By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
- Bitcoin outperformance halted with the massive liquidation of leveraged long positions on Monday. First negative week for Bitcoin in two months, dragging Ethereum and the rest of cryptocurrencies with it.
- Gold lost ground for a second week in a row after failing to reclaim the USD 2,000/oz level.
- A mixed macro backdrop keeps US Treasury yields within a narrow range and mostly unchanged in the past week.
- The US dollar was also range-bound except against the Japanese yen, which outperformed after the Bank of Japan hinted at policy tightening.
Major economic data releases in the past week were mixed. Last Friday’s US Non-Farm Payroll indicated a surprising drop in unemployment and underscored continuing tight labour market conditions. On the other hand, US Consumer Price Index data yesterday aligned with market expectations of inflation.
All eyes are on the US Federal Reserve’s “Fed” decision tonight (Thursday 0300 hrs SGT), with the market largely sidelined in anticipation. The subdued VIX, also known as the Fear Index, reflects institutional confidence in this outcome.
Once this air of uncertainty is cleared, the stock market could look to continue its upward trajectory into the year’s final weeks, likely to be propelled by broad-based gains across sectors like technology, industrials, and banks.
Potential Market Catalyst This Week
This week marks the final policy decisions for the year from major central banks, including the Fed, the European Central Bank (ECB), and Bank of England (BOE). Among these, the Fed’s rate decision is the most closely watched.
Dec 14 (Thursday) 0300 hrs
- US Fed Rate Decision and Quarterly Summary of Economic Projections – An unchanged policy target rate of 5.25-5.50% is largely expected, and that would likely signal the end of the rate hike cycle.
The post-meeting press conference by Fed Chair Jerome Powell will be closely scrutinised, along with the updated Summary of Economic Projections. In September, the dot-plot distribution for 2024 terminal rates shifted significantly downward (Fig. 1). However, recent inflation declines have exceeded the committee’s September forecast. As a result, some market participants are anticipating even lower dot-plots by the Fed for 2024. Nevertheless, the revised dot-plots would remain lofty compared to what bond markets are currently pricing (4.15% by December 2024).
As a background, there are currently around USD 95 billion of assets sold by the Fed each month as part of its Quantitative Tightening (QT) efforts. We do not expect the Fed to deviate from its current course. As it continues to drain the market of liquidity via QT, Treasury bond auctions have remained largely healthy despite small pockets of volatility.
However, QT’s future trajectory will likely take its cue from the Fed’s rate-path outlook. A dovish tilt towards future rates would unlikely coincide with aggressive QT. Therefore, a dovish FOMC statement could trigger a significant curve flattening, with 10-year yields experiencing a steeper decline than the front-end. In the end, divergence in rate expectations between markets and the Fed could create turbulence in risk asset prices, particularly in H1 2024.
Dec 14 (Thursday) 2000 hrs
- Bank of England Monetary Policy – The BOE is charting a slightly more cautious path compared to other central banks, with only 100 basis points worth of interest rate cuts implied from the UK (SONIA) forward curves. Notably, the Monetary Policy Committee (MPC) is likely to maintain the current bank rate of 5.25% at tomorrow’s meeting. However, Governor Andrew Bailey may attempt to temper market expectations of future rate cuts.
Dec 14 (Thursday) 2115 hrs
- European Central Bank Monetary Policy – Market participants expect the Main Refinancing Rate to remain at 4.5% but are pricing in rate cuts of similar magnitude to the Fed over the next year (125 basis points cut). Attention will be focused on the press conference to be held by President Lagarde and VP Luis de Guindos half an hour after its rate policy announcement. The ECB is thought to be the likeliest first G10 central bank to cut key interest rates. This is partly attributable to weaker economic data in Europe, such as last month’s larger than expected CPI drop indicated (2.4% actual vs 2.7% forecast).
Dec 13 (Wednesday) 2130 hrs
- US Producers Price Index (PPI) (fc. 0.0% MoM)– Benign PPI will underscore weaker inflation.
Dec 14 (Thursday) 2130 hrs
- US Retail Sales (fc. -0.1% MoM)
Dec 15 (Friday) 2245 hrs
- US Flash Manufacturing Purchasing Manager’s Index (PMI) (fc. 49.5)
- US Flash Services Purchasing Manager’s Index (PMI) (fc. 50.70)
Bitcoin experienced a brief panic sell-off on Monday morning, dropping nearly 8% in 20 minutes to reach a low of $40,400. This triggered liquidation of over USD 200 million in leveraged long positions, according to Coinglass.
Rumours suggest the plunge was driven by whales (large wallets with significant market impact) taking profits after Bitcoin’s strong run without pullbacks in the last two months. Ethereum was also affected, losing almost 9% and reaching a low of $2,170 during the same period.
Prices have since stabilised, but the initial shock of the flash crash has dampened enthusiasm.
While initial reactions may have indicated widespread concern, a closer look suggests the market may not be as worried as initially perceived. In the Bitcoin derivatives market, the sharp pick-up in implied volatility (IV) due to position covering has abated, and (IV) has reverted to normal contango (upward sloping term structure) (Fig. 2).
In retrospect, a correction was not unexpected, considering Bitcoin’s exceptional performance this year. Before Monday’s flash crash, it had gained a staggering 167% year-to-date. We believe corrections tend to eliminate “weak hands” and leveraged positions, paving the way for future upward momentum. The fundamental factors driving Bitcoin’s optimism remain largely unchanged. Technical levels for both Bitcoin and Ethereum are updated in Fig. 3 below.
When integrating Bitcoin into your investment portfolio, consider an allocation size suitable for your long-term goals. Bitcoin’s unique risk-reward profile implies inherent short-term volatility, but it is essentially the cost of an asset with a tremendous track record of extraordinary long-term returns. Our HYDI products offer a compelling solution for our clients to achieve such diversification and investment goals.
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