It’s the 1st of August. The two big central bank decisions are behind us and summer is in full swing. So what comes next? Where will markets be at the end of this year? Nobody knows the answer to that question but I can almost guarantee you one thing: there is turbulence ahead.
Just like Japanese summer, the volatility already got started in July. However, we seem to have entered a new phase and central banks are the main drivers of the momentum shift.
Having hiked rates to levels unseen in 15 years, there is little doubt that the BOJ has entered a tightening cycle. Governor Ueda did not rule out another hike this year and the yen responded quickly to his comments, rising to 150 against the dollar. Today it is trading at around 149. Weston Nakamura sees 152 as the most important price level in global macro right now and we are already well beyond it.
Japanese stocks reacted positively to yesterday’s decision, pumping across the board. However, the Nikkei 225 index slumped -2.5% today as exporters felt the pinch of a stronger yen.
US tech investors rotate into small caps
In the US, Fed chair Powell left rates unchanged while hinting that he is getting closer to a cut. The market fully expects this to happen in September and there will be visible disappointment in people’s brokerage accounts if it doesn’t. Volatility is already rearing its head. Tech stocks have sold off over the past month amid fears that the AI bubble might be bursting. Nvidia has been trending down from its 6 June high of $140.76 and a -7% dump on 29 July seemed ominous, but last night it pumped +12.7% after AMD’s better-than-expected earnings release. Go figure…
Hats off to strategist Tom Lee for calling the rotation into small caps. IWM has been the main beneficiary of the tech selloff.
The crypto coaster rolls on
Not to be outdone by chipmakers, crypto remains unpredictable over short time frames. At the Bitcoin conference in Nashville last week, none other than Donald Trump showed up to play to the crowd. His list of “promises” included: keeping the Bitcoin the US government has seized as a strategic reserve, (yes, wow!) firing Gary Gensler on day 1, ending the democrat’s war on crypto and making the US a leader in mining.
The air quotes around “promises” don’t need much explanation. Trump has zero interest in crypto and is plainly exploiting the dem’s antagonistic stance toward the industry for votes. But don’t let that distract you from the bigger picture: governments are examining Bitcoin as a strategic hedge against their own money-printing excess. The fact that this conversation is even happening is remarkable. Bitcoin game theory is going to get very interesting in the months and years ahead.
Bitcoin is back in the $64,000 range today, as it appears that the Biden/Harris camp may be selling off the reserve that Trump promised to keep. It’s never boring. See my Bitcoin bull market update for more.
Meanwhile, investors in Japan received a lesson in FOMO from Bitcoin proxy Metaplanet Inc. this week. Shares went on a tear after the company announced its Bitcoin treasury strategy in April and many people piled in late. Now the stock is coming back down to earth with a bang as the excitement wears off. Shares are down over -70% from their 24 July high and the move down doesn’t look done yet. Of course, every man and his dog wanted the stock when it was skyrocketing and nobody is interested now. There’s a clear lesson there. That said, I wouldn’t be surprised if Metaplanet makes another run if/when Bitcoin makes a decisive break above its previous all-time high and enters the parabolic phase of the cycle. Timing is everything in narrative-driven trades.
So, what to do?
I have noticed an uptick in clients trying to position and trade some of these macro moves, particularly the USD/JPY angle. The problem with access to unlimited information, content and opinion is the urge to react to it and do something. So here’s my two cents:
The summer, and perhaps the rest of the year, will see some turbulence. Volatility goes both up and down. Overall, the backdrop keeps me optimistic. Rate cuts in the US are coming – it’s just a question of when. As things currently stand, it would not be a panic cut, which is constructive for risk assets. US stocks, gold and crypto should react accordingly. Regardless of who wins, the US election will remove a lot of uncertainty. If you are broadly diversified, you could do a lot worse than fastening your seatbelt and taking a nap for a while.
If the BOJ is tightening and the Fed is loosening, the yen should continue to strengthen. This is going to put some strain on export-related Japanese stocks and the market as a whole looks more unpredictable than the US. Governor Ueda said he doesn’t think the rate hike will damage the Japanese economy. He’s probably right for now, but let’s see what kind of toll a series of hikes will take. The last time the BOJ tried to hike was 2007/2008 and that move was reversed in a hurry…
If you have been waiting for your chance to escape JPY and get into your base currency, that window is opening. Don’t miss it – long term it does not look good for the yen.
Stay hydrated folks!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
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