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Good morning everyone,

I was in Hong Kong last week, visiting the city for the first time in nine years when China's central bank unveiled the biggest stimulus package since the COVID-19 pandemic.

In an attempt to pull the economy out of its slump, China's central bank governor, Pan Gongsheng, announced that the bank would cut borrowing costs, inject more money into the economy, ease the burden of mortgage repayments for households, and reduce the amount of cash banks must hold as reserves, freeing up about 1 trillion yuan (US$142 billion) for new lending.

At the heart of the current economic slowdown is the property market. China's property market has been in a severe downturn since peaking in 2021. Several developers have defaulted, leaving behind large inventories of unwanted apartments and a worrying list of unfinished projects.

The housing crisis has weighed heavily on the economy and crippled consumer confidence, with 70% of household savings tied up in property.

Beijing has removed many restrictions on home purchases and sharply cut mortgage rates and down payment requirements in response but has so far failed to revive demand or arrest the slump in home prices, which fell in August by the most in more than nine years.

DISCLAIMER: This newsletter is not financial advice. It does not take into account your financial situation, is general in nature, and is for educational purposes only.

Also, this newsletter contains affiliate links. This means that I may receive a commission from them. But for Crypto Down Under, I only choose products I use myself and can recommend wholeheartedly. Don’t forget to do your own research.

How China’s central bank started panicking

There is a saying in finance: The stock market stops panicking when central banks start panicking.

That's what we saw after the Chinese central bank's announcement.

Stocks on the Shanghai, Shenzhen, and Hong Kong markets soared, posting their biggest weekly gain in 16 years - just in time for Tuesday's celebrations of the 75th anniversary of the founding of the People's Republic of China (PRC). (Not-so-subtle banners all over Hong Kong reminded me every day of the upcoming anniversary of the PRC. Something you wouldn't have seen a few years ago.)

But a sigh of relief was heard around the world.

Shares in European luxury brands jumped as wealthy Chinese are the most important customer segment for these brands.

Shares of iron ore miners in Australia rose on hopes that the stimulus package will revive development activity in the property sector.

And China ETFs, which track the Chinese stock market, rallied.

How market euphoria spread

China's stimulus package followed a sharp interest rate cut by the US Federal Reserve (Fed). The Fed's rate cut sent the S&P 500 and the Dow to new all-time highs. With the central banks of the world's two largest economies pumping liquidity into the markets, euphoria quickly spread.

The Australian Financial Review even proclaimed that the "everything bubble" was back, a condition in which all asset classes rally indiscriminately without any improvement in fundamentals.

Slowly, my friends, I thought to myself. I don't see a bubble in crypto. In fact, retail investor interest, usually an indicator of a cycle top, is still relatively low.

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How a missile strike ended the market euphoria

But then on Wednesday, the market euphoria was hit by a missile strike. I woke up to bitcoin down more than 5%.

Iran had launched a rocket attack on Israel in retaliation for Israel's assassination of Hezbollah leader Hassan Nasrallah, stoking fears of all-out war between the Middle East's two arch-enemies.

Since Hamas-led militants launched a surprise attack on Israel on 7 October last year, the spiral of escalation in the Middle East has been well underway. Israel is likely to retaliate. It could try to target Iran's oil infrastructure, which would drive up the price of oil. Or it could even try to target Iran's nuclear facilities, which could be catastrophic.

The conflict is deadly, tragic, and far from over. But has it upended the current bull market?

I don't want to sound cynical, but I don't think so.

How bitcoin reacts to geopolitical events

As I pointed out last week, bitcoin is highly volatile because it trades around the clock. This means that it falls hard and fast when something bad happens, such as a geopolitical conflict.

But bitcoin also recovers faster and rallies harder than other asset classes.

According to BlackRock, bitcoin has outperformed the S&P 500 and gold within 60 days of every major geopolitical event since 2020.

Let's keep an eye on this and check back in with bitcoin at the beginning of December.

How to think two conflicting thoughts at the same time

My best guess is that bitcoin will be higher than it is today at the beginning of December.

That's because in about four weeks, America will elect a new president, and the outcome, whatever it will be, will provide more regulatory clarity for crypto, not less.

That's because just two days after the US presidential election, on 7 November, the Fed will announce its next interest rate move. And most Fed watchers expect a 25 basis point (0.25%) rate cut.

And that's because most market watchers don't think the Chinese central bank's stimulus package has been enough to revive the economy. Many analysts say more fiscal stimulus, also known as government spending, is needed to restore confidence.

The world is a messy place where conflicting things happen at the same time. A bull market can be brewing while a conflict is lurking.

How to have two conflicting feelings at the same time

By the way, I thoroughly enjoyed my trip to Hong Kong. I love the city, the food, and the hustle and bustle.

But I also got a taste of the National Security Law that China passed in 2020 to crack down on dissent.

As I was walking through the airport, I came across a board with 'Wanted' flyers showing alleged criminals that the police were looking for. I went closer and realized that there were people on the list that I knew. They were people I had met and interviewed when I was a journalist.

Have a safe weekend, everyone!

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