Inflation Cools But Rally In Crypto, Stocks May Not Last

The days of rapidly rising prices may be in the rearview mirror in the US economy, according to consumer price index (CPI) data released on Wednesday – perhaps giving investors a window to take on risk again.

July’s CPI report came in 0.2% lower than forecast, showing an 8.5% increase in prices across the board year-on-year, down from 9.1% in June. The petrol and energy indices lost 7.7% and 4.6% respectively in July. However, higher food prices persisted, with an increase of 1.1%.

The month’s core CPI gauge, which excludes food and energy prices, climbed 0.3%, also below analysts’ expectations.

Cryptos and stocks rose, with the Dow Jones Industrial Average gaining 500 points and the tech-heavy Nasdaq up 2% by midday Wednesday in New York. Bitcoin and Ether increased by 4% and 10% respectively.

“Bitcoin could rise significantly if this broad risk-on rally continues,” said Edward Moya, a senior market analyst at Oanda. “The majority of the crypto market remains skeptical of the Bitcoin rebound that started in mid-June, but momentum traders may pounce on this opportunity if Bitcoin rises above the $25,000 level.”

Wednesday’s report comes as bitcoin begins to distance itself from traditional markets after a month-long period of near-lock-step trading. Bitcoin’s correlation with bonds and the Nasdaq 100 has fallen to a three-month low, according to a new data report from research firm Kaiko.

Jeff Dorman, chief investment officer at digital asset-focused firm Arca, said the decoupling between crypto and stocks has been ongoing for months, but has been difficult to see through broader and rapid macro shifts.

“Around May, we started having the idiosyncratic news about digital assets; The Luna UST collapse, followed by the Three Arrows’ collapse, and Celsius, BlockFi, etc.,” said Dorman. “We’ve really disconnected from stocks in the last two and a half months — you just couldn’t tell because a lot of the timing of the events was around the same time as the Fed pivot and these macro events.”

Despite today’s market moves, analysts are unsure how long a rally can last.

“However, the problem with bear market rallies is that fast money will pile up believing that recovery is near, and this will cause hedge funds and other institutions to take risks chasing profits in a down year,” said Steven McClurg. chief investment officer at digital asset fund manager Valkyrie Investments. “We are likely to rally in the near term, but an inverted yield curve with a spread of 38 basis points leads us to believe that the long-term outlook is not good. Tougher times lie ahead, and traders can only ignore them for so long.”

It’s also important to consider the collapse of the current market, Dorman said.

“We’re back to roughly a trillion dollar asset class, but almost 20% of that is stablecoins, which is much higher than the last time we were in a trillion dollar asset class a few years ago, when stablecoins were around 2% of the market , he said. “So you just have a very large cash position, and not many places to invest it.”

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