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A key driver to start the week was Bill Ackman publicly tweeting that he had squared his US treasury shorts. 10y treasury yields, trading ahead of 5%, slipped after the news and continued to trade on the weak side over the next couple of sessions, marking a low near 4.80%. This also helped the US stock market recover some of its slide into last Friday’s close. Federal Reserve speakers were also on the wires, and the overall messaging leaned towards peak rate hikes being priced in. December rate hike probabilities continued to inch lower.
For the most part though, markets traded weak over the weak thanks to bouts of risk aversion and key US data. US housing starts blew expectations out of the water, prompting US rates to rally and undoing most of the move from the Ackman tweet. Similarly, US Q3 GDP came in strong at 4.9%, while PCE data was also in line with surveys. The ‘good news is bad news’ paradigm continues. It didn’t help that Google, another M7 heavyweight, missed on its earnings estimates as well (though its rival Microsoft beat expectations).
The week also continued to see worries ramp up over tensions in the Middle East. Despite news that Israel would be delaying its invasion into Gaza till after the weekend, the delay was purportedly to give time for the US to move defences into the region for its other allies. Stock implied volatility remained high, with the VIX staying above 21. The S&P 500’s slide has been measured, dropping between 20-30 points during the New York trading session, and certainly doesn’t behave like it's in crash mode. But Gold closed the week above $2000 for the first time since the start of the Russia/Ukraine war, which seems like a clear sign that markets are worried.
Southeast Asia’s central banks have taken a hawkish tone after Bank Indonesia raised interest rates unexpectedly 2 weeks ago, followed by Bangko Sentral ng Pilipinas last week. Both cited stemming domestic currency weakness as the catalyst for the move. All eyes will now shift to Malaysia, where Bank Negara Malaysia meets on 2 Nov to decide on the Overnight Policy Rate amidst the Ringgit weakening to a record against the US Dollar. Our local currency hit a new YTD high of 4.80 on Monday, but has retraced slightly after that to close the week just below 4.78.
That being said Malaysian government bond yield curve movements seem to suggest that investors are not fussed about a BNM hike with merely small movements in the short end of the curve (1 - 3 years):
These movements are typical of a liquidity disjointment in the domestic bond market after a couple of difficult weeks vis-a-vis the macroeconomic data, especially higher US Treasury yields. Despite the mixed movements across the yield curve, the losses outweighed the gains leading to the government bond index succumbing to another loss this week:
Another interesting observation is that corporate bonds fared worse than its government counterpart. This is because corporate bonds are generally less liquid, and this week the complex reflected some delayed effect from last week’s heavy losses in the government bond segment.
Once again, the Halogen Shariah Ringgit Income Fund managed to meet its mandate despite difficult prevailing conditions, generating a positive return of 3bps.
The iShares Bitcoin Trust has been listed on the DTCC (Depository Trust & Clearing Corporation, which clears NASDAQ trades). And the ticker will be $IBTC. Again all part of the process of bringing ETF to market.. h/t @martypartymusic pic.twitter.com/8PQP3h2yW0
— Eric Balchunas (@EricBalchunas) October 23, 2023
In contrast with the doom and gloom in traditional markets, crypto sentiment is surging. The week started with the market catching on to BlackRock listing the ticker for its planned ETF on the Depository Trust and Clearing Corporation’s website. With the code IBTC being plain to see, markets took it as a sure sign that approval is near. Bitcoin broke handily above 32,000 early Monday morning, which marked the resistance during the June episode.
The high in spot of 35,000 in spot before moderating to trade in the range of 33,000-35,000 for the rest of the week. Over that move, short perpetual swap positions were liquidated heavily, causing prices to spike way above spot in those markets. The highs were around 36,000 in Binance and 36,750 in Bybit, both the current leaders in perpetual swap trading volumes.
Sentiment wasn’t just limited to BTC alone. The Crypto Fear/Greed Index started the week at a mere 53 (marked neutral territory), but jumped to a high of 72 (greed) over the following days as the entire crypto market was surging. Other altcoin majors like Ethereum and Ripple were lifted as well. As a key sign of the move being sentiment led, memecoins like DOGE and PEPE were huge beneficiaries too, with PEPE experiencing a near 100% surge.
US stock market performance continues to underwhelm, despite seasonality and sentiment implying otherwise. Clearly, the Israel/Palestine conflict weighs hard on risk appetite. As we caveated last week, exogenous shocks like this mess up the traditional playbook, and risk management becomes even more important in times like these. We think that based on price levels, flows, and sentiment that conditions are strong for a year-end rally should things simmer down. However, it is better to adopt a reactive stance than trying to catch falling knives.
The market’s expectation of the coming Nov FOMC meeting is unanimously for rates to stay pat. More importantly though is to watch for messaging on whether we’ve seen peak rates in this cycle or not. The market continues to anticipate that rate cuts would be coming by the 2nd half of next year. There’s a risk that due to the inflationary nature of war and the continued fiscal largesse of the current US administration that this view doesn’t play out. While higher long end rates take some urgency away from the FOMC’s war on inflation, it doesn’t change the conditions for them to keep rates higher for longer.
We don’t think that a rate hike is the right move for BNM to make, if currency weakness is the concern. In the last two years, not a single major G7 central bank has managed to stem currency weakness vs. the Dollar via rate hikes. The Bank of Canada even hiked 75 bps once last year in a surprise move, but that got them nowhere. BNM has generally been more concerned about the growth outlook, balanced against inflation. Given that inflation locally isn’t (officially) material, we don’t think a rate hike is on the cards. We have noticed though that local front end rates have been tightened via other means, such as the 3mth KLIBOR rate inching up.
The moves in Bitcoin have been a pleasant surprise, with the market rocketing past the previous resistance level to make new YTD highs. And all of this comes despite the soggy performance of traditional financial markets. Price action looks very, very supportive of a new high being made from here, although we are prepared for swings in the current range. From a technical perspective, Bitcoin looks to be consolidating in the 33000 to 35000 range in a classic flag accumulation pattern. While it’s not unreasonable to see that floor break, we think that any attempt to visit 30000 again will be bought fiercely all the way down in anticipation of an official ETF announcement. Open interest in futures and perps remain low, so the market is way less fragile than it was in August/September prior to the huge liquidation cascade down to 25000.
With sentiment surging, it’s quite clear that the market is in FOMO mode (fear of missing out). However, we must point out the high likelihood of the actual confirmation of a Bitcoin spot ETF playing out in the classic ‘buy the rumour, sell the fact’ fashion. We expect a huge surge in price on that confirmation, but for this surge to then be heavily monetised. Two key points support this:
Don’t get us wrong - we think that Bitcoin will continue to appreciate over the long term and provide strong diversifiying effects in portfolios, and over a longer term the spot ETFs will certainly be a driving force in channeling liquidity into the asset. However, now more than ever, risk management and emotional control are extremely crucial. If you wish to buy Bitcoin here, you must do so knowing that the risk-reward ratio of your decision is less attractive now in the short term, and be prepared to weather some volatility in that regard.
That said, the upside for Bitcoin from here on an ETF approval is at least the 40,000 mark, and could go as high as 48,000 based on the charts.
Thank you for reading and we’ll see you next week!
Team Halogen
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