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US Treasuries form the largest, most liquid and important securities market in the traditional finance world. This week, two institutions with great power - the Federal Reserve and the Treasury Department - acted. The net result was a huge rally for US bonds.
The US stock market was encouraged by the lower rates, after being hit by higher rates in the recent past.
The Treasury made two significant moves that supported lower yields. First, that it was going to raise less debt than initially expected, at USD112bn. And second, planned issuances of 10-year and 30-year bonds will rise less than planned - a sign that the Treasury doesn’t want longer dated yields to go too high.
The Federal Reserve left rates unchanged at 5.25% to 5.50% for the second meeting in a row. Their policy meeting statement was tweaked with a hint that higher bond yields had been doing the Fed’s work and therefore short-term interest rates may not need to rise again. This led the market to conclude that the Fed is done hiking rates.
The net result was a rush to buy treasuries across the board, resulting in bond yields declining and helping financial conditions to ease. The mood in markets was decidedly risk on, with stocks staging a sharp rally and oil easing despite the lack of resolution in the Middle East. Friday night’s Nonfarm Payroll report also came in weaker than expected at 150k vs. 180k surveyed, and the unemployment rate ticked higher to 3.9%. This helped put the icing on the cake, helping the S&P 500 complete a near 250 point rebound for the week.
Post FOMC, USD weakness was also front and center, with strong recoveries in most G7 currencies. Yen strength was most notable, as the Bank of Japan’s effective removal of a YCC ceiling introduced volatility into the Yen’s price this week. Rumours of a more hawkish tweak to policy started pre-BOJ but ultimately disappointed, causing price to see-saw dramatically. Into Friday, the JPY reversed all weakness post BOJ.
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As widely expected, Bank Negara Malaysia kept rates unchanged at 3%. The language in the MPC statement was very much in line with the previous meeting’s, with little change to the growth and inflation outlook and not too much concern for the weakness of the Ringgit.
For the most part, the Ringgit took this development in stride, with little being changed over the event. USDMYR continued to be driven by external developments, mainly the post-FOMC environment and lower US treasury yields. While lagging earlier in the week, USDMYR played catch up to other regional currency pairs post FOMC and ended the week just below 4.73.
On the back of the global bond rally, the local bond market followed suit to a lesser degree in line with its lower historical volatility: while the 10-year US Treasury ended the week with a 29 basis point rally, the 10-year Malaysian Government Security managed 15 basis points instead.
Yields fell all across the curve including the short end, which benefited the Halogen Shariah Ringgit Income Fund albeit to a lesser extent compared the market indices:
Cryptocurrency sentiment continued to help support crypto prices across the board. Bitcoin price managed to break very briefly above the 35200 resistance level on Wednesday, sparking a short lived rally to 36000. Ultimately, the pair retreated back below 35200, to trade back in the established range over last week. Price action continued to see little correlation with traditional finance, and ironically was not a huge beneficiary to the FOMC led rally there.
Despite the association with Sam Bankman-Fried (who was also found guilty on all 7 charges of fraud this week), Solana has been a major outperformer in the crypto space. Amongst the top 50 coins, Solana stands out the most with a week on week gain of nearly 25%. The high in SOL was nearly $47 (48.2% gain) before ultimately retreating. Price was likely driven by hype over the annual Solana Breakpoint conference that occurred during the week. Despite some indications that FTX was selling some of its SOL supply, the amount sold was a relatively small fraction, certainly not enough to deter SOL’s rise.
US markets remain in the driver's seat. We think the current situation leaves markets between a rock and hard place. The more US bonds rally on perceptions that the Fed is done hiking, the greater the chance that the Fed will start hinting at raising rates.
Using the 10-year US Treasury as a barometer, yields have now unwound more than half of the September/October run-up resulting in conditions getting close to neutral. Powell and the rest of the FOMC have consistently mentioned how the rise in longer dated yields have reduced the need for further hikes. With another FOMC in December, there is a chance that yields can go up again. Powell did emphasise that this cycle was different from others because of the impact of receding pandemic conditions.
We previously mentioned that structurally, conditions were conducive for a market rally sans an escalation in geopolitical conflict. Given the slow burn of that event, there hasn’t been an exogenous shock of sufficient magnitude to drive volatility higher and keep the pressure on risk assets. And now with the yield curve coming off, markets are quickly switching tack to position for the seasonal year-end/Santa rally. While risks still abound, we think this is a probable scenario given the structural conditions and seasonal trend.
Taking this into account and coupled with the fact that Malaysian bond markets are strongly influenced by its US counterpart, we see the potential for more volatility in the domestic bond markets. A great place to shield from this would be the Halogen Shariah Ringgit Income Fund.
The Ringgit will continue to be influenced by external factors. In our opinion, BNM’s rate decision was the correct one and would have done very little to stem currency weakness, despite what the man on the street might think. With a 1.1% decline week-on-week and momentum looking to favour USD weakness, USDMYR could possibly regain the 4.60/4.70 range if the trend continues.
For those watching, Bitcoin’s break above the 35200 level saw a quick acceleration to the upside. Data from Amberdata.io indicated that at least part of that reason could be attributed to the ‘gamma squeeze’ phenomenon which has commonly been observed in traditional financial assets like Tesla, Apple, and of course Gamestop. Data from the Deribit options exchange indicated that options market makers were heavily short call strikes in the 34000 to 36000 levels.
With a technical break of a ‘triple top’ pattern on shorter time frame charts, market makers may have been forced to hedge these shorts by initiating long positions on the break. We noted that the move was accompanied by a rise in perpetual swap funding rates, which supports that thesis - though we’ve no doubt that part of the rise there was also speculative traders chasing short term momentum.
Structurally and from reading the price action, we continue to target higher levels in Bitcoin, though some consolidation in the current range is still to be expected. Don’t sleep on the other tokens though. After spiking to a YTD high last week, the BTC dominance index has generally been on the decline as other Altcoins have started to pick up momentum. ETH has yet to see a strong range break, but looks to be gathering momentum as intraday lows have consistently been moving higher.
Solana’s rise in the last two weeks has also been a major contributor to the decline in BTC dominance levels. However, we caution that since Breakpoint first started in 2021, the price of SOL has consistently risen into the conference but then would dip thereafter. While 2 years of seasonal watching should not be the basis of a trade, the price action makes sense from a sentiment standpoint.
Thank you for reading and we’ll see you next week!
Team Halogen
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