The S&P 500 index SPX, -1.51% on Friday cemented its worst monthly percentage fall since the pandemic lockdowns of March 2020, but also joined the Dow Jones Industrial Average DJIA, -1.71% and Nasdaq Composite Index COMP, -1.51% in booking the worst, first 9-month stretch since 2002, according to Dow Jones Market Data.
“The problem is that at the end of last year, we were priced for perfection and now we are discounting for a disaster,” said David Kelly, chief global strategist at J.P. Morgan Asset Management, by phone.
“I don’t think any of us can remember a time for both stocks and bonds — probably back to 2008 — that’s gone as badly as this year.”
But with the carnage, Kelly and others also see a chance to pick up beaten-down stocks and bonds, without waiting for the market to bottom or the Fed to finish its inflation fight.
Carnage: a look at the costs
Stocks and bonds have been hit especially hard since Russia launched its war against Ukraine in February, or a month before the Federal Reserve began raising interest rates from near zero.
Government bond returns were at -9.1% (see chart) six months into the Ukraine war, according to BofA Global, a steeper decline than the same time frame of other war in the past 70 years.
There’s also the roaring U.S. labor market, which looks unlikely to cool when the August jobs report arrives next Friday, a key economic data point in the week ahead for the Fed and markets.
“Clearly, a lot of the market weakness is due to the Federal Reserve,” said James Ragan, director of wealth management research at D.A. Davidson & Co., in a phone call. “They’ve made it very clear they want to see the labor market pull back some. That’s really important.”
Ultimately, though, bond yields have nearly doubled this year as the Fed has sharply increased its benchmark interest rate to combat 40-year high inflation. That dynamic has enticed investors to hunt for bargains, while also keeping them on alert for the next crisis to erupt in markets.
As a cautionary tale, a BofA Global credit strategist team pointed to last week’s “meltdown in UK assets” and called the Bank of England’s emergency bond buying response a warning for other central banks.
“The Fed has a difficult choice: go slower from here or risk the BOE experience in having to repair the damage,” they warned, in a weekly client note.
However, some investors also see opportunity with stocks and bonds down more than 10%-25% (see chart) on the year, according to data from Mizuho Securities.
Stocks, bond are tanking in 2022
MIZUHO SECURITIES USA
The damage looks particularly harsh when comparing it to the yearly gains for stocks, bonds, housing and commodities in a typical year over roughly the past five decades.
Bond returns and stocks post gains in typical years since 1975
MIZUHO SECURITIES
Corporate earnings estimates fizzle
While investors worry the stock-market rout could last for a while, especially as earnings expectations fizzle, confidence has been growing among bond investors eyeing today’s higher yields.
U.S. investment-grade corporate bond yields hit 5.7% this week, the highest level since 2009. The 10-year Treasury yield TMUBMUSD10Y, 3.828% rose to 3.8% Friday, posting its highest yield gain over three quarters since 1987, according to Dow Jones Market Data.
The bond moves comes as corporate earnings growth estimates for the S&P 500 have been slashed to a 2.9% for the third quarter, on a year-over-year basis, according to FactSet data. That’s represents a sharp revision from the 9.8% rate expected rate at the start of the quarter.
Against that backdrop, Ed Perks, CIO and lead portfolio manager for the Franklin Income Fund, favors investment-grade corporate bonds that also fetch average dollar prices of $86, versus more than $110 roughly a year ago.
Individual investors often get exposure to the sector through corporate bond exchange traded funds, the largest of which is LQD, -0.25%, the iShares iBoxx $ Investment Grade Corporate Bond ETF
“We think a lot of the damage has been done in this asset class, while in equities we are rerating. It’s changing rapidly in front of our eyes,” Perks said.
U.S. stocks fell sharply Friday to close out a terrible month, with the Dow and S&P 500 finishing the session down 1.7% and 1.5%, respectively, to their lowest levels since Nov. 2020, according to Dow Jones Market Data. The Nasdaq posted a 1.5% decline and its lowest finish since July 2020.
The market is currently in a news-driven environment where the prices of cryptocurrencies have been determined by news agenda rather than fundamentals.
Bitfinex analysts have warned crypto investors to be cautious as bitcoin’s (BTC) recovery over the weekend is not a sign that its correction is over; the asset could witness more bloodshed in the near term.
In the latest Bitfinex Alpha report, experts deemed the market’s reaction this week critical, especially as supply alleviated over the weekend could return when traditional markets open.
“No Man’s Land”
Since Saturday, bitcoin has risen almost 10% from $57,600 to $63,000, closing last week in the green. The asset has surged above the 125-day range low of $60,200, which it broke through earlier this month after news of the German government’s massive BTC selling hit the market.
Market sentiment began to improve after reports that wallets linked to the German government were almost empty. However, the positive sentiment may not be sustained for long as the BTC the German authorities moved to trading desks and exchanges are yet to be sold.
While the supply from Germany appears to have been factored into bitcoin’s market price, Bitfinex analysts believe the end of selling pressure depends on how the involved trading desks execute their trades in the coming days.
Although the shift in sentiment underscores the market’s capacity to integrate new information and adjust expectations quickly, analysts think the market’s reaction over the first two trading days of the week cannot be overlooked for two reasons.
First, the low support level in the $60,200 range has now become a potential resistance line. Second, trading patterns over the past three months suggest that weekends are usually favorable for markets, especially on Saturdays when supply pressure seems to subside.
“We are now in no man’s land until we get clear resolution above or below this level,” the analysts said.
A News-Driven Environment
Besides the potential resistance level and three-month weekend trading pattern, the market is currently in a news-driven environment, where the prices of cryptocurrencies have been determined by news agendas rather than fundamentals.
Since selling pressure concerns are not yet completely obsolete due to upcoming Mt Gox creditor distributions, Bitfinex analysts expect such headlines to continue to have some impact on price movements. As such, the analysts urged investors to exercise caution in their trading strategies.
BlackRock’s IBIT led with $117.25 million in inflows on July 15, also being the most traded Bitcoin ETF.
The US spot Bitcoin ETFs recorded a daily net inflow of $301 million on July 15th. This extended their winning streak to seven consecutive days amidst a broader market recovery.
None of the ETFs recorded outflows for the day.
Bitcoin ETFs Rake in $16.11B in Net Inflows Since Jan
According to the data compiled by SoSoValue, BlackRock’s IBIT, the top spot Bitcoin ETF by net asset value, recorded the largest net inflows of the day at $117.25 million. IBIT was also the most actively traded Bitcoin ETF on Monday, with a volume of $1.24 billion. Ark Invest and 21Shares’ ARKB came in close behind with net inflows of $117.19 million.
Fidelity’s FBTC experienced net inflows of $36.15 million on Monday, while Bitwise’s BITB saw $15.24 million in inflows. VanEck’s HODL, Invesco and Galaxy Digital’s BTCO, and Franklin Templeton’s EZBC funds also recorded net inflows. Meanwhile, Grayscale’s GBTC and other ETFs, such as Valkyrie’s BRRR, WisdomTree’s BTCW, and Hashdex’s DEFI, registered no flows for the day.
A total of $2.26 billion was traded on Monday. The trading volume for these ETFs was less than in March when it exceeded $8 billion on some days. Meanwhile, these funds have collectively attracted $16.11 billion in net inflow since their January launch.
What’s Next For Bitcoin?
Earlier this month, bitcoin’s price decline was mainly due to fears of massive selling pressure from Mt. Gox and the German government’s BTC sales.
But the assassination attempt on pro-crypto former US President and presumptive Republican candidate Donald Trump at Saturday’s rally seemed to spark a recovery in the world’s largest digital asset, and experts are bullish on the asset’s price trajectory going forward. Bitcoin surged more than 9% over the past week and was currently trading slightly below $64,000.
Veteran trader Peter Brandt discussed bitcoin’s price outlook, suggesting a potential major rally. He referred to a pattern he terms “Hump->Slump->Bump->Dump->Pump” and highlighted that the July 5 double top attempt was a bear trap, confirmed by the July 13 close. He sees a likely continued upward trend but warned that a close below $56,000 would negate this bullish view.
“Bitcoin $BTC could be unfolding its often-repeated Hump…Slump…Bump…Dump…Pump chart construction. Jul 5 attempt at the double top was a bear trap, confirmed by Jul 13 close. Most likely scenario now is that bears are trapped. Close below $56k negates this interpretation”
PeckShield alert reveals LI.FI’s protocol vulnerability is similar to a March 2022 attack, with the same bug recurring.
The decentralized finance (DeFi) platform LI.FI protocol has suffered an exploit amounting to over $8 million.
Cyvers Alerts reported detecting suspicious transactions within the LI.FI cross-chain transaction aggregator.
LI.FI Issues Warning After $8 Million Exploit
LI.FI confirmed the breach in a statement on July 16 via X: “Please do not interact with any http://LI.FI powered applications for now! We’re investigating a potential exploit.” The team clarified that users who did not set infinite approval are not at risk, emphasizing that only those who manually set infinite approvals seem to be affected.
According to Cyvers Alerts, more than $8 million in user funds have been stolen, with the majority being stablecoins. According to on-chain data, the hacker’s wallet holds 1,715 Ether (ETH) valued at $5.8 million and USDC, USDT, and DAI stablecoins.
Cyvers Alerts advised users to revoke relevant authorizations immediately, noting that the attacker is actively converting USDC and USDT into ETH.
Crypto security firm Decurity provided insights into the exploit, stating that it involves the LI.FI bridge. “The root cause is a possibility of an arbitrary call with user-controlled data via depositToGasZipERC20() in GasZipFacet, which was deployed 5 days ago,” Decurity explained on X.
“In general, the risks behind routers, cross-chain swaps, etc. are about token approvals. Raw native assets like (unwrapped) ETH are safe from these kinds of hacks b/c they don’t have approvals as an option. Most users & wallets also no longer do “infinite approvals” which gives a smart contract total control on removing any amount of their tokens. It’s important to understand which tokens you’re approving to which contracts.
This dashboard looks for all transactions of a user that intersects Lifi. Not all of these transactions indicate risk- but you can see how, broadly, integrations & layers of tech (like how Metamask bridge uses Lifi on BSC) can complicate how users do or don’t put their assets at risk. Revoke Cash is the most well known approval manager app.
But it’s also good security practice to simply rotate your address. New addresses start with 0 approvals, so starting fresh by moving your tokens to a fresh address is another good security practice.” – commented Carlos Mercado, Data Scientist at Flipside Crypto.
Recent Exploit Mirrors March 2022 Attack
Further analysis by PeckShield alert revealed that the vulnerability is similar to a previous attack on LI.FI’s protocol that occurred on March 20, 2022. That incident saw a bad actor exploit LI.FI’s smart contract, specifically the swapping feature, before bridging.
The attacker manipulated the system to call token contracts directly within their contract’s context, making users who had given infinite approval vulnerable. This exploit resulted in the theft of approximately 205 ETH from 29 wallets, affecting tokens such as USDC, MATIC, RPL, GNO, USDT, MVI, AUDIO, AAVE, JRT, and DAI.
“The bug is basically the same. Are we learning anything from the past lesson(s)?” PeckShield Alert said in a July 16 X post.
Following the 2022 incident, LI.FI disabled all swap methods in its smart contract and worked on developing a fix to prevent future vulnerabilities. However, the recurrence of a similar exploit raises concerns about the platform’s security measures and whether adequate steps were taken to address the vulnerabilities identified in the previous breach.
LI.FI is a liquidity aggregation protocol that allows users to trade across various blockchains, venues, and bridges.
