By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
Last Friday the US equities markets were undercut by the rising Middle East crisis. In retrospect, the spark of optimism for US equities at the beginning of October turned out to be a red herring, as the S&P 500 Index closed out the month down 2.1%.
After a three-month losing streak, the Index is down 8.8% from its July peak. It is also technically weak, having cross below the 200-day moving average level of 4230.
At the same time, US bonds saw support from safe-haven demand, providing a reprieve for bond yields. Since the US 10-year Treasury yield hit 5%, it has since come off and stabilised at around 4.9% currently.
Rising Bond Yields
Yesterday, the Bank of Japan (BOJ) kept its short-term interest rate target at -0.1% and introduced minor adjustments to its yield-curve-control (YCC) policy, where it now adopts a more adaptive approach to managing yields on 10-year government bonds, allowing for higher yields up to 1%.
This makes the BOJ currently the sole remaining central bank in the world still with an ultra-accommodative monetary policy.
Nonetheless, the BOJ’s upgrade of Japan’s 2024 inflation outlook from 1.9% to 2.8% may set the stage for it to eventually exit its Negative Interest Rate Policy (NIRP). 80% of Reuters-polled economists believe this will happen by June next year.
When this happens, it could have a ripple effect on global bond markets, especially the US bond market, where Japanese investors are historically among the most active buyers. Rising Japanese bond yields could encourage fund repatriation by Japanese investors and reduce demand for US government bonds, leading to lower bond prices and higher US Treasury yields.
Speaking of higher US Treasury yields, some market participants believe the recent rise of bond yields has tightened financial conditions, doing the Fed’s job effectively.
Consequently, the market expects the Fed to keep its interest rate policy unchanged tomorrow, and there is only a 28% chance of a 25 basis points at the following meeting on Dec 12-13.
Fed Chair Jerome Powell hinted the labour market and economic growth may need to slow to ultimately achieve the Fed’s inflation target of 2%. With recent robust economic data indicating resilience in these areas, we believe the Fed will not soften their posture until a data trend (comprising of two quarters of weaker data) emerges to indicate otherwise. Thus, the base case remains a cut no earlier than mid-2024.
Potential Market Catalyst This Week
Central Banks Meetings:
Nov 2 (Thursday) 0200 hrs
- FOMC – US Federal Reserve Interest Rate Decision (fc. 5.25-5.50%, Unchanged)
Nov 2 (Thursday) 2000 hrs
- Bank of England Interest Rate Decision. (fc. 5.25% Unchanged) – Fear of a deepening recession the UK triggered by poor economic activities, weak household and corporate spendings, soft labour demand, as well as persistently high price inflation will prompt BOE to adopt a cautious wait-and-see approach.
Nov 1 (Wednesday) 2200 hrs
- US ISM Manufacturing Purchasing Managers’ Index (fc. 49.0) – A leading indicator that provides a pulse for the level of US economic activity. It is unlikely to move into expansionary territory above the pivotal 50 level, as it has been in the past 5 months.
Nov 3 (Friday) 2030 hrs
- US Nonfarm payrolls (fc. +178k) – Previous month’s blowout employment figures (+336k) set the backdrop for higher bond yields which the market duly delivered. We can only hope for a slightly less bullish number this time, especially when equity markets remain susceptible to a larger correction in the face of potentially even higher bond yields.
Nov 2 (Thursday)
- Apple (AAPL) after market close – Of the Magnificent Seven technology stocks in the S&P500, five have already reported their quarterly earnings, and there is no distinct emerging trend so far (Fig.1). Only Microsoft (MSFT) and Amazon (AMZN) have held on to gains in this earnings reporting month, while Alphabet (GOOGL), Meta (META), and Tesla (TSLA) are down in October. Nvidia (NVDA) reports November 21. The lack of a clear concerted driver from these stalwarts exposes the Index’s vulnerability to other macro factors.
The burst in demand for Bitcoin spurred by the recent wave of Bitcoin Spot ETF optimism may have faded away, but Bitcoin has stuck itself comfortably in a new range since it broke out of its USD 31,500 resistance on Oct 24.
Short-term price action remains constructive, and the derivatives market space continues to see increasing upside exposure into December, predicated on the upcoming spot ETF approval deadlines. Any hints of potential approvals will fuel the next meaningful uplift in sentiments and price of Bitcoin.
Bitcoin has had four positive months this year (January, March, June, and October), followed by small retracements (Fig. 2). We believe this trend will continue, and Bitcoin to stay between $30,000 and $35,000 (Fig. 3) in the meantime, unless there is an unexpected early approval of a Bitcoin ETF.
Despite the interplay between rising bond yields and risk assets, Bitcoin price’s divergence may persist due partly to its flight-to-quality attributes and local factors (Fig. 4).
Implied volatilities for Bitcoin have tapered off from its 60 vol handle peak but remain elevated compared to the lows seen in August this year (Fig. 5). To find out how implied volatility may affect the APY of HYDI products, please refer to our supplementary article here.
So there are two ways to play this. In the short term, look to position a range-bound price action. In the longer term, higher conviction plays would be to accumulate Bitcoin and/or Ethereum as the Bitcoin Spot ETF approvals come into fruition.
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