Lucas on Warpcast

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The global financial landscape witnessed a turbulent week, with significant declines sweeping across major stock indices and the cryptocurrency market. Amidst this volatility, investors wonder whether to brace for a prolonged downturn or see this as a strategic opportunity. In our latest market report, we delve into a comprehensive global macro overview, dissect the factors driving widespread sell-offs, and offer insights on navigating these challenging times. Stay informed, gain a clear perspective on positioning your investments, and understand the critical data that shapes the market dynamics through the research below. Title: U.S. Recession Alert! An In-Depth Analysis of the Market

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1. What happened? 1.1. Overview - On August 5th, the global stock market experienced significant declines, leading major share indices to tumble just weeks after reaching record highs: - New York: The S&P 500 finished the trading day down 3%, marking its worst day in nearly two years, closing at 5,186. This extended its decline from its peak to 8.5%. - Tokyo: The Nikkei Index fell by over 12%, the biggest drop since 1987, erasing its gains for the year. - Taiwan: The benchmark index had its worst day ever. - Other Markets: Stock indexes in South Korea, India, Australia, Hong Kong, and Shanghai all recorded their biggest declines in four years.

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1.2. What Caused the Bloodbath? - Fears of US hard-landing: July’s weak jobs report revealed an unemployment rate increase to 4.3%, a nearly three-year high. This triggered the “Sahm Rule,” which indicates a recession when the three-month average unemployment rate is at least 0.5 percentage points higher than the lowest level in the previous 12 months. The current three-month average is 4.1%, compared to the lowest level of 3.5% in the past year, creating a gap of 0.63%, thus signaling a recession.

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- Unwinding of the Yen carry trades: The Bank of Japan’s rate hike reduced the interest rate differential between Japan and the U.S., causing the yen to rise in value against the dollar by 12% since mid-July. This ended the practice of investors borrowing cheap yen to buy higher-yielding assets, mainly U.S. tech stocks. As a result, investors had to sell these assets to cover their losses, putting downward pressure on tech stocks and contributing to global market declines.

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- Political unrest: Middle East tensions have escalated since the killing of a senior Hamas leader on July 31. Anticipated retaliation from Iran and Hezbollah following Israeli strikes has increased fears of a larger conflict. This geopolitical tension has dampened market sentiment and led investors to seek safety over risk assets.

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- Berkshire Hathaway’s Stake Reduction in Apple: Warren Buffett added to market anxiety by disclosing that Berkshire Hathaway now holds just 400 million shares of Apple, down 50% compared to Q1. Notably, Berkshire’s cash position has reached a record $277 billion, with significant investments in Treasuries. Global investors see this as a bearish signal from one of the world’s most respected investors, leading to increased market chaos.

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- Political Election Uncertainty: The odds of Donald Trump winning the upcoming elections are now equal to those of Kamala Harris, despite previously having a significant lead. This unexpected shift adds to broader worries about how policies coming out of November could impact markets.

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- Jump Trading’s Influence: One of the largest market makers, Jump Trading, began selling their positions over the past two weeks, particularly during weekends when institutional trading was absent. They offloaded over $400 million in ETH, causing Ethereum to drop to its lowest level since January 2024 ($2,100). Rumors suggest that Jump Trading’s sell-off might indicate their exit from the cryptocurrency market due to a U.S. CFTC investigation. Another theory posits that Jump Trading took advantage of the interest rate differential to borrow cheap Japanese yen and invest in cryptocurrency. The BOJ’s rate hikes compelled them to sell assets into USD, convert to yen, and repay the borrowed money.

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- Selling Pressure from ETFs: Bitcoin experienced $528 million in outflows, making it not immune to the broad asset class sell-off. This was driven by fears of a U.S. recession, geopolitical concerns, and broader market liquidations across most asset classes.

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