By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
The recent surge in interest rates, wreaked havoc on risk assets last week.US equities performance in the past week was negative, with major indices closing lower. Both S&P 500 and NASDAQ Indices fell 2.9% each in the past week.
Gold continues to benefit from uncertainty arising from the Middle East crisis. At USD 1975/oz, Gold is up 1.8% this past week. It came within a hair of the USD 2000/oz psychological level last Friday.
VIX crossed above the 20 level on elevated fears but has since subsided. Currently at 19.
The Only Real Game in Town
The ongoing quarterly earnings in the US reveals a mixed bag for the most part. A good illustration is the contrasting results from Alphabet (GOOGL) and Microsoft (MSFT) today, with the former missing expectations while the latter delivering a beat. Overall, no clear trend has emerged from the US quarterly earnings season. In general, companies are slightly beating earnings estimates, but the beat rate has been tepid.
The real focus in the coming weeks and months will be on interest rates, particularly long-term ones (Fig. 1). Investors have been selling bonds in response to the Fed’s “higher for longer” mantra. This in turn drives up long-term Treasury yields. The bellwether US 10-year Treasury hit 5% for the first time since 2007 on Monday:
The current bond market rout, considered the worst of its kind, will ripple through various risk assets, including real estate, corporate investments, and equities. In the equity market for instance, higher yields from risk-free US Treasury bills are making them a more attractive alternative, potentially dampening enthusiasm for equities.
The upcoming US Federal Budget deadline, due November 17 (Friday) is also muddying the rates outlook. The situation is complicated by the White House’s plan to seek congressional approval for a $106 billion war emergency aid package intended for Israel and Ukraine. This adds an extra layer of complexity to an already highly contentious and polarized budget debate. The current Federal deficit stands at an unprecedented USD 33 trillion.
With this growing debt backdrop, the market believes that the burden would fall on the shoulders of future buyers of these bonds. We believe we are witnessing a return of demand for “term premium”, which refers to premium these bond buyers will demand for taking on more duration risk. The supply and demand imbalance may continue to drive longer maturity bond yields even higher in the coming months.
Paul Volcker raised long-term interest rates from 2% to 16% in the 1980s to fight inflation. Investors should keep this in mind, because even though long-term rates are now at multi-decade highs of 5% (Fig. 2), it is possible that they could go even higher in the coming months, for the reasons we discussed.
On the flipside, there are growing concerns that these higher rates will slow down the US economy and lead to a recession. On Monday, two heavyweight investors, Bill Ackman and Bill Gross, expressed skepticism about the health of the US economy, with the latter going so far as to predict a recession this quarter.
Potential Market Catalyst This Week
Central Banks Meetings:
October 25 (Wednesday) 2200 hrs
- Bank of Canada (BOC). Expected to keep key rate at 5%.
October 26 (Thursday) 2015 hrs
- European Central Bank (ECB). Expected to keep all rates unchanged.
October 31 (Tuesday) 1100 hrs
- Bank of Japan (BOJ). While BOJ is expected to maintain its ultra-loose monetary policy at the upcoming meeting, there is a small chance that Governor Ueda may tweak the yield curve control (YCC) policy to accommodate the highly anticipated tightening next year.
October 26 (Thursday) 2030 hrs
- US Advance GDP (fc. 4.3%) – Economists forecast that the third quarter will see strong economic growth of 4.3%, doubling that of the previous quarter. The Atlanta Fed model’s real-time estimates suggest that there is even some room for an upside surprise.
October 27 (Friday) 2030 hrs
- USD Core Personal Consumption Expenditure (PCE) Index (fc. +0.3% MoM) – Core PCE is one of the Fed’s preferred measures of inflation. It is unlikely to change much in the near term, as it has been slowly declining to 3.7% in September. However, this is still far from the Fed’s inflation target of 2%. Speaking of the Fed, they are expected to keep interest rates unchanged when they meet next week (October 31-November 1).
October 26 (Thursday)
- Amazon (AMZN) after market close
Bitcoin (BTC) surged past $35,000 yesterday, a level which was last seen in May 2022. It has gained almost 20% in the past 7 days, with most of the gains recorded this week.
With less than a week to the end of the month, Bitcoin has undoubtedly lived up to its track record of seasonal strength, having broken out of its six-month range and registering almost 30% gain in October alone.
4 Letter Word Sparks Pump
The slew of positive development regarding the potential approval of Bitcoin ETFs continue to fuel gains for Bitcoin.
Most notably, Blackrock’s upcoming iShares Bitcoin Trust has successfully been registered with the Depository Trust and Clearing Corporation (DTCC), complete with an assigned unique ID number or ticker symbol, IBTC. However, it has been revealed by DTCC that the ETF has been on its website since August, which is standard practice when preparing to launch new ETFs into the market.
Other recent positive events include a favourable court ruling for Grayscale, boosting the likelihood of converting their Bitcoin trust, GBTC, into a Spot ETF. Additionally, the Securities and Exchange Commission (SEC) has dropped its case against Ripple Labs, adding to the overall optimistic sentiment.
All Show and No Tell
Bitcoin’s pump is also proving to be the tide that lifts all cryptocurrency boats. Ethereum has its best daily gain since the Shanghai upgrade in April 2023. It has gained 12% since the start of the week and saw a high of USD 1,850 yesterday.
So far, a lot of bullish momentum rides on anticipation of potential approval of Bitcoin spot ETF applications by the SEC. Price action also suggests a short squeeze in both the spot and derivative markets, compelling dealers to scramble to cover positions or manage exposures due to Bitcoin rapid price ascent.
However, once the dust settles, Bitcoin may settle into a new range of USD 30,000 – USD 35,000 for the next couple of months until the SEC applications deadlines are due (Fig.3). Depending on where Bitcoin trades then, when approval is given, Bitcoin will likely see another push higher.
This Bitcoin-centric development will continue to spur demand for Bitcoin over other cryptocurrencies. The lack of a substantial narrative regarding Ethereum’s upgrade roadmap suggests that Bitcoin’s dominance could rise further. Bitcoin’s current market capitalization stands at USD 665 billion, or 54% of the entire cryptocurrency market (Fig. 4).
Bitcoin implied volatilities jumped across the various tenures (Fig. 5). The implied volatility term structure inverted for a brief period when shorter tenure options had higher implied volatilities compared to longer tenure ones but has since mean reverted to a regular upward sloping term structure (Fig.6).
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