By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
● Historic day for Bitcoin as US Securities and Exchanges Commission (SEC) approved Bitcoin Spot ETF last Thursday. Net initial inflows were USD 900 million with Blackrock leading the charge with 36% market share, while Fidelity’s FBTC is a close second.
● Excitement surrounding the launch initially propelled Bitcoin to a two-year high, but the rally quickly met resistance, sending the price down to a low of USD 41,500 over the weekend. Bitcoin price has stabilised around USD 43,000 this week.
● US banks kick off corporate earnings reporting season with subdued results, set against the backdrop of higher inflation data.
● Donald Trump wins the Iowa Caucus easily, setting himself up as the leading candidate to win the Republican ticket for November 5th US presidential elections.
Last Friday’s earnings reports from four major Wall Street banks – JPMorgan, Bank of America, Citigroup, and Wells Fargo – reflected a cautious outlook. Key factors impacting their performance included higher loan loss provisions and one-off expenses. JPMorgan’s fourth quarter earnings in 2023 were significantly affected by a large fee paid for acquiring First Republic Bank, despite a record earnings year overall. Citigroup announced plans to cut its global workforce by 10% by 2026 as a cost-saving measure.
These banks are grappling with the effects of last year’s regional banking crisis and broader economic challenges, leading to a downturn in investment banking activities. A positive note was seen in consumer-driven spending. However, with potential interest rate cuts by the Fed looming, which might further compress interest margins, future bank earnings forecasts might require cautious reassessment.
Last week’s US CPI data came in higher than forecast, (act. +3.4% YoY vs. fc. +3.3%), challenging the market’s expectations of a Federal Reserve rate cut in March. Coupled with strong employment figures, this data suggests the Fed may wait for more substantial evidence before adjusting its policies. This stance aligns with the hawkish tone from December’s Fed Minutes, which contrasted with Chair Powell’s earlier indications.
Similarly, European Central Bank (ECB) officials have echoed a hawkish sentiment this week. ECB’s Robert Holzmann indicated that rate cuts this year are unlikely, while Joachim Nagel of the Bundesbank hinted at possible easing by summer.
Markets are closely monitoring incoming data, which will significantly influence central bank decisions. Despite current market expectations of a 63% likelihood of a March rate cut, recent employment and inflation data might render this optimism premature.
If the Fed delays rate cuts until mid-2024, market expectations will likely need adjusting, potentially creating short-term challenges for risk assets. Also, pay heed to Fed chatter and comments, which may be an echo chamber for the pushbacks. Fed speakers this week include John Willams (Wednesday), Raphael Bostic (Thursday) and Mary Daly (Friday).
Red Sea Skirmish and Oil Prices
Yemen’s Houthi rebels have in recent months created disruption for merchant vessels in the Red Sea. These attacks culminated this week when a missile struck a US-owned shipping container in the Gulf of Aden.
Despite these events, oil prices have not been immediately impacted, and the likelihood of conflict escalation is considered low. Last year, with major conflicts on two fronts, oil prices still managed to decrease by 20%, aiding global deflationary trends.
According to projections by the US Energy Information Agency, crude oil prices this year are expected to mirror 2023 prices, despite these potential supply chain disruptions and ongoing OPEC+ cuts of 2.2 million barrels per day until March 2024.
The US Republican Party Primaries season kicked off Monday with the Iowa caucuses and will last through June. Donald Trump’s performance in Iowa was no surprise (Fig. 1), having led polls earlier by a wide margin. This sets him up as the leading candidate to win the GOP nomination, and a repeat of a Trump vs Biden presidential election slated for November 5th.
Research on the stock market’s response to four-year election cycles in the US indicates that the stock market often fares better in the latter half of a presidential term. This pattern is generally linked to efforts by the sitting administration to stimulate the economy, aiming to boost their re-election prospects or keep their party in power. Reflecting on the 2020 election themes, a similar pattern is conceivable. Such measures usually increase market liquidity, positively influencing risk assets. However, it is important to remember that other economic and geopolitical factors can also impact market performance.
Concurrently, there is an urgent need for the US Congress to pass a bipartisan short-term bill before the impending Friday deadline to avoid another partial government shutdown. If passed, this bill would allow government agencies to remain funded until March 1st, giving legislators additional time to craft a more comprehensive spending legislation.
Potential Market Catalyst This Week
Jan 17 (Wednesday) 2130 hrs
● US Retail Sales (fc. +0.4 MoM) – Retail sales data should show that US consumers are still spending albeit at the more moderate pace. It is expected to be similar to November’s data.
Jan 19 (Friday) 2300 hrs
● Prelim University of Michigan (UoM) Consumer Sentiment (fc. 69.3) – This survey of consumers’ take of future economic conditions could be indicative of future expectations for spending patterns. This installment of preliminary data is expected to be slightly weaker compared to the previous month’s figures.
SEC Finally Approves!
The approval of the first-ever Bitcoin Spot ETF by the SEC last Thursday brought a collective sigh of relief in the cryptocurrency market. This initially drove Bitcoin to a two-year high, but the excitement was short-lived as resistance soon caused a drop to USD 41,500 over the weekend. Since then, Bitcoin’s price has found some stability around USD 43,000.
This price movement can be viewed in the context of a 70% surge in Bitcoin’s value since June 2023, when Blackrock filed its ETF application, making some level of profit-taking by early investors likely. Another factor influencing Bitcoin’s price dynamics could be investors shifting their focus to Ethereum, anticipating the possibility of an Ethereum Spot ETF following Bitcoin’s lead. This is clearly demonstrated by Ethereum’s outperformance over Bitcoin’s this past week.
Implied volatility has also come off hard (Fig. 2) as the event risk and short-term volatility retreated. Prices have stabilized and we now look to both macro factors as well as Bitcoin’s upcoming halving cycle to reset into a new range (Fig. 3).
Having registered over USD 4 billion worth of two-way trading volume on its debut, Bitcoin Spot ETF can be considered the most successful ETF launch ever. In two days of trading, Blackrock and Fidelity are clear winners, netting two-thirds of net inflows (Fig. 4).
Unsurprisingly, the outflow from Grayscale was caused by existing investors unwinding the GBTC discount arbitrage as well as looking for alternative ETFs with cheaper fees. Grayscale’s fees are a lofty 1.5%, compared to the rest.
All said, net inflows have undershot expectations a little. But these are early days indeed. New flows from traditional platforms and channels will take time as investors warm up to the idea of asset allocation into Bitcoin. Market consensus sees net allocation into Bitcoin Spot ETF to be anywhere between USD 10 – 15 billion in the first year alone.
The longer-term effects of Bitcoin Spot ETF may emulate the trajectory of Gold. The first US Gold ETF was launched by State Street in November 2004 under the ticker GLD. In the ten years since it was launched, the price of the commodity had jumped fivefold from USD 332 to USD 1,600 /oz. Gold ETFs have a combined USD 105 billion in assets under management currently.
Given the long runway of Bitcoin adoption, allocate and acquire your coins responsibly and securely with HYDI.
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