Emerging 'Cockroaches' in TradFi Sting Bitcoin, but Fed Response Could Be Bullish

U.S. stocks are suffering a setback on Thursday as credit issues are beginning to show their face alongside a slowing economy.

"When you see one cockroach, there are probably more," said JPMorgan CEO Jaime Dimon on his bank's quarterly earnings call yesterday.

Dimon was referring to the bankruptcies earlier this fall of auto parts supplier First Brands and subprime auto lender Tricolor Holdings. Dimon's comments drew a response from the co-CEO of private equity player Blue Owl Capital Mark Lipschultz, who said banks should be combing their own books for "cockroaches."

Nevertheless, the First Brands bankruptcy has stung its banker, Jefferies (JEF), which has tumbled 25% over the past month, including a 9% slide on Thursday. For its part, Jefferies this week said it could easily withstand any losses due to First Brands.

Adding to credit worries Thursday was Zions Bancorp (ZION) last night saying it had booked a $50 million charge against two loans taken by borrowers who are now facing legal troubles. Then there's Western Alliance (WAL) which said it had sued a commercial real estate borrower alleging fraud. ZION and WAL are down 12% and 10%, respectively, Thursday, leading large losses in the regional banking sector.

The broader stock market is handling the news decently for now, with the S&P 500 lower by just 0.8%, but the "risk off" sentiment has helped send gold higher by another 2.5% to yet another record of nearly $4,300 per ounce.

As for the digital version of gold, bitcoin BTC$90,662.78 is seeing no such bid, with investors for now continuing to treat it as just another "risk on" asset. The price of BTC tumbled as low as $107,500 Thursday before a modest recovery to the current $108,000, down 3.2% over the past 24 hours and 11% over the past seven days.

Seeds of a bull move?

Recent history might give hope to the bulls. Other traditional market crackups — think the March 2020 Covid plunge or the March 2023 bank failures — also sent bitcoin sharply lower alongside stock indices.

The government response, however, — a vast loosening of fiscal and monetary policy — set the stage for epic bulls runs for BTC.

The seeds of that response seem to already be being sniffed out in the bond market. The 10-year Treasury yield is down by eight basis points today to 3.97%, its lowest level since April's "Liberation Day" market panic.

The two-year Treasury yield — which would be the most sensitive to an easing of monetary policy — has tumbled to 3.42%, a level not seen in more than three years.

A check of short term rate futures at the CME finds traders now putting a 3.2% chance of a 50 basis point rate cut at the Fed's policy meeting later this month. Prior to today, those odds were 0.0%. Traders have also upped bets on 75 basis points of rate cuts by year-end to an 11% chance versus a 0% chance one day ago.

Read more: Bitcoin Tumbles Below $109K; Tightening Liquidity Key to Crypto's Struggles