By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
- Bitcoin and Ethereum continue to trade in a stable range.
- The US dollar continues to struggle across all major currencies. It appears to have peaked and gaining momentum on its slide.
- Gold is yet another beneficiary as it crosses the USD 2,000/oz mark. It is now USD 30 shy of its all-time high of USD 2,075/oz.
- US Treasury yields continue to fall with strong market demand for US government bonds as the Fed rate pivot narrative gathers strength.
The Fed is widely anticipated to start cutting interest rates by mid-2024, even if inflation targets have not been met. This is because the Fed will want to normalise monetary policy to address the slowing economy. It has raised rates 11 times in the past 20 months, which has been the most aggressive in four decades.
The market consensus now points to a 1% rate cut by the end of 2024.
It remains to be seen whether lowering rates to the 4% handle will be enough to rejuvenate the housing market and stabilise the financial well-being of banks. These critical sectors of the US economy, accounting for approximately one-fourth of its GDP, have been under tremendous strain during this rate-tightening cycle.
On the positive side, tight labour market conditions could help mitigate the impact of a contracting economy on wages. This could, in turn, support consumer spending patterns and continue to bolster market confidence.
Some evidence of this can be seen in last week’s US holiday retail sales receipts. Adobe Analytics reported that last week’s retail spendings reached a record $9.8 billion and USD 12.4 billion for Black Friday and Cyber Monday respectively, while Sensormatic Solutions, a company that tracks shopper visits to stores, noted a 4.6% increase compared to a year ago.
Provided inflation continues its downward trajectory, Fed Chair Powell would likely be content with the Fed’s performance in navigating the economic challenges thus far. However, as the saying goes, “it is not over till the fat lady sings.”
Potential Market Catalyst This Week
Several Fed members are scheduled to speak this week, including John Williams on Thursday and Austan Goolsbee and Fed Chair Jerome Powell on Friday. As reported in the FOMC Minutes last week, the consensus to maintain current interest rates is likely to be echoed.
Also, last weekend’s OPEC+ meeting was rescheduled to tomorrow due to disagreements on production quotas among member nations. The agenda will still be about deepening oil production cuts to shore up prices amid a weak global economic outlook. If the odd chance of a deeper cut were to materialise, oil prices should rebound, but well within tolerable levels.
Nov 29 (Wednesday) 2130 hrs
- US Prelim GDP q/q (fc. 5.0%) – Quarterly forecast on the US economic growth is expected to be much higher than Aug’s reading of 2.1%, reflecting the resilience of the US economy. If the figure undershoots, we may see some retracing from recent market highs.
Nov 30 (Thursday) 2130 hrs
- US Core Personal Consumption Expenditures (PCE) (fc. +0.2%) – We expect the Fed’s primary inflation gauge to stay within forecast and continue to signal to the Fed that current monetary policy is effective in taming inflation.
Dec 1 (Friday) 2300 hrs
- Institute for Supply Management (ISM) Manufacturing PMI (fc. 47.9) – A slight improvement from last month is forecasted, but still way under the pivotal 50.0 level, which would continue to indicate manufacturing activity contraction.
Dec 5 (Tuesday) 2300 hrs
- Institute for Supply Management (ISM) Services PMI (fc. 52.5) –Services PMI, a key leading gauge of economic activity, focuses on purchasing managers outside of the manufacturing sector. This index has been instrumental in fuelling US’s economic growth, driven by robust consumer demand. We expect the trend to continue.
Flirting at $38,000
Bitcoin prices experienced a brief rally last Friday, reaching a high of USD 38,400, a level not seen since May 2022. However, the overall trend over the past week has been one of consolidation, with prices trading within a stable USD 2,000 range. This is not unexpected, given the lack of recent developments regarding the much-anticipated Bitcoin Spot ETF.
Since October, market participants have been carefully considering the potential impact of a Spot ETF approval on Bitcoin’s price trajectory (Fig. 1).
We anticipate that Bitcoin prices will begin to test their psychological resistance level of USD 40,000 in the weeks leading up to the next approval window in January 2024.
Depending on the timing and circumstances of the US Securities and Exchanges Commission (SEC) approval, Bitcoin prices are likely to experience increased volatility then. However, we expect the market to eventually settle into a higher range of USD 42,000 to USD 50,000 in Q1 2024.
One of the most important features of Bitcoin is its limited supply and issuance mechanism. The Bitcoin protocol is programmed to automatically reduce the block reward of coins in a process called halving. This significant event occurs approximately every four years and effectively reduces the supply of bitcoins.
Since its inception, Bitcoin has had three halvings. The first Bitcoin halving occurred in November 2012, and it had a negligible effect on Bitcoin’s price. This was likely because Bitcoin was not yet widely adopted and was thus in its formative years of price discovery.
However, both the July 2016 and May 2020 halvings produced parabolic price rallies (Fig. 2 and 3).
Convergence of Catalysts
Although the next Bitcoin halving’s impact on its price may be influenced by various factors such as overall market sentiments, liquidity as well as regulatory developments, we maintain that Bitcoin’s cyclical nature will prevail, mainly from the perspective of classical demand and supply dynamics.
The fact remains that most natural Bitcoin sellers consist of miners who need to monetize their mined Bitcoins to pay for a myriad of mining operational costs. The halving will effectively halve that supply.
At the same time, the potential approval of the Bitcoin Spot ETF could unlock a significant pool of institutional capital from pensions to asset managers, materially boosting demand for Bitcoin.
Evidence of growing anticipation for a surge in Bitcoin demand can already be seen in the narrowing discount of the Grayscale Bitcoin Trust (GBTC), the world’s largest Bitcoin investment vehicle. GBTC is a closed-end fund that trades similarly to a stock, with each share backed by a specific quantity of Bitcoin.
Its value trades at a discount from its net asset value (NAV) due to inherent illiquidity, but has recently narrowed to just 8%, the closest it has traded to its NAV since July 2021. This suggests that investors are increasingly confident in the future value of Bitcoin and are willing to pay closer to its actual value for exposure to Bitcoin.
Similarly, European digital asset manager Coinshares reported this week that institutional participation in various digital asset products has been at the highest levels since the previous crypto bull run in 2021. Year-to-date inflows currently stand at approximately USD 1.7 billion.
In summary, the convergence of these two catalysts next year is poised to significantly impact the Bitcoin’s price. The current consolidation phase presents attractive opportunities to accumulate Bitcoin strategically, as it is likely to resume its upward trend over the medium term.
What the Bitcoin Derivatives Market Tells Us
Past week’s strong consolidation has led to slightly lower implied volatilities (IV). However, the Bitcoin derivatives market indicates that there is ongoing interest in bullish positions.
For instance, Bitcoin call option contracts expiring on January 29, 2024, with a strike price of USD 50,000, are particularly noteworthy. Furthermore, the call/put ratio of open interests in Bitcoin option contracts for Q1 2024 is approximately 3:1, creating a steep volatility skew for call option contracts. This implies a strong bias for upside exposure.
On a closing note, I would like to point out that Ethereum IVs have exhibited a notable increase lately, suggesting that some market participants believe current Ethereum prices have not fully reflected a potential surge associated with an Ethereum Spot ETF catalyst. Robust demand for Ethereum options has contributed to the narrowing gap between Ethereum IVs and Bitcoin IVs.
We will discuss this topic further in next week’s edition. In the meantime, we wish you a wonderful week ahead!
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