U.S. Markets Rally on Fed Rate Cut Expectations Stocks Crypto Gain

U.S. markets saw a strong rebound on Monday as traders increasingly priced in the possibility of a Federal Reserve rate cut later in the year. Optimism was fueled by revised labor market data that suggested softer job growth, reducing pressure on the Fed to keep interest rates high. This shift in sentiment led to a broad-based rally in equities, particularly in the tech sector, with the Nasdaq and Russell 2000 indexes rising by 1.84% and 2.35%, respectively. Cryptocurrencies also benefitted, though to a lesser extent, with Bitcoin and Ethereum posting gains of 0.74% and 0.42% [1].

The market move was largely driven by algorithmic trading strategies, according to Jake Ostrovskis of Wintermute, who described it as "fairly machine-driven." He warned of heightened risk-taking and signs of froth in both traditional and crypto markets. Elevated CTA exposure and increased downside hedging in Bitcoin options further underscored investor caution amid gains [1]. Options data showed strong demand for put contracts in the $105,000 to $110,000 strike range, indicating a preference for protection over further upside.

The Fed’s potential pivot remains a key focus for traders. The CME FedWatch Tool now reflects over 90% probability of a 25 basis point rate cut in September, up sharply from 63.1% the previous week. This suggests a rapidly evolving market view driven by the latest labor data. However, the political landscape remains uncertain, with the recent removal of Bureau of Labor Statistics Commissioner Erika McEntarfer seen by some as a sign of policy interference, complicating the Fed’s path forward [1].

Despite the positive momentum, analysts remain cautious. The risk-on environment may not be sustainable, especially with a crowded short U.S. dollar trade and strong equity momentum raising concerns about potential corrections. Ostrovskis noted that any pullback in the stock market could quickly spill over into crypto, given the tight correlation between tech equities and digital assets. "If the U.S. stock market rolls over, crypto will follow suit," he said [1].

While the rally in both stocks and crypto has been welcome, investors are advised to remain alert. The shift in Fed expectations has lifted sentiment, but broader macroeconomic uncertainties continue to pose a risk. Until structural concerns ease, market participants should brace for sharp pullbacks in response to negative news. The coming weeks will be critical in determining whether the current optimism can hold or if volatility returns.

References:

[1] https://coinmarketcap.com/community/articles/6892087c7c289c157e5799f2/