Key Points
- The sharp fall in Bitcoin indicates a liquidity contraction in financial markets.
- Morgan Stanley and Goldman Sachs CEOs warn that equity markets could be heading toward a drawdown.
Remarks by leading bank CEOs at the Global Financial Leaders’ Investment Summit in Hong Kong spurred a stock sell-off.
“We should welcome the possibility that there would be drawdowns, 10% to 15%, that are not driven by some sort of macro cliff effect,” Morgan Stanley CEO Ted Pick observed…
“When you have these cycles, things can run for a period of time. But there are things that will change sentiment and will create drawdowns, or change the perspective on the growth trajectory, and none of us are smart enough to see them until they actually occur,” Goldman CEO David Solomon said at the summit. (Reuters)
The comments echoed an earlier warning by JP Morgan CEO Jamie Dimon:
“The risk of a serious fall in the US stock market within the next two years is being underestimated,” Dimon claimed. “There are a lot of issues creating uncertainty, including geopolitical tensions, fiscal spending, and global remilitarization.” (BBC)
Bitcoin broke support at 110K, with follow-through below 105K confirming a downtrend. The sharp fall, from a top of 125K in early October, warns of a liquidity contraction in financial markets.
The secured overnight financing rate (SOFR) is still trading at a premium to interest on reserve balances (IORB), indicating financial market stress.
A rising Treasury General Account balance at the Fed, caused by the government shutdown, is sucking liquidity out of financial markets.
Wolf Richter explains:
The balance in the government’s checking account, the TGA (Treasury General Account) has ballooned over the past three weeks as the government halted paying for some of its operations and salaries due to the shutdown, while still selling Treasury securities and collecting taxes, fees, and tariffs. So cash is still coming in, but the cash outflow has been temporarily slowed, and the checking account balance has ballooned….
As the TGA balance rises, it removes liquidity from reserves and the market.
Stocks
The S&P 500 index fell 1.2%. Declining Trend Index peaks warn of a secondary correction, which would be confirmed if the index breaks support at 6750.
The Nasdaq 100 fell 2.1%, with the QQQ Trend Index signaling secondary selling pressure.
Treasury Markets
10-year Treasury yields are consolidating near 4.10%, suggesting a continuation to test 4.2%.
Manufacturing
The ISM Manufacturing PMI has been signaling a contraction for eight months.
New orders have also retreated, warning of a declining outlook.
Manufacturing employment has also been contracting since March.
Producer prices are still rising, but the pace is slowing.
Dollar & Gold
The Dollar Index broke resistance at 100 for the first time in over three months. The July break turned out to be a bull trap, with a sharp fall to 99 the following day, so expect retracement to test the new support level.
Gold has formed a narrow consolidation above $3,900 per ounce. A breach of support would signal another decline, with a target of $3,600, while recovery above $4,050 would complete a bear trap, signaling another test of $4,400.
Silver is testing support at $46 per ounce, with declining Trend index peaks indicating secondary selling pressure. Respect of support would signal another test of $50.
Conclusion
The government shutdown is sucking liquidity out of financial markets, risking a secondary correction in major stock indices. However, the shutdown won’t last forever, and reversal to a bear market is unlikely.
The manufacturing contraction continues, with no sign of any tariff benefit, but massive investment in AI infrastructure continues to support the economy.
The dollar has strengthened after the conclusion of a trade truce with China, but this is unlikely to last long. We expect continual flare-ups as the two sides jockey for position in the long-term tussle for economic power.
Acknowledgments
- CoinDesk: Bitcoin
- Federal Reserve of St Louis: FRED Data
- BBC (audio): Jamie Dimon worries about the global economy
- Institute for Supply Management: ISM Report on Business
- Reuters: Wall Street heavyweights flag risk of pullback in equity markets
- Wolf Richter: Repo Market Liquidity Pressures Made Worse by Government Shutdown
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.