EMC Labs September report: With the interest rate cut finalized, is the second half of the bull market about to start?

Original title: "EMC Labs September Report: The dust has settled, and monetary expansion is about to start the second half of the bull market"

Original author: 0xWeilan, EMC Labs

The information, opinions and judgments on markets, projects, currencies, etc. mentioned in this report are for reference only and do not constitute any investment advice.

On September 18, the Federal Reserve launched a rate cut cycle, with the first rate cut being 50 basis points. This marks the complete end of the rate hike cycle that started in March 2022, and also means that the Federal Reserve and the US government believe that the task of recovering liquidity from the over-issued currency due to the epidemic has been won, and the focus has shifted to the negative effects of this "strong medicine" - damage to the economy and employment. One of the best ways to prevent economic damage is to return the money supply to the expansion cycle.

On September 24, the Chinese government announced an unprecedentedly aggressive monetary policy for the economy, stock market and real estate market, increasing liquidity release on the basis of the original interest rate cuts and reserve requirement ratio cuts. This means that the world's second largest economy has decided to combat sluggish consumption, falling real estate and rising employment rates by strongly increasing money supply and promoting equity market gains. The record-breaking rebound of China's stock market (including Hong Kong stocks) has attracted the attention and capital flows of the global capital market.

Together with the European Central Bank, which has already cut interest rates, three of the world's four major central banks have already launched monetary easing policies. The total amount of money issued under their control is about 23 trillion US dollars, accounting for about 20% of the world's total money supply.

It is of great significance that 2024 is the year when major central banks around the world turn to monetary easing. This shift is a necessary means to revive the economy in the post-epidemic era, and it is also the starting point for a new round of asset value revaluation.

As an emerging equity market, Crypto assets will also usher in a revaluation in the context of monetary expansion. EMC Labs is cautiously optimistic about the market outlook, and believes that the crypto market, which has been fully adjusted internally, will open the second half of the bull market in the interest rate cut cycle.

US Dollar, US Stocks, US Bonds and Gold

US Dollar Index

The interest rate cut started, and the US Dollar Index rebounded slightly before returning to a downward trend. By the end of the month, it approached the 100 mark again, returning to the point in April 2022. As the interest rate cut continues, it may only be a matter of time before it falls below 100.

Thanks to the advance pricing of the equity market, the US stock market spent September relatively "smoothly". In July, August and September, the three major indexes all experienced violent fluctuations to rebalance the differences of various funds. In the monthly cycle, the Nasdaq and Dow Jones gained 2.68% and 1.85% respectively. However, due to the advance pricing, the stock index did not achieve a sharp rise. A reality that must be faced is that the current valuation of US stocks has already reflected a certain degree of interest rate cut expectations and does not appear to be "cheap". Traders seem to be unable to find a basis for trading for the time being. This has become the biggest obstacle to the rise of US stocks.

For the US economic outlook, all parties in the market are still using CPI and employment data for speculation and pricing. The biggest point of contention is whether the US economy will achieve a "soft landing" or a "hard landing", as well as the extent of the interest rate cuts in November and December. At present, the US stock price has basically completed the pricing of the "soft landing". If the data deteriorates, there may be downward pricing to prevent the investment risks caused by the "hard landing". This is the biggest uncertainty. The elimination of this uncertainty may not be completed until later in Q4.

U.S. 10-year minus 2-year Treasury bond yield spread

Along with the interest rate cut, the U.S. Treasury market has also seen a trend change. Concerns about the long-term development of the U.S. economy have caused the 2-year Treasury bond yield to be higher than the 10-year Treasury bond for a long time since July 2022. This trend was reversed in September, and the current 10-year and 2-year Treasury bond yield spread has returned to 0.16. This means that Treasury bond investors have initially completed the confirmation of the "soft landing" of the U.S. economy.

As another important investment target besides U.S. Treasuries, London Gold responded to the arrival of the monetary expansion cycle with a sharp monthly increase of 6.21%. Such a large monthly increase shows that larger funds have chosen safe targets when the economic outlook is uncertain.

As a representation of the Crypto market, BTC assumes a function similar to that of a large market index. Currently, the pricing of BTC is controlled by the BTC ETF channel funds, but such funds seem to refuse to regard BTC as "digital gold" and prefer to regard it as a technology stock like the "Seven Giants". This linkage enabled BTC to stabilize in September and achieve a 7.35% increase, which was higher than the Nasdaq, but it was still constrained by the Nasdaq's trend and stopped at $65,000, and did not complete the recovery of the previous high.

There are two paths to break through the previous high. One is that the Nasdaq recovers the previous high and BTC follows the breakthrough; the second is that the funds in the market regain pricing power. If the second path is realized, the trend in the second half of the bull market will be more positive. Based on the principle of prudence, we regard "breaking the previous high" as a necessary condition for the resumption of capital inflow and the increase of risk appetite of on-site funds to boost Altcoin targets.

BTC Supply Structure

We view the market cycle as a phenomenon of value transfer between long and short hands in time and space. After the long position reached its peak in December, it continued to reduce its holdings until May. Since June, the second increase in holdings in this round of rising cycle has started. By the end of September, the holdings have risen to 14.07 million. This structural reorganization is conducive to price increases.

Changes in long and short positions (monthly)

Analyzing the distribution of BTC on all chains, it can be found that as of September 29, more than 87% of BTC are in a profitable state. The distribution of chips in the "new high consolidation zone" of 54,000 to 73,000 is 6.24 million, an increase of 238,300 compared with August 31. The current maximum holding price has increased from $58,893 at the end of August to $65,518. The continued upward shift of the price center of gravity helps to reduce the selling pressure during the upward price movement.

BTC cost structure

It is worth noting that in late September, with the rebound of BTC, long hands began to tentatively reduce their holdings again, while short hands began to increase their holdings. This "from long to short" is a signal of liquidity recovery, and it will also test the strength of buying power again. If buying power is difficult to absorb selling pressure, the market may fluctuate or even go down. If it fluctuates, long hands may return to collection again, and the time for the market to recover the previous high will be extended. As of now, we cannot conclude that the new trend of "from long to short" has begun.

Funding side

Monthly fund flow statistics of stablecoins and 11 BTC ETFs in the United States

Funding also showed an optimistic performance this month. The two major channels eliminated differences and recorded positive inflows, with a total scale of US$3.788 billion. Among them, the stablecoin channel was the main inflow, with a scale of US$2.588 billion. The ETF channel, which was in an outflow state last month, resumed inflows this month, recording US$1.2 billion.

However, there is also a worrying side. Since the inflow scale resumed in July, the inflow scale in July, August and September has shown a trend of shrinking month by month. Against the background of the overall positive trend of stock markets in various countries, BTC urgently needs to break through the previous high to attract accelerated inflows of funds with the rising effect.

During the six-month consolidation in the "New Highs Consolidation Zone", the inflow of stablecoins and ETF channels has exceeded 38 billion so far. These funds have taken over the selling pressure of the "New Highs Consolidation Zone", refreshing the cost price of more than 6 million BTC in this area to around US$64,000.

Technical Indicators

BTC Price Trend (Daily)

Technical indicators are important trading tools for short- and medium-term traders. At present, the market is in the early stage of continuous capital inflow and liquidity recovery. The decisions of short-term traders have a significant impact on market trends.

64,000, 66,000, 70,000, and 73,000 USD are the short-term focus prices, representing short-term cost suppression, downward trend line suppression, upward trend line reversal suppression, and new high suppression, respectively. This month's breakthrough of the 200-day moving average, which has already shown a downward shift, is of great significance. The price of 64,000 USD is also the short-term cost price and the high point of the August rebound. The "effective" conquest of this pass is very important, followed by the breakthrough of 66,000 USD and 70,000 USD. At present, 3 of the 4 key price levels have not been broken, and the hope should be on the funds of the BTC ETF channel.

The effective breakthrough of 73,000 USD means the awakening of the most conservative funds in the market and the gradual entry of off-site funds.

Possibilities in the Second Half

In previous reports, we have mentioned many times that the driving force of the first stage of the bull market mainly came from the position covering of funds on the market and the new funds before and after the approval of BTC ETF. As major central banks around the world enter the stage of liquidity expansion, EMC Labs believes that the subsequent rise in BTC asset prices mainly comes from the revaluation of value caused by monetary expansion and the new allocation of traditional capital to BTC ETF.

As risk appetite gradually increases, in the second half of this round of Crypto bull market, attention and funds will gradually flow into Altcoins that have been fully adjusted. We believe that BTC's market share will gradually decline, from nearly 60% at the highest point of this round to 40%. Altcoins will gradually differentiate after the general rise of the rebound. We focus on blockchain infrastructure and Web3 applications that represent the direction of industrial development, have technological or model innovation, have user acquisition capabilities, and are friendly to token models.

Conclusion

Currently, the eMerge Engine developed by EMC LABS shows that the rising period index has been repaired to 0.75, gradually entering a state of moderate expansion. The repair of this indicator marks a great repair of the BTC ecosystem and market structure, and it is also the internal structure adjustment that we have repeatedly emphasized. BTC is ready to mark a higher price under greater liquidity shocks.

Predicting and participating in the development of the market with action will be rewarded. We believe that improving risk appetite, positive attitude and bold action have become the best choice at this stage.

The biggest concern comes from whether the US economy will "hard land". Once a "hard landing" occurs, the decline in risk appetite will lead to a downward valuation of asset values, and the US stock market may experience an annual weakening trend. If so, the crypto asset market may find it difficult to get out of an independent trend.

In addition, the crazy rebound of the Chinese stock market has also attracted a certain inflow of international capital. Considering that this rebound comes from the unprecedented monetary policy investment of the Chinese government (various fiscal policies will be introduced in October), we believe that the rebound of the Chinese market has a certain degree of sustainability, and the inflow of international capital will also continue. This will undoubtedly affect the rebound and stability of the US stock market, and in turn may affect BTC and the entire Crypto market, which have higher requirements for risk appetite.

This negative impact comes from the chaos and conflicts that are bound to occur in the process of global monetary policy shift. In the short term, it will inevitably cause continued fluctuations in BTC prices, but it will not change our judgment on its long-term trend.

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