key to understanding whether the Fed is concerned about this market unwind or not — it doesn’t care if your 401k is down 20%; it does care if funding markets seize up and credit spreads blow out. Here’s a few charts I like to look at for a better handle on the core components of the market the Fed actually cares about:

The chart below contrasts the VIX, a measure of volatility within equities, and MOVE, a measure of volatility in credit markets.

There was a huge move up in the VIX, but the MOVE index remained range-bound and unbothered. Part of this is due to the flight-to-safety bid to long-end Treasurys during market crashes. If Treasury markets were to seize up, we would still see outsized volatility in the MOVE figure.

HYG is an ETF that tracks high-yield corporate bonds, whereas HYGH is a rate-hedged version that isolates credit stress specifically. As a quick reminder, bonds can lose value in two ways: an increase in interest rates, or an increase in the probability of default.

In the chart below, we see that the downturn was isolated to credit risk concerns as HYGH fell much lower than HYG. Although it’s bouncing today, this does signify that the equity unwind we’ve been seeing has started to percolate into credit markets.

Although still quite far from any meaningful level that would require Fed intervention, it is something to keep an eye on.

Let’s look at the spread between high-yield (HY) and investment grade (IG) debt. Typically, this spread widens when credit spreads increase due to increasing concerns of default. Since HY has a greater composition of credit spread to its yield compared to IG, it widens during recessions. As noted in the chart below, spreads did widen, but not to any substantially concerning level yet. We will need to keep an eye on this spread for any continuation.

Overall, there’s been a lot of turmoil in markets this week that has justifiably increased the odds of the Fed cutting over the next few meetings. However, when we look at the core markets that the Fed cares most about (such as credit), something such as an inter-meeting cut is getting a bit dramatic for my taste.

— Felix Jauvin

$49 million

The amount of new inflows that poured into US spot ether ETFs on Monday, even as ether itself lost as much as 20%.

The figure comes as spot bitcoin ETFs lost $168 million amid yesterday’s broader market turmoil. Bitcoin and ether spot prices were both on the rebound Tuesday, up around 4% and 1%, respectively, over 24 hours as of 2 pm ET.

The stocks that cried wolf…

After just 21 stocks in the S&P 500 closed higher yesterday, things are looking up.

The S&P 500 was up 1.6% two hours into the trading session while the tech-heavy Nasdaq moved 1% higher.

Crypto-related equities were riding the recovery wave Tuesday, too. Coinbase, which lost as much as 20% Monday, was trading 3% higher at 2 pm ET today.

MicroStrategy, after sliding as much as 25% Monday, was also back in the green today, up 5% at 2 pm ET.

Core Scientific moved a whopping 16% higher Tuesday. While the general stock market rebound doesn’t hurt, this move was likely fueled by an announcement that the bitcoin miner would supply additional power to host CoreWeave’s NVIDIA GPUs.

The Japanese yen and VIX pulled back this morning, helping to ease recessionary concerns and calm markets after Monday’s global selloff.

As Felix mentioned above, the VIX spiked to 55 yesterday, the highest level since March 2020. The volatility index pulled back around 30% to 27 Tuesday morning, but is still up 66% over the past five trading days.

The yen eased against the US dollar for the first time since the start of August. The greenback has now fallen around 6% against the yen over the past five trading days.

Markets are still calling for a September rate cut though, although traders are less certain than they were yesterday. Fed fund futures showed a 67% chance of a 25 basis point cut next month Tuesday, down from 85% Monday but up from 11% a week ago.

The unfortunate news for most investors is that while they may think the sky is falling, the Fed does not. It’s going to take more than one lackluster jobs report to convince them that a rate cut is necessary.

— Casey Wagner

VP gets a VP

Vice President and presumed Democratic nominee Kamala Harris has tapped Minnesota Governor Tim Walz as her running mate.

Walz’s crypto policy is…not well-documented. He has not made any public policy statements regarding the industry, but did recently sign a new bill into law that seeks to protect crypto ATM customers.

The legislation, signed in May, went into effect this month and requires crypto kiosk and ATM operators to display warnings to customers. New customers are also limited to transactions under $2,000 per day and have 14 days to file a report in the event of fraud, which can result in a refund of losses.

The Minnesota bill received serious backing from the AARP, which also advocated for similar legislation in Vermont and Rhode Island.

The effort is yet another example of states taking crypto regulation into their own hands while federal legislators struggle to get on the same page.

I’ve heard the Harris camp is making the rounds to crypto lobbyists and advocacy groups. I’ve also heard her people weren’t too happy with Bitcoin Magazine CEO David Bailey after he claimed Harris declined an invitation to speak at Bitcoin 2024 after being “in talks” with event organizers.

(Blockworks reached out to the Harris team to confirm these claims and has not heard back.)

Still, I think we are a ways from a comprehensive crypto policy plan from Harris/Walz (remember, Trump also has yet to release a written platform), if we get one at all.

— Casey Wagner

Bulletin Board

• It looks like former Phoenix Vice Mayor Yassamin Ansari is slated to win the Democratic nomination in Arizona’s third Congressional district after a close race triggered a recount Monday night. Ansari last month co-signed a letter to the DNC demanding more favorable crypto policies from the party.
• CoinShares, listed on the Nasdaq Stockholm, announced Q2 earnings today. The company said it doubled its revenue year-over-year and sold its FTX claim for a recovery rate of 116%.
• Household debt is on the rise, a new report from the Federal Reserve Bank of New York shows. Total household debt rose by $109 billion during the second quarter, bringing the national total to $17.8 trillion. Mortgage balances were the biggest contributor, which rose $77 billion.

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