Fed Rate Cuts Loom, Bitcoin Halving, and Elections Spice Up 2024

By Ang Kok Wee, Head of Treasury

Past Week’s Performance Dashboard

Cryptocurrency kickstarts 2024 with a bang! Bitcoin surged above $45,000 for the first time in 21 months, in anticipation of Bitcoin Spot ETF confirmation potentially as early as this week.

In contrast, US equities markets take a breather. The Nasdaq dipped 2.5% from its recent peak, while the S&P 500 held steady just 2% below its record high.

All eyes are on the upcoming release of the Federal Open Market Committee (FOMC) meeting minutes on Thursday (0300 hrs SGT). Market participants will be seeking confirmation of the Fed’s extraordinary dovish outlook on interest rates. They will also be looking out for hints regarding the timetable of expected interest rate cuts.

US Employment data (Friday, 2130 hrs) will be closely watched although a material deviation from the forecast of +167k is unlikely. Instead, focus remains on the Fed’s rate cut timing relative to the market’s expectations.

Key Themes of 2024

2023 defied expectations. Instead of a predicted global recession, we witnessed a remarkable comeback, fuelled by big tech giants leading the AI charge. The Nasdaq soared 43%, and the S&P 500 made a decent 24% gain last year. This was in despite of an unusually volatile bond market. The US 10-year Treasury yield, after reaching a decades’ high of 5.05%, plunged back to the 3% handle to close out the year almost where it started.

As we look ahead to 2024, key themes like central banks’ policies, geopolitical shifts, the US Dollar, major elections, and Bitcoin’s cyclicality may significantly influence the markets.

Interest Rate Normalisation

2024 will be the year when central banks look towards normalising monetary policy. The first US Federal Reserve’s FOMC of 2024 will take place at the end of January, but a rate cut is not on the cards.  Instead, CME Fed futures are discounting that the Fed will begin cutting rates at the following meeting on March 19-20, with an 89% chance of a 25-basis point cut priced in.

Similarly, in Europe, the swaps market anticipates a 60% chance that the European Central Bank (ECB) will start to cut rates in April. Meanwhile, the Bank of England (BoE) is expected to trail behind both the Fed and ECB in terms of policy easing, largely due to the UK’s enduringly high inflation rates. It is also widely expected that the Bank of Japan (BOJ) will put an end to its negative interest rate policy by April.

With this assumption as a backdrop, a bullish case for equities can be made this year, especially if the Fed is able to pull off a soft landing for the economy and guide inflation back to its mandated long-term target rate of 2%. Historically, successful soft landings had seen the S&P500 rally by approximately 15% on average in the 12 months after the first cut (Fig. 1).

Fig 1 What Happens When the Fed Cuts Rates Source JPM Federal Reserve NBER Bloomberg

A failure to rein in inflation would certainly trigger another bout of bond market volatility, where a bear steepening may force the front end of the yield curve (2-year US Treasury yields) to plunge, resulting in the 2 vs 10-year Treasury spread to pop back up above the neutral level. This phenomenon has been a consistent precursor to market woes (Fig. 2).

Fig 2 Two vs 10 year US Treasury Spread Recessions Canary Source TradingView

Geopolitics and US Dollar Strength

Ongoing major conflicts in Ukraine and Israel remain unresolved, with escalating social and economic costs. Additionally, geopolitical tensions in the Middle East are intensifying, especially around critical maritime passages like the Red Sea, heightening the risk of a regional armed conflict.

The year 2024 is also set to witness significant elections in several key countries, including Taiwan, Indonesia, India, the UK, the US, Russia, and Brazil. These elections may witness shifting power plays and disrupt the status quo.

The U.S. Presidential election will be the most closely watched. Polls indicate that it might be a repeat of the 2016 election, potentially pitting Donald Trump against Joe Biden again. Given the polarised nature of the previous election, a similar matchup could increase political uncertainty, possibly boosting demand for the US dollar as a safe-haven asset. Financial institutions like Fidelity and JP Morgan are forecasting a rebound in US Dollar strength this year considering these developments.

Bitcoin’s Halving and Cyclicality

The fourth halving of Bitcoin since its creation is anticipated to occur around April 2024. This event seems to follow a repeating pattern (Fig. 3) in Bitcoin’s price, likely driven by the ironclad principles of supply and demand. Since miners, who typically sell their block rewards to support their operations, are the main sellers of Bitcoin, each halving effectively cuts Bitcoin’s mining supply in half. On the other hand, factors like growing adoption and the expected launch of a Bitcoin Spot ETF are set to significantly increase demand. Historical data shows that previous halvings have typically led to explosive growth and peak values about a year after the event (Fig. 4). Rather than attempting to time the market, this bullish perspective suggests a strategy of gradually accumulating Bitcoin as the halving approaches.

Fig 3 Bitcoin Parabolic Performance in Past Halvings Source TradingView
Fig 4 Bitcoin Cycle Peaks About One Year Post Halving Event

Bitcoin Spot ETF Anticipation Reaches Fever Pitch. As the Securities and Exchanges Commission (SEC) regulators come back from the long holiday weekend to finalise paperwork for Bitcoin Spot ETF approvals, anticipation of an announcement as early as this week is pushing the price of Bitcoin higher. On Tuesday, the crypto stalwart pushed past its resistance of USD 44,800, to a high of USD 45,900, a level last seen in April 2022 (Fig. 5).

Fig 5 Technical Levels for Bitcoin and Ethereum

Bitcoin’s price momentum will understandably be dictated largely by both the timing and materiality of the approval details. If approvals are not forthcoming in January, then the final window for approval will be in March, by which an approval would almost certainly be a foregone conclusion.

In the past two days, we have witnessed intense option buying interest for upside exposure for (call options), with strikes varying from USD 45,000 – 50,000 and maturities until the end of January. This extremely positive sentiment for Bitcoin has had a ripple effect across various other crypto tokens, including Ethereum. Similarly, Ethereum has experienced a significant uptick in demand for call options, specifically within the USD 2,500 – 2,700 range, with expiries aligning with those of Bitcoin (Fig. 6).

Fig 6 Bitcoin and Ethereum Implied Volatility See a Significant Pickup Due to Demand for Options

Ethereum Dencun Upgrade. With its own Dencun upgrade (EIP-4844) slated for January 17, the blockchain is introducing Proto-Danksharding, a key step towards increasing Ethereum’s transaction throughput and scalability via its Layer 2 rollup chains. These improvements from its current form aim to eventually become a fully scaled, maximally resilient ecosystem and bolster its revenue generation longevity.

Potential Ethereum Spot ETF Approval. Additionally, we see that the market’s focus on Bitcoin Spot ETF may have invariably overlooked and underpriced a potential Ethereum Spot ETF approval, which may be only a few months behind Bitcoin’s.

Currently, Bitcoin outperforms Ethereum because of institutional allocation into Bitcoin as digital gold “pure play”. However, these aforementioned Ethereum-specific developments may provide a decent tailwind for it to play catchup on price momentum in the second half of the year.

Alt Coin Season. Following the notable recovery of the crypto market in 2023, historical trends suggest this upward trajectory may persist. Historically, ‘Alt coin seasons’—periods where 75% of the top 50 tokens outperform Bitcoin over 90 days—have been precursors to market selloffs, with April 2021 and November 2022 serving as examples. Currently, the alt coin season chart shows that we are far from a speculative market, indicating a more stable environment in the crypto landscape (Fig. 7).

Fig 7 Altcoin Season Index Source httpswwwblockchaincenternet

While we will continue to experience volatile pockets around these major milestones, we think given the generally positive macro environment, Bitcoin’s cyclicality, and upcoming development, it is possible to see an all-time high by year’s end.

Have a wonderful year ahead!

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