Rate cut speculation drives Bitcoin surge and stock rally

Traders embraced risk-on mode Wednesday as asset prices from gold to stocks and cryptos trended higher amid a rise in expectations for an interest rate cut at the next FOMC meeting in November.

The CME FedWatch Tool indicates that the likelihood of a 25 basis point rate cut on November 7 has risen to 94%, up from 80% last week. This shift comes as concerns about the Fed needing to maintain steady rates have diminished, particularly following yesterday's pullback in equities driven by ASML.

A positive quarterly report from Morgan Stanley contributed to improved market sentiment, as traders interpreted the year-over-year increase in profits as a sign that the economy is regaining momentum. By the end of the trading day, the S&P, Dow, and Nasdaq all closed higher, gaining 0.47%, 0.79%, and 0.28%, respectively.

Bitcoin is challenging its previous peak

Bitcoin is currently testing its previous peak of $68,000, with market sentiment strengthened by increased speculation surrounding a potential victory for Trump in the upcoming election, which has significantly heightened demand for Bitcoin exposure.

In the past week, Bitcoin has consistently outperformed equity markets. A substantial surge in activity is evident, with Bitcoin's futures open interest on the CME reaching a record 172,430 BTC, valued at approximately $11.6 billion, indicating strong bullish sentiment among active traders.

Moreover, the options market is showing a notable bullish tilt for both Bitcoin and the U.S. dollar in the short term. While Bitcoin usually has an inverse correlation with the dollar index (DXY), this relationship may diverge as we near the U.S. elections, according to current trends in the options market.

At the time of writing, Bitcoin trades at $67,870, an increase of 1.62% on the 24-hour chart. After hitting a high of $2,862/oz earlier in the day, gold currently trades at $2,673.60/oz for a gain of 0.44% on the session.

U.S. Stocks Surge in Bull Market Amid Rate Cut Speculation

Stocks have taken a pause since Monday, when the S&P 500 index achieved its 46th record close of the year. During this two-year bull market, the index has nearly doubled.

Recent weeks have seen the market rise due to robust earnings, resilient economic growth, declining inflation, and expectations of further interest rate cuts by the Federal Reserve.

The S&P 500 has climbed more than 60% since Oct. 12, 2022, when the index hit a bear-market closing low of 3,577.03, according to Dow Jones Market Data. The gain has come more quickly and has been bigger than many analysts expected, pushing some Wall Street firms to repeatedly raise their year-end targets to keep up.

U.S. stocks are experiencing a significant surge in a continuing bull market, driven by speculation surrounding potential interest rate cuts. Strong corporate earnings, resilient economic growth, and falling inflation have contributed to this upward momentum, with the S&P 500 recently achieving its 46th record close of the year.

However, the higher-than-expected consumer price index (CPI) for September, released this past week, along with a strong monthly jobs report, has led some investors to question whether the Fed will proceed with a key interest rate cut next month.

Data from Thursday indicated that the U.S. CPI rose by 0.2% in September, surpassing the forecast of a 0.1% increase. Core CPI, which excludes food and energy, increased by 0.3%, exceeding economists' expectations of a 0.2% gain. Nevertheless, the producer price index data released on Friday showed that inflation remains relatively low and stable.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.