By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
Sizzle or Fizzle?
Last week, the Fed maintained the interest rate between 5.25% and 5.50%. Fed Chair Jerome Powell noted that despite inflation remaining significantly above its 2% goal, the Fed will observe further economic data before deciding on any rate increases. Powell’s nuanced remarks regarding September’s rate projections (dot-plots) suggested a dovish tilt, although he did not exclude another hike. The rate futures market now indicates just a 15% chance of an interest rate increase in December.
Additionally, the US Treasury also signalled a lower-than-expected debt-issuance plan in its quarterly refinancing report. This prompted a bond rally as fears of a continued increase in supply eased. The 10-year Treasury yield has lost 30 basis points in the same period, to 4.60%.
The US employment figures released last Friday were indeed the icing on the cake. Ironically, the reported rise in unemployment to 3.9% and fewer jobs added than anticipated was a relief to the market, as this was seen as evidence of a slowing labour market and economy. This reinforces speculation that the Fed’s cycle of rate hikes could be over, with rate reductions potentially starting by mid-2024.
The stock market responded positively, with the S&P 500 recording its best week of the year, up 4.4% since last week. The trend continued into this week, with stock recovery hoping to set the foundations of a year-end rally. For this trend to continue, however, evidence of the broader strength of the market may be necessary to sustain one.
It is also interesting to note that the equities market’s “fear gauge”—the VIX — saw its biggest weekly plunge since December 2021. It is currently at 14.8, way off the 20.0 inflection level of market worry.
Potential Market Catalyst This Week
The calendar for the week is light, with only Fed speakers including Chair Jerome Powell (Wednesday and Friday) and Fed Vice Chair Jefferson (Thursday). We do not expect them to deviate from the current posture established since last week’s FOMC.
Please note daylight savings have been in effect since the past weekend.
Nov 8 (Friday) 2300 hrs
Prelim University of Michigan (UoM) Consumer Sentiment (fc. 63.5) – Last week’s employment data suggested that negative economic indicators might paradoxically boost market confidence, hinting that ongoing soft consumer sentiment could further fuel the recent rally in risk markets (Fig. 1).
Nov 14 (Tuesday) 2130 hrs
US Consumer Price Index (CPI) (fc. +0.6%) – After a +0.4% MoM print last month, with annual inflation stable at 3.7%, this inflation metric suggests a stabilising trend. An undershoot from the forecast would continue to bode well for risk assets (Fig. 2).
Bitcoin’s performance last week was marked by stability as the buzz from Bitcoin Spot ETF narrative distinctly faded into the background. It traded briefly to a high of almost $36,000 last Thursday but otherwise has been in a tight range between USD 34,100 – 35,500 for most of the week. It gained a modest 2.3% from the previous week.
In the recent earnings report, MicroStrategy (MSTR), led by Michael Saylor, disclosed the acquisition of an additional 6,067 Bitcoins at $27,531 each, raising its holdings to 158,400 Bitcoins. As the leading corporate Bitcoin investor, MicroStrategy’s continued investment may signal market confidence, potentially swaying other institutional entities to view Bitcoin as a credible option for long-term investment or corporate reserves.
Since Bitcoin’s surge in September, its correlation with other risk assets, like equities (S&P 500), has diverged and is currently at relatively low levels. Should a mean reversion occur, it could lead to equities playing “catch-up” to match Bitcoin’s gains, or Bitcoin’s price might trade towards the lower end of the USD 30,000 – USD 35,000 range (Fig. 3). This view provides a fair outlook for other risk assets, including equities, in the short term.
Surprisingly, the stability in the underlying price action of Bitcoin has not caused a major sell-off in its implied volatility. The term structure of implied volatility in Bitcoin remains little changed from last week (Fig. 4). While we continue to see demand for short-term bullish trades in the options market, our base case remains that Bitcoin will continue to trade in this new range. Consider opportunities to accumulate Bitcoin at lower than current levels with the HYDI BTC Put product.
Lastly, a quick update on the trial of Sam Bankman-Fried, founder of FTX. Last week, he was convicted of all seven counts of fraud related to the collapse of the cryptocurrency exchange. This comes after a month-long trial and a swift guilty verdict delivered by a jury. Sentencing is scheduled for March 2024. With the proper closure of a significant fiasco caused by bad actors in the cryptocurrency industry, this could symbolically close the chapter of Bitcoin’s tumultuous winter of 2022.
Precious lessons have been gained regarding the security of exchanges, the transparency of operations, and the responsibility for customer assets, all of which will strengthen the industry’s future. At Nodeam, we exemplify these qualities and always ensure our clients’ assets are safeguarded at all times.
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