Countdown to Bitcoin ETF Decision, Fed Hawks Props up Dollar

By Ang Kok Wee, Head of Treasury

Past Week’s Performance Dashboard

● Bitcoin supercharged volatility driven by the looming Spot ETF deadline, triggering massive liquidations on both leveraged long and short positions as the spot round tripped between USD 40,600 and USD 47,900.

● Equities underperform in the wake of uncertainty over the timeliness of rate cuts, after some Fed officials sounded hawkish when they indicated the Fed was in a “restrictive stance” while waiting for inflation to fall towards the target rate.

● Market scales back on interest rate-cut expectations. The 10-year US Treasury yield rose back above 4%, and the US Dollar strengthened as a result.

Strong US Labour Market

Last Friday’s US employment report was positive with 216,000 hirings in December, exceeding forecasts by 48,000. The unemployment rate held steady at a healthy 3.7%. This is indicative of a robust labour market which the Fed hopes to rely on to support continuing consumer spending patterns as the economy slows.

However, the strong labour data was interpreted by the market as somewhat inflationary, and the discount for a 25-basis point rate cut in the March 19-20 FOMC meeting subsequently fell from 89% to 61% (chance of a cut).

New Year Hangover

The late rally in 2023 may have returned a tremendous year for risk assets but 2024 is so far turning out to feel more like a hangover from an overdose of rate cut optimism.

Tech giants, which were responsible for 60% of S&P500’s performance last year, have displayed mixed performance. The only exception has been Nvidia (NVDA) which has gained 7.3% year-to-date and hit an all-time high of USD 540.

The timing and extent of potential Fed easing holds the ultimate sway over the market’s performance in first half of 2024, driving investor sentiment and sector rotations. Given so many moving parts, there is a dispersion of opinions on whether the Fed can orchestrate a soft landing, with varying perspectives among different financial entities (Fig. 1).

Fig 1 Wall Street Base Case Economic Outlook for 2024 Source Bloomberg

Earnings Season

Quarterly reporting season for US equities begins this Friday. While corporate profits are moving into a sweet spot, the economy is widely considered to be in a late-cycle phase and may mean only modest earnings growth. This may favour allocation to large-cap companies with quality cashflows in the utilities and healthcare sectors as safer bets. We will continue to update as the earnings season unfolds in the next few weeks.

Potential Market Catalyst This Week

This week will see inflation figures released, which will be crucial in providing feedback to the Fed on their monetary policy path.

Jan 11 (Thursday) 2130 hrs

US Consumer Price Index (CPI) (fc. +3.2% YoY) – Inflation has come down quickly in recent months due to moderating costs of services. The trend needs to persist to convince the Fed to act sooner rather than later.

Jan 12 (Friday) 2130 hrs

USD Producer Price Index (PPI) (fc. +0.1%) – The volatile PPI was flat in the previous reading. Given that consumer spending has been robust, producers may find it easier to charge more for goods and services and pass it on to consumers.

BITCOIN

Watershed Moment

The Securities and Exchanges Commission (SEC) has kept everyone in suspense as the deadline draws to a close today. However, it appears the regulator is working hard for a final push across the line, as evidenced by its extensive feedback, the amended filings, and its rapid (rare same day) response time, all implying a positive outcome for the near dozen applications. If the SEC gives the green light, the ETFs could start trading as soon as the next business day. This possibility was also alluded to by VanEck and Valkyrie heads yesterday.

Bitcoin ETF Fee Fight Heats Up

The stakes are enormous, with billions potentially flooding in from retail and institutional investors eager for Bitcoin exposure. It also underscores the serious intent of these asset managers to prepare for a successful launch. Key applicants like BlackRock, VanEck and Fidelity revealed their fund fee structures for their proposed Bitcoin ETFs on Monday, heralding a key step towards obtaining the green light from SEC. The expense ratios (fees charged by the ETF manager) for most being will be around the 0.2- 0.5% range. It appears most are offering to waive off fees for a limited period (Fig. 2).

Fig 2 Expense Ratio for Various Bitcoin Spot ETFs Source Bloomberg

This news drove Bitcoin as high as 9% to USD 47,000 on Monday, before giving back some gains.

Supercharged Short-Term Volatility

Intraday volatility surged in the past week as the Spot ETF deadline loomed. A speculative Matrixport report on potential rejections triggered a flash crash last Wednesday, dragging Bitcoin down 10% and causing USD 500 million in leveraged long positions to be liquidated.

So, what can we expect from the market when these ETFs are finally approved? One thing for sure is market volatility. This morning’s fake news (SEC approval & subsequent denial) highlights this, with prices whipsawing between USD 47,900 and USD 45,100. Demand for options has also caused implied volatility to remain elevated, and the cost of hedging the event risk is approximately USD 2,800 per Bitcoin (Fig. 3).

Fig 3 Bitcoin and Ethereum Implied Volatility

Once the initial exuberance settles down, a market correction could set in. However, for long-term investors, the bigger picture shines brightly. Bitcoin’s potential for substantial long-term returns should remain the focus, regardless of temporary fluctuations.

Fig 4 Technical Levels for Bitcoin and Ethereum

While Standard Chartered’s prediction of USD 50 – 100 billion entering the Bitcoin ETF market in 2024 may be on the optimistic side, market consensus gravitates towards USD 10 – 15 billion of inflows. The debut of Bitcoin in mainstream finance will be monumental for the digital asset in 2024. We maintain our view that we will see a new all-time high for Bitcoin before the year ends.

Ethereum

Meanwhile, Ethereum has been considerably overshadowed by Bitcoin. But during this morning’s Bitcoin head fake, Ethereum price gained 6% and held steady at 2360. We think this may be an early indication of what could come. Three drivers may provide Ethereum with the edge over Bitcoin post approval:

● A group of asset managers including Blackrock, VanEck and Proshares have submitted similar applications to the SEC but are currently overshadowed by their Bitcoin counterpart.

● January 17 Dencun Upgrade (see last week’s commentary).

● Technically ETH/BTC may be forming a double bottom with the last time ETH being so weak compared to Bitcoin was in June 2022. This morning’s move may seal 0.05 level as a strong support (Fig. 5).

Fig 5 ETHBTC Forming a Double Bottom Source TradingView

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