Risk Signals Intensify, Rates Offer Partial Offset, Follow-Through Still Lacking

Discussed in today’s video:

• Private Credit Stress Broadening: Apollo announced markdowns within one of its BDCs. Alternative asset manager equities, already in a downtrend since mid-August, saw renewed pressure, with Apollo down roughly 9% intraday.
• High-Yield Spreads Moving in the Wrong Direction: High-yield spreads have widened to new YTD highs. While spreads remain tight on an absolute basis, the rate of change matters more than the level. Given crypto’s historically meaningful sensitivity to high-yield credit, this remains a critical input.
• Geopolitical Risk: Market-implied odds of a U.S. strike on Iran this weekend rose sharply, from below 10% to above 30%. While headlines remain fluid, the balance of probabilities appears to be drifting toward confrontation. Geopolitical shocks typically produce initial de-risking that can prove buyable, provided there are no durable macro implications.
• Rates Backdrop Improves Despite Hawkish Data Flow: Recent labor and growth data have surprised to the upside, inflation has printed somewhat firm, and Fed rhetoric has leaned hawkish. Yet the bond market has rallied, with the 10-year yield breaking below 4%. Notably, Fed funds futures have begun repricing cuts back into this calendar year over the past 24 hours.
• AI Disinflation Narrative Gaining Traction: The divergence between strong macro data and falling yields suggests markets may be increasingly pricing in AI-driven productivity and disinflation effects. Workforce reductions across high-profile companies reinforce this narrative. For crypto, lower yields and renewed easing expectations represent a constructive partial offset to credit and geopolitical headwinds.
• Revisiting the Short-Covering Rally: Wednesday’s sharp rally met criteria consistent with a positioning unwind: Bitcoin up more than 5%, broad altcoin participation, and strong negative cross-sectional correlation between prior 90-day returns and event-day performance (historical underperformers outperformed). We identified 10 comparable historical episodes, 3 of which occurred this year.
• Historical Precedent Suggests Caution: The majority of similar events occurred during the 2022 downtrend. Average forward returns over 7-, 14-, and 30-day horizons have been negative, with win rates around 50% at best. While not determinative, precedent suggests these events often resemble bear market rallies rather than durable trend reversals.
• Follow-Through Mixed, Flows Remain a Watchpoint: Price stabilization has been modestly constructive, but conviction remains limited. ETF flows have been modest and CME open interest has declined.
• Bottom Line: Despite rising private credit stress, widening high-yield spreads, and elevated geopolitical risk, improving rate dynamics support our base case for a near-term rally. We are maintaining current positioning while acknowledging these headwinds and monitoring conditions closely.

Tickers in this video: BTC -2.03%