By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
● Bitcoin prices continue to slide below USD 40,000 on the back of large outflows from GBTC and whale accounts. It has lost 20% of its value since its post-Spot ETF approval high of USD 49,000.
● In contrast, US equities have achieved major milestones, with S&P 500 and Dow Jones Index hitting all-time highs, driven by stronger consumer data last week.
● Central bankers reiterate hawkish language, and the market responds by dialling back chances of a Fed rate cut in March but is still factoring in ample cuts for the year.
● Focus of US earnings season is shifting to the “Magnificent Seven” tech giants. Leading this group, Tesla is set to announce its earnings today (Jan 24) while Google and Microsoft report next Tuesday (Jan 30).
● Chinese policymakers move in to stabilise ailing equities markets with huge liquidity injection.
After weeks of wavering, US equities rallied last week. Both S&P500 and Dow Jones Index smashed their previous records last Friday. Two catalysts provided the confidence for markets to rally:
● US consumer patterns continue to remain robust, with strong prints on Retail Sales and Consumer Sentiment last week.
● Positive AI-related development in the semiconductor industry boosted chipmaker stocks like Nvidia, AMD, and Broadcom Inc.
From Banks to Technology
The US corporate earnings season’s focus now turns to technology stocks. First among the “Magnificent Seven” to report will be Telsa (TSLA) on Wednesday.
● January 24 (Wednesday) – Telsa
● January 30 (Tuesday) – Microsoft, Alphabet
● February 1 (Thursday) – Apple, Meta, Amazon
● February 28 (Wednesday) – Nvidia
The results of these tech giants’ earnings will provide clues to the next direction of the market. If TSLA’s earnings can deliver, then the near-term path of least resistance for the market will be more upside.
The explosive move in the equities space has been more about the confidence the market has in the resilience of the US economy than the realigned expectations of the Fed’s rate cuts.
Ironically, a sustained rally in the stock market might worry the Fed about more inflation in the pipeline, as could an acceleration in geopolitical tensions and stronger-than-expected economic growth.
Last week, Fed speakers sounded almost in unison proclaiming they are in no hurry to cut rates. In response, Fed funds futures now indicate the odds for a rate cut at the March FOMC meeting to be 40%, a steep slide from 81% just a week ago. Rate cuts are likely to begin in the May – June window.
The positive mood on Wall Street in recent months has been in stark contrast with China, the world’s second-largest economy. Draconian policies have cast a shadow of uncertainty over its expected recovery after the pandemic. This uncertainty is reflected in the poor performance of Chinese stocks, with the benchmark CSI300 Index languishing near its lowest point in five years.
In response, Chinese policymakers are planning to inject liquidity into the market to combat this downturn and boost market confidence. It announced yesterday that it will mobilise about 2 trillion yuan (USD 278.5 billion) for a market stabilisation fund. These funds will be used to purchase shares onshore to stem the steep correction in the stock market. Although this move is seen as a positive step towards stabilising the markets, it remains to be seen if further fiscal and monetary band-aids are needed to turn its ailing economy around.
Potential Market Catalyst This Week
This week’s data could provide insights into how the US inflation story will pan out, which may in turn influence the timing of Fed actions in the months to come.
Jan 24 (Wednesday) 2245 hrs
● US Flash Manufacturing Purchasing Managers’ Index (PMI) (fc. 47.6)
● US Flash Services Purchasing Managers’ Index (PMI) (fc. 51.4) – Both of these leading indicators of US economic health are expected demonstrate similar trends: contracting manufacturing while services remain healthy.
Jan 24 (Thursday) 2130 hrs
● Advanced US GDP (fc. 2% QoQ) – The US Commerce Department will release its initial gross domestic product estimate, and economists are expecting the data to indicate slowing growth.
Jan 25 (Friday) 2130 hrs
● US Core Personal Consumption Expenditures (PCE) Price Index (fc. +0.2% MoM) – The consensus expectation is for core PCE prices, which exclude the volatile food and energy components, to stabilize. The forecast of +0.2% growth for the month will bring the full-year rate to 3%. While trending lower, is still higher than the Fed’s long-term inflation target.
Since SEC’s approval of the Bitcoin Spot ETF on January 11, Grayscale Bitcoin Trust (GBTC) has been the major seller in the market. Over the past week, it has seen a total outflow of USD 3.5 billion.
Of these, half were sales from FTX’s holdings, which were redeemed for the latter’s bankruptcy settlement. The remaining selling activity involved GBTC shareholders who capitalized on their arbitrage opportunities with GBTC shares, opting for lower-priced spot ETFs. Since the sales began, GBTC’s discount to Net Asset Value (NAV) has been reduced to 0.06% currently. Additionally, Chainanalysis, an on-chain analytics firm, has reported some selling activity from significant Bitcoin holders, known as ‘whales’.
These structural sales have dominated the past week and have put additional pressure on Bitcoin’s value, which has fallen 20% from its recent high of USD 49,000.
The market sentiment for Bitcoin is likely to remain bearish until the selling pressure from GBTC eases. But there is optimism that this correction will be short-lived. For one, FTX has sold out all its GBTC shares. Secondly, as interest from regular investors begins to warm up to Bitcoin Spot ETFs, secular demand will ultimately drive prices higher.
Throughout Bitcoin’s history, sharp price corrections are not uncommon. Its inherently high volatility is very much a feature. Sizing of positions is therefore paramount so investors can ride out the short-term volatility to participate in its long-term outperformance over all other assets.
Despite negative performance since the approvals, Bitcoin’s long-term bull trend remains intact. Over longer time frames, Bitcoin is still up 17% and 70% over the past three and twelve-month periods respectively.
Technically, the immediate support level come in at USD 36,000 (Fig. 1). Implied volatilities have largely normalised now with the exception of dates around Bitcoin halving, which still attract some bids. There was a flurry of demand for short-term downside protection that has since abated with Bitcoin prices holding up at around the USD 40,000 level (Fig. 2).
JP Morgan recently expressed skepticism about the potential for an Ethereum Spot ETF, despite precedence set by the approval of a Bitcoin Spot ETF. This caution stems from the SEC’s history of lengthy decision-making processes, even though Ethereum futures ETFs suggest implicit commodity recognition. The earliest possible approval for an Ethereum Spot ETF is anticipated to be around early May 2024, coinciding with the final deadlines for Ark21Shares and VanEck.
Despite these uncertainties and the broader crypto market downturn, Ethereum’s network activity is at its highest since November 2021 (when Ethereum was at its all-time high of USD 4,800), highlighting its continued economic value of the blockchain. Its Dencun upgrade is also progressing, having completed the first of three testnet upgrades, with plans to go live on the mainnet in the next quarter. Admittedly, it would still need stability (in Bitcoin) to realise the full potential of Ethereum’s value.
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