Bitcoin hits new 2023-high at $39,730, up 130% this year

Is another rally on the way?
Team Halogen
December 4, 2023

Market Movements

Global Macro Highlights

✂️ Bill Ackman bets Fed will cut interest rates as soon as 1Q24
⏸️ Fed’s Waller expresses confidence that policy is the right place to bring down inflation  
📈 US Core PCE inflation rises 3.5% from a year ago as expected
🏭 US manufacturing mired in weakness, economy heading for slowdown
Source: Bloomberg

The S&P 500 posts another straight week of gains, on the back of easier financial conditions as treasury yields continue to abate. Earlier in the week, FOMC Governor Christopher Waller opened the door to a possible Fed pivot. In a Tuesday speech, he stated confidence over current monetary policy being sufficient to fight inflation, and reckons that the Fed ‘could start lowering the policy rate’ should the trend in inflation declines continue. Fed Chair Powell pushed back against speculation over rate cuts during his Friday speech, but his remarks over inflation were taken positively by the markets.

On the growth side of the equation though, Bill Ackman has also publicly announced on Tuesday that he expects the Fed to cut interest rates as soon as the first quarter of 2024. Now famous for his call that 10Y Treasury yields would go to 5.00%, and taking profit on his trade near the top, the market is certainly paying attention to his remarks and getting on the bandwagon. It didn’t help that Friday’s ISM manufacturing data came in weaker than expected, with a decline in new orders and factory employment. The GDPNow indicator has also slipped precipitously to now read 1.2% for Q4.

Overall, 2Y Treasuries have staged a whopping 40 bps decline over the week. Gold has also been performing well with the directional change in real yields (lower real yields are positive for gold). The market now expects 125 bps or 1.25% of interest rate cuts by next December as the most probable scenario.

Malaysia Markets Highlight

⛽ Malaysia to cut blanket fuel subsidies in second-half of 2024
💰 Anwar: Investment commitments worth RM347b secured from overseas
Source: Bloomberg

It is often said that a picture paints a thousand words. The chart above tells the most pertinent Malaysian economic story of current times. As an emerging economy that is reliant on foreign inflows and capital (although less so than some of its neighbours), there is an overarching need to prove to foreign investors that as an actively borrowing sovereign entity Malaysia is able to pay back its debts. A fiscal deficit that exceeds all neighbours, barring the Philippines, is not a statistic that lends well for a borrower. 

Once this vantage point is understood, one understands the urgency for the government to try and reduce the fiscal deficit. Not merely for the sake of prudence, but at this juncture it is to avoid reaching a precipice of no return. Economy Minister, Rafizi Ramli, announced that the government aims to roll out a targeted fuel subsidy in the second half of 2024 hence implying the end of blanket subsidies. 

The longer term structural issue of increasing FDI attractiveness seems to also be on the government’s priority with news that PM Anwar is actively courting new investors. This is something worth monitoring despite actual resultant flows/benefits being some ways off.

The “elephant in the room” subsidy has finally been addressed, after the Budget announcement last month seemed rather underwhelming in terms of structural reforms (chicken, egg, electricity and diesel phased subsidy reduction). Make no mistake, this announcement by no means is a done deal and further due course needs to take place before this becomes reality. Furthermore, markets largely brushed off this announcement perhaps it comes with potential political backlash if handled incorrectly. 

Instead, domestic markets benefited more from the spillover effect of the November rally in global bonds with government bonds bouncing back from a loss in Week 47, while corporate bonds were on pace week-on-week.

Another point to note is that the Halogen Shariah Ringgit Income Fund continues to prove its low volatility credentials (read: steady returns) in this prevailing environment, and delivered an annualised net return of 4.03% in November 2023 (33bps).

The yield curve flattened as longer dated bond yields fell, with an interesting but not uncommon inversion between the 7 and 10-year.

Source: Bond Pricing Agency Malaysia

Crypto Market Highlights

📈 Bitcoin hits fresh 2023 high of $39k, analysts say the rally is just getting started
🤑 MicroStrategy bought $600M of BTC in November, increased holdings by 10%
💥 World's largest Bitcoin futures ETF breaks 2021 record highs for assets under management
Source: Bloomberg

The crypto space hasn’t had much in the way of quality news over the last week, with probably the only notable headline being that MicroStrategy continued to buy more Bitcoin just below the $37,000 level. Despite any real headline grabber, price action remained supportive. Bitcoin continues to make higher lows and culminated with a new year-to-date high on Sunday, pushing up to $39,730 and just shy of the $40,000 level.

Correspondingly, our Halogen Shariah Bitcoin Fund gained 8.8% in November 2023 and is now 43.5% up since inception in August 2023, making it among the top 3 performing funds YTD in Malaysia according to Lipper.

Bitcoin leads the major tokens in this space, as the BTC dominance index has been on an uptick this week. Tokens like Ether did try to take centre stage on Friday with a minor outperformance, but Bitcoin still outperformed with this latest push higher.

What are we monitoring for the week ahead

What does all of this mean? Our thoughts

The narrative is now rapidly shifting to US economic weakness forcing the Fed to pivot quickly. For now, the market reaction is ‘bad news is good news’, where weaker economic data is cheered by the market and helps support asset prices. This will be put to the test again this week, with US employment data once again being front and centre. 

We think this reaction function persists until we start seeing weakness in corporate earnings. Especially if those are led by the tech sector, which now makes up nearly 27% of US total equity market capitalization. There is a little bit of push and pull here though, as the tech sector is also sensitive to movements in interest rates, and lower rates across the board provide a bit of support. From here though, it’s all about the valuation game. But the US earnings season doesn’t start till late January 2024, so the market can still play this game.

Bill Ackman is now looking like he’ll be 2 for 2 (3 for 3 if you count his take profit call too). Of course, it helps that he’s using that fame to encourage the market in his favour. On that note, the market has room to pile into this trade still. We think that 5x rate cuts being priced in for 2024 might seem a lot for now, but may end up being a little underwhelming if the data does show a sharp slowdown. 

For bonds, the disparity between the Fed’s messaging and market pricing makes for potential breeding grounds of volatility and seeing how rates have enjoyed a really good run over the past 4 weeks, any upcoming vol will likely sting bond investors. If you’re looking to seek refuge while waiting for a better entry point we would like to recommend the Halogen Shariah Ringgit Income Fund as a liquid rest stop.

The FX space has been a little more choppy this week despite the movements in yields. USDMYR has been range bound, but most of the global USD weakness happened in the late Friday hours, after the ISM print and post Powell’s speech. We’d expect an opening gap lower on Monday, and some catching up in the pair in line with regional peers.

The recent bout of price action in crypto seemed to indicate that we won’t need an ETF approval to push Bitcoin to the $40,000 level, and indeed that’s what we got. Michael Saylor’s purchase of more Bitcoin is helping to fuel that sentiment from the spot side, and spot interest likely continues to build with Coindesk reporting that nearly $1 billion of BTC has been withdrawn from exchanges, likely into cold storage. However, the weekend push seems to be more derivatives led than spot. as momentum traders pushed price higher hoping to liquidate leveraged short sellers and trigger stop loss orders.

It clearly worked, as data showed over $20 million in liquidations and a sharp reduction in Open Interest (OI) levels (by about $500 million across all exchanges tracked). Given this latest move, short sellers might be reluctant to fight the uptrend with fresh positions, which does set up scope for slightly weaker resistance at the 40k level. We’ll be watching that closely.

The options market seems to think that nothing material will develop in that space for the month. With some anecdotal accounts of institutional volatility selling, the at-the-money volatility curve on Deribit had been slowly declining, with shorter tenors being hit more than those post December. There is also a widening premium between the end December expiry and the end January expiry; the former does not cover the 3rd SEC ETF deadline which falls around 14 Jan 24. The spread trade indicates that traders have been selling front month volatility to fund long options positions which cover the event deadlines. While the latest weekend push breathed a bit of life into the curve, its shape still persists.

Source: Laevitas

In terms of price action, we expect the $40,000 level to attract interest, but might take a few attempts to break. The play should remain the same: wait for an ETF headline fueled rally in BTC, before rebalancing any exposure. Until then though, spot could continue to push higher, building a higher base for a more favourable rebalancing level.

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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Team Halogen
December 11, 2023
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