Inflation Cools, Bitcoin and Stocks Bounce

There’s an old trader’s saying that “in a crisis, correlations go to 1.0”




Cryptocurrencies and equities posted significant gains Thursday following several sessions in the red as inflation data came back better-than-expected and digital asset traders digested the fall of FTX. 

Bitcoin and ether rebounded Thursday, rallying 12% and 21%, respectively. The bounce back comes a day after both currencies extended losses Wednesday when Binance backed out of the deal investors were hoping would save the industry. 

“This week’s events also underline the power of bitcoin as a genuinely decentralized cryptocurrency offering financial self-sovereignty to the individual — in stark contrast to supposedly reputable tokens that can be wiped out overnight,” a note from analysts at SatoshiLabs’ crypto hardware wallet, Trezor, read. “These crypto earthquakes stimulate a consumer response.”

Equities also ended the trading session in the green, thanks to lowered fears over inflation and heightening concern over a recession. The S&P 500 and Nasdaq closed 6% and 7% higher, respectively. Thursday’s Consumer Price Index came in lower than analysts’ expectations and showed a 7.7% increase in prices year-over-year and 0.4% increase over the last month. 

“As worries of recession and the potential for a financial shock overtake inflation anxieties, bond investors may want to consider ‘lengthening’ maturities, and stock investors should prepare for a renewed and sustained rally,” Jim Paulsen, chief investment strategist at The Leuthold Group, said. 

Even Wednesday’s sell-off, which saw the S&P 500 and Nasdaq Composite indexes closing 2.1% and 2.5% lower, respectively, should have been greater, Nicholas Colas, co-founder of DataTrek Research, said. 

“The decline should have been worse, given unexpected midterm results and volatile virtual currencies. Investor confidence needs a positive catalyst from here, however,” Colas said. 

Cryptocurrencies will still have a long storm to weather, analysts warn. 

“It will take weeks to learn the full extent of which firms have exposure to FTX and what percent of customer funds are recoverable,” Tom Nath, chief operating officer at BitOoda, said.

“FTX is still claiming that assets exceed customer liabilities, but that illiquidity is preventing them from unfreezing withdrawals,” he said.

Investor fear can spread across a brokerage account, Colas added. 

While [crypto] is theoretically very different from equities, many investors hold both on the same retail investor trading platforms. A sharp decline in online currency values can therefore spill over into other, unrelated, markets,” he said. “There’s an old trader’s saying that ‘in a crisis, correlations go to 1.’”

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