Bitcoin breaks $44,000 mark as bets for rate cuts rise

Is the market's expectation aligned with the Fed's next move?
Team Halogen
December 11, 2023

Market Movements

Global Macro Highlights 

🥇Gold price hits all-time high as traders bet on interest rate cuts
💼US recurring jobless claims dropped by 64,000 in Thanksgiving week
🛢️Oil extends losing streak as failed rally hardens bearish mood
🇯🇵Yen surges after BOJ hints at policy shift, sending dollar lower

Source: Bloomberg

The week started in a big way with Gold continuing its rally and hitting a new YTD high of ~$2,146, which prompted renowned Gold bug Peter Schiff to tweet about it. Sadly, this was not meant to last, and prompted a very sharp reversal in Gold. XAU dropped precipitously from there, closing the day down over 5% from its YTD high. While the reason for the initial rally was attributed to the change in real US yields, there was no similar headline narrative that would support this abrupt reversal and subsequent weakness.

Meanwhile, oil has been trading weak despite some marginal supply cuts by smaller OPEC+ members. Risk assets did seem to be trading with ‘weaker economic growth’ sentiments over the week, with treasury yields dipping ever lower and US equity barometers meandering. The JOLTS and ADP payroll data supported this narrative. 

Source: Bloomberg

However, Friday’s NFP headline numbers blew things out of the water, with better than expected numbers and a lower unemployment rate than forecasted (3.7% vs. 3.9% expected). 

Source: Bloomberg

That said, job revisions continued their downward trend as well, which helps to offset some of the bite that the November report had. Subsequently, treasury yields rallied off their month’s lows, and ES futures briefly dipped. While yields eventually stabilised (and the curve flattening further), stocks staged a strong rebound into the close, with a new YTD high notched in the SPX500. 

BOJ Govenor Ueda had made comments on Thursday that the central bank had several options available when it was time to tighten monetary policy. The market took those comments to mean that a policy shift was near, and expressed that euphoria via an unwinding of JPY shorts. USDJPY suffered heavy losses, culminating in a mini-flash crash late Thursday night that saw USDJPY trade briefly below 142, before profit taking and the subsequent NFP report rallied the pair all the way to close the week near 145.

Malaysian Market Highlight

📊 Malaysia’s labour force improves in October 2023, unemployment rate remains at 3.4%

Source: Trading Economics, Department of Statistics, Malaysia

With little of note in economic data releases for Malaysia this week, domestic markets took queues from external developments. The only significant local data release that caught our eyes this week was unemployment being steady for the fifth consecutive month.

Stocks were generally in negative territory, with sentiment being affected by volatility in FX markets (thanks to the BoJ in part) and the souring outlook in China (Moody’s cuts outlook for financial institutions across China and Hong Kong).

With US Treasuries ending the week largely unchanged (despite relatively high volatility), fixed income markets enjoyed another week under the sun with gains across the government bond yield curve:

Source: Bond Pricing Agency Malaysia

Notably, there is more flattening in the Malaysian yield curve as tenures 5 and above all saw gains this week with the short end staying pat. This also spilled over to corporate bonds which also had a good week:

A stable short end of the yield curve meant that the Halogen Shariah Ringgit Income Fund continued to produce steady returns. 

Crypto Market Highlights

✏️ BlackRock, Bitwise file updated applications for spot Bitcoin ETF
⚒️ Bug fix on Bitcoin core could end Bitcoin ordinals and BRC-20 Token, according to Bitcoin Developer
📈 Bitcoin breaks $44K as gold price reaches new all-time high

Source: TradingView

Despite Peter Schiff’s comments on Monday, Bitcoin continued to be this year’s star, easily slicing through the $40,000 level on Monday. It briefly paused at $42,000 (a local high of $42,420 was printed on Binance, for anyone who gets the meme), before continuing on to make a new YTD high on Friday, with minimal pullbacks in between.

Headlines reported on Wednesday that both Blackrock and Bitwise had updated their filings with the SEC to incorporate comments and suggestions from the regulator. It was also reported that the SEC is now in talks surrounding technical details with the various applicants, which indicates that the process has advanced one step closer to a final approval. Overall, the odds of the SEC approving a spot Bitcoin ETF look even better than they did (which Bloomberg had initially pegged as 90%), with the news expected to drop between 5 and 10 January 2024.

While Bitcoin remained lofty on the news, the entire crypto market was even more buoyant in the latter half of the week. Ether staged a 5% rally on Thursday, massively outperforming Bitcoin, in what looks like the next leg up in the rotation trade. Other major alts like AVAX and SOL in turn outperformed ETH, but this week’s story seems to be the listing of Jito, which had a massive airdrop, and the meteoric rise of BONK (Solana’s dog themed memecoin).

There was a little bit of drama in the Bitcoin space on the technical side. Well known community developer Luke Dashjr said he was working towards a Bitcoin Core upgrade that would exclude ‘spam data’, which included Bitcoin inscriptions and Ordinals (Bitcoin’s version of NFTs). Ordinals do indeed introduce utility into Bitcoin’s traditionally purist blockchain functions, but have also resulted in much more expensive network fees of late. The Bitcoin community is now divided, though many are arguing that despite Luke’s best efforts, Ordinals are here to stay. Bitcoin did wobble slightly over the news, but ultimately shrugged it off.

What are we monitoring for the week ahead

What does all of this mean? Our thoughts 

Despite the knee jerk reaction over the headline NFP number, the market evidently thinks that a soft landing is the current scenario, thus fading the initial drop in equities and continuing the stock market rally. We focus more on the continued downtrend in job revisions, which overall doesn’t change the picture that an economic slowdown is occurring. In that scenario, the long bond trade looks to be a better one in terms of winning probability, though for now we still see the stock market rally continuing.

This coming week heralds the November CPI print and the last FOMC meeting of the year. Expectations are for inflation to continue slowing and the Fed to keep rates on hold. More importantly, we look to the Fed’s forward guidance and statement of economic projections. Given the Fed’s messaging, the market’s expectations of 5 rate cuts by Dec 2024 is likely unrealistic vs. the dot plot we are likely to see. That might cause some volatility in prices over the event. Ultimately where we settle will depend on how Chairman Powell navigates the press conference - overly hawkish rhetoric would see an unwind in recent equity and bond gains.

We expect local markets to react to the FOMC event, but not much else locally. The only real outperformer in FX recently has been the JPY. As a whole, pairs which have been heavy favourites in the JPY carry trade, such as EUR and AUD, also suffered with the JPY short unwinding. The MYR has never been positioned as such, owing to its relatively closed nature, and was thankfully spared that. However, USD remains relatively strong vs. Asian units for now.

MYR bond markets in particular look rather expensive on the long end and perhaps could be at threat of a change in sentiment/narrative in global rates and bond markets but this is tempered by signs of a domestic deceleration amidst soft external drivers. After all, a flattening yield curve is a sign of slower growth prospects. It is this same assessment that has been weighing on Malaysian stocks too. If you share the view that the risk-reward trade off is looking unappealing, you may consider parking your funds in the Halogen Shariah Ringgit Income Fund which is a proven safehouse from volatility while looking/waiting for the next buying opportunity. 

The recent headlines about Bitcoin ETF applications advancing to the technical stage is definitely good news for those betting on an approval outcome. Correspondents have said that reaching this stage has usually been the precursor to such. However, it is unlikely that an approval will come before the identified window of Jan 5 - 10 of next year, given the arguments that a) approvals will likely come simultaneously for all applications as opposed to piecemeal and b) the last date for comments to be entered on some applications is January 5, 2024.

The options market agrees with at least some of that. Chances of approval going higher inversely correlates with the implied volatility of options (which is itself a measure of uncertainty). End January implied volatility on Deribit has dipped by 4 vol points week on week. As a whole, the entire volatility curve has also slipped lower in the last couple of days.

While the initially identified resistance levels have since given way (in surprisingly easy fashion), the signs still remain that the final outcome could result in a buy the rumour, sell the fact scenario, plus a rotation into ETH longs instead. We saw this on Wednesday night, where the initial Bitcoin rally was then rapidly outpaced by ETH.

We think Bitcoin has potential to grind higher from here as anticipation for the final stretch builds. $48,000 was the previously identified resistance to watch, though given the ease at which the market has sliced through some of the previous levels, this might not hold that easily either. At these levels, risk management and sizing becomes even more important in decision making. We are not adverse to the idea of buying short dated puts in BTC closer to the anticipated date for portfolio hedging purposes, though ultimately look to buy dips once again after the initial volatility clears.

Thank you for reading and we’ll see you next week!

Team Halogen

Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.

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December 20, 2023
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