By Ang Kok Wee, Head of Treasury
Past Week’s Performance Dashboard
● After almost two weeks since the approval of Bitcoin Spot ETF, outflows from GBTC appear to be slowing. Bitcoin bounced around the USD 40,000 support level last week before mounting a charge higher. Currently at USD 43,000, Bitcoin has retraced almost half of its losses from its recent sell-off.
● US equities continued to edge higher over the past week, with S&P500 and Dow Jones indices rising to close at fresh records on Monday. Mega-cap tech companies will headline the busiest corporate earnings week.
● US interest rates are expected to remain unchanged at tomorrow’s Federal Open Market Committee (FOMC) policy meeting. The market will be peeled for any hints of future rate cuts from Fed Chair Powell’s briefing.
● US Jobs report on Friday (Feb 2) is expected to show solid but slowing job markets in January.
● The International Monetary Fund (IMF) hikes its global growth forecast for 2024, citing a resilient US economy and stabilising Chinese market due to fiscal policies.
On Monday, both the S&P 500 and the Dow Jones indices marked their sixth record high, partly fuelled by an unexpected reduction in the US Treasury’s quarterly federal borrowing. The Treasury had initially projected a net borrowing of USD 816 billion for the first quarter of 2024 in October last year but revised this figure down to USD 760 billion on Monday.
To put this in perspective, the US government ran a USD 2 trillion budget deficit last year, elevating its national debt past USD 34 trillion for the first time. The Fed’s interest rate policies, aimed at curbing inflation, have inadvertently escalated the cost of servicing existing debt, substantially contributing to the annual deficit. This inconvenient topic was mentioned by Treasury Secretary Janet Yellen, who last week admitted that sustained high interest rates could present significant challenges in managing the national debt and funding the federal budget.
US Federal Reserve in the Spotlight
Regarding interest rates, the key focus of the week is the first FOMC policy meeting for 2024. No change is expected to the Fed funds rate. While the Fed has telegraphed a 75-basis points cut this year with its Dot Plots, data suggests it will not be in a hurry to cut rates. Last week’s Core PCE and GDP data indicates a slightly receding year–on-year inflation amid resilient US economic growth.
Expect a cautious statement mirroring last month’s communication, offering no clues about the timing of rate cuts. As mentioned in our previous post, the market has already begun adjusting to verbal pushbacks from policymakers, and we think rate cuts will only begin in mid-year.
Busy Calendar for Earnings
Market participants are bracing for a flood of corporate earnings reports from 20% of S&P 500 constituent companies, notably including mega-cap tech giants Microsoft, Alphabet, Apple, Meta, and Amazon.
Microsoft led the charge this morning with quarterly results that exceeded expectations, showcasing robust performances in the cloud services and Artificial Intelligence (AI) divisions. Microsoft’s early investments in OpenAI have branded it the king of AI applications, which helped propel it past Apple as the world’s most valuable company, with a market capitalization surpassing USD 3 trillion.
Conversely, Alphabet missed earnings expectations, facing challenges with lower-than-expected advertising revenue despite growth in its cloud business.
Pivotal Equities Market
The collective performance of these five mega-cap stocks, with a combined market capitalization of USD 10 trillion, is pivotal in shaping the Index’s near-term direction. With some of these stocks currently trading at all-time highs, it can be argued that most positive developments have already been baked into current prices (Fig. 1).
Consequently, there is growing concern among market participants about the potential impact on the Index if these companies report underwhelming earnings or provide weaker forward guidance.
Still, despite a shaky start, the S&P 500 Index has performed well in the month of January, with a 5.2% gain. This equities rally that began in late October last year is partly due to a more favourable macro and interest rate outlook.
The IMF echoes this optimistic sentiment. Just yesterday, it updated its global growth forecast for 2024, raising it by 0.2% to 3.1%. It attributes the adjustment to the unexpected resilience and stability in key global economies, aided by effective inflation management through the central banks’ restrictive monetary policies.
Potential Market Catalyst This Week
Feb 1 (Thursday)
● US FOMC Policy Meeting (fc. Fed Funds rate unchanged at 5.25-5.50%)
● US Institute for Supply Management (ISM) Manufacturing PMI (fc. 47.2)
Feb 2 (Friday)
● Apple, Meta and Amazon (after market close)
● US Non-Farm Payroll (NFP) (fc. +150k)
Feb 5 (Monday)
● US Institute for Supply Management (ISM) Services PMI (fc. 51.2)
Reversal of Fortune
The initial outflows from Grayscale Bitcoin Trust (GBTC) have steadily slowed in the past week, with reported outflows at around USD 200 million per day. Total GBTC outflow currently stands at USD 5.2 billion. Considering inflows from the other nine ETFs, net positive aggregate inflows stand at USD 1 billion (Fig. 2).
As we mentioned last week, once selling pressure from GBTC eases, we should expect a secular demand pickup which will in turn drive steady inflows into the other ETFs. Currently, the primary beneficiaries are Blackrock and Fidelity, with ARK21 Shares and Bitwise also experiencing significant inflows, though to a lesser extent.
Bitcoin bounced around the USD 40,000 support level last week until the large month-end option expiration last Friday evening. Since then, it has been on a steady upward trajectory, gaining 8.3%. It has since recouped almost half of its losses that occurred during its 20% post-ETF sell-off, settling comfortably back into a more familiar pre-ETF approval range (Fig. 3). Implied volatility continues to slide back towards the lows seen last year as the risk premium recedes (Fig.4).
With the Bitcoin halving event less than three months away, it is difficult to say if the recent sharp selloff could pass off as the expected pre-halving dip. Historically, such dips have preceded major rallies leading up to halving events in past cycles.
Ethereum’s second testnet for the Dencun upgrade went live successfully today, bringing Ethereum’s “proto-danksharding” feature a step closer to its mainnet launch by the end of February 2024. This important and highly anticipated upgrade will enhance blockchain speed and cost and boost its ecosystem’s growth. Separately, Standard Chartered Bank digital asset research released a memo highlighting Ethereum’s price potential, forecasting that the token might reach USD 4,000 if there is progress in the SEC’s approval of a spot ETF in the coming months.
Considering this is a pivotal week full of important data releases and macro events, adopting a cautious stance and observing market reactions to these developments before making any decisions may be a prudent strategy.
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