Happy 2024! We expected the Christmas period to be more quiet on the news front (hence the break), but in the traditional space there really has been a lack of headline news. While news has been more forthcoming on the crypto side of things, this edition will be more focused on our expectations and preparation to kickstart the year.
Traders and institutional money managers are a superstitious lot - what can you expect from a community that consistently uses the term ‘animal spirits’? But one thing many agree on is the importance of starting the new financial year on the right footing. Why? Because starting the year on a strong foundation helps build momentum for one’s investing performance for the rest of the year. Imagine being down 10% in the first quarter alone. That makes it much harder for one to meet his or her performance targets by year end. Conversely, being up 10% in the first quarter instead provides a comfortable buffer for risk taking, and a larger base to compound gains.
With this in mind, the turn of the year is an important time to recentre oneself and strategise for the next one. And that’s what we hope to break down in this edition.
Let’s start off with a recap of what we’ve expected to happen during our November outlook briefing:
Easier macro financial conditions leading to increased risk taking appetite and higher asset prices at the start of the year, before a possible deterioration due to worries of a slowdown
Local markets to be driven by the external environment, which if nothing else points to a mild strengthening of the Ringgit
Crypto markets will be driven by the decision to approve or not spot Bitcoin ETFs in the US, before succumbing to a typical ‘buy the rumour, sell the fact’ type of price action and a subsequent rotation out of BTC into Ether.
Given 1 and 2, we would expect that traditional macro barometers should have a strong January. For some additional reassurance, we turn to seasonality studies.
If you’ve been following our writeups, you might have noticed that we’re big fans of seasonality. Though never to be traded on its own merits, seasonal trends can be big tailwinds in favourable environments. Sometimes, the reason for a seasonal trend can be easily explained, but in markets, it’s usually a little harder to define. Regardless of whether it can be explained in words though, seasonality in markets continues to be a thing, and we look at seasonal trends to help reinforce our views.
Here’s a quick look at the performance of a few barometers - namely the S&P500, the TLT ultra long bond ETF (as a proxy for US bonds), and the GLD ETF (for Gold) - in the month of January over the last 15 years. The plot shows the performance of a strategy that only bought the underlying at the start of January, sold it at the end of the month, and did nothing else for the rest of the year.
Right off the bat, we can see a pattern, a fairly strong one at that, for Gold. Since the start of the QE era post 2008 GFC, Gold has had strong seasonal performance in January nearly every year. To a certain extent, we can see the same trend in long dated US treasuries, but one that is less pronounced. There doesn’t seem to be a strong seasonal trend in stocks, despite what feels like a naturally bullish predisposition to go long the index.
In terms of win rate, being long Gold in January has a win rate of 68.25% over the last 15 years. Not bad odds for a simple strategy. Similarly, being long TLT produced a win rate of 62.5%. This does provide some support to our view that being long assets tied to easier financial conditions, such as treasuries and Gold, will achieve positive results.
Is there a similar seasonal pattern for local assets?
We extend the above study to our local stock index and the Ringgit. It doesn’t quite seem like we see the same strength in seasonal trend, but it does look like the Ringgit has had a tendency to strengthen (USD/MYR lower) in January since the year 2015. Again, this does help support our expectations for the coming month ahead.
There has already been some front running of this take though, as the December price action in the last two weeks has been nothing but positive for traditional financial markets. This is especially so in the local space, where after a terrible year for fixed income asset managers, front loading of local sovereign paper in December has pushed yields lower. Similarly, inflows from portfolio managers have helped push USDMYR below the 4.60 level to end the year. Some dilution of the seasonality effect could take place, but should not change our view drastically.
There are several known events to watch out for at the start of the year which have been telegraphed in advance. Keeping track of these events is crucial to having an updated decision framework going into the event, and being able to react or position accordingly.
The obvious ones would be central bank meetings. The first Federal Open Market Committee decision for the year lands 31 January 2024 at 3 am local time. Fed messaging has indicated peak rates are behind us and we continue to operate on the assumption of that environment. Nonetheless, one should continue to look at the data leading up to the meeting to see if anything has changed. As a reminder, the Fed is expected to hold rates steady at the January meeting, and start cutting rates at the March meeting.
Similarly, our own BNM Monetary Policy Committee decision will be released on 24 January 2024 at 3pm. Expectations surrounding this meeting have also been well telegraphed, but BNM has always been more nuanced than the Fed to read, given the lack of a press conference format. Of interest would be their forward looking statements on the growth and inflation outlook for the country.
BNM also released the Malaysian Government Debt Auction Calendar for 2024 to better prepare financial institutions. Released alongside was analysis from Malaysia’s top-ranked bond sell-side firm, i.e. Maybank Investment Banking Group, with the following key takeaways:
Duration likely to extend with more supply in 15-30Y
Impact will be curtailed by lower overall supply
The first quarter of 2024 in particular features the lowest amount of maturities and therefore the highest net supply (since supply does not vary as much as maturities from quarter to quarter). This means that 1Q24 will be the most bearish in terms of domestic supply and demand dynamics but this could easily be offset if US Treasury yields continue to mark new lows.
Last, but not least, in the tradfi space is marking the start of the US large cap earnings season. This officially kicks off Friday, 12 January 2024 starting with the banking sector where heavyweights like JPMorgan, Citibank, and Bank of America report their Q4 and FY2023 earnings.
Earnings season will be important to keep track of for two reasons. First, the only way US equity indices sustain their current lofty levels is if earnings can keep up. The runup in price from November was largely attributed to a Santa rally and cash on the sidelines, and the breadth of the rally was notably wider as well. Second, earnings will likely inform us by proxy on the trajectory of US growth, which everyone has niggling worries about now. Many expect a slowdown, but whether it will be a soft one or harder than anticipated could be hinted at in earnings.
The Crypto Rollercoaster
Speaking of events, THE event of January for us will be the approval deadlines by the SEC for various spot Bitcoin ETF applications. Though there are a range of deadlines, the earliest one is on 10 January 2024 for the Ark/21 Shares application. Many industry experts predict that approvals will come simultaneously as opposed to piecemeal, so the 10 January 2024 deadline will likely apply for all ETF applications that have met the criteria. To make things even more adrenaline inducing, the decision could fall anytime between the 2nd and 10th of January of 2024.
In the last couple of weeks, the SEC has literally spelt out what applicants must do to be part of the first wave of approvals. Applicants would need to refile their applications to use the cash creation process, and name or have in place an agreement with an Authorized Participant (a regulated broker-dealer who can facilitate the creation and redemption of the ETF baskets). The deadline to amend these applications was 29 December 2023, and we got a wave of last minute updates that have met those criteria.
Unless some other factor in the individual application results in a disqualification (like in the case of Grayscale), we peg the odds of at least one ETF application being approved at 99%. Where we go from here though, is what probably needs the most preparation for.
Some industry observers have noted that the level of hype for a new ETF has been unprecedented in this case. The event has been so well telegraphed, and interest so high, that it is hard to tell whether the next move in price would follow traditional behaviour. As such, we think it is important to map out the possible outcomes and reactions to the news.
A popular theory, and one we believe to an extent as well, is that an approval decision will result in the typical ‘buy the rumour, sell the fact’ type of price action. News of an approval decision likely causes a spike in price as uninformed buyers rush in, before well positioned traders use this as exit liquidity en masse, causing a cascade lower and a slow bleed lower thereafter.
Market participants should all be students of history, and it is rarely ever the case that this time will be different. Some of the reasoning that supports this theory would be the following:
Similar type of price action for major events where a traditional institution adopted Bitcoin, namely the launch of Bitcoin futures on CME in 2017, and El Salvador’s official purchase of Bitcoin for the country’s reserves in 2021
If industry experts think that it’s a 99% chance of an approval, shouldn’t the price already be much higher?
Open interest in Bitcoin futures is already near $5 billion on CME alone, and probably closer to $12 billion across the top exchanges. This has been a very steady metric throughout the last couple of months, despite pockets of long liquidation
Open interest in Bitcoin call options covering the event far outweighs OI in puts, which could dampen volatility and price gains to the topside owing to profit taking and hedging behaviour
After the market close on 29 Dec, Bitcoin lost some ground, indicating that some of this unwinding might already be taking place
But plenty of questions remain unanswered with regards to the extent of any selloff, and the path taken there. Will it be an explosive rise and fall, driven by the news? Or a slow bleed lower in the next week as traders preempt this expected behaviour into the deadline? The latter ironically changes the entire equation to support a third possibility - the selloff will either be extremely shallow, or not at all.
There are also metrics that support the idea of a shallow selloff, namely:
Exchange balances of Bitcoin, tracked by Coinglass, are not increasing notably, which would be a sign that spot holders are transferring Bitcoin into exchanges and looking to sell them.
On the contrary, the balance of stablecoins on exchanges has risen instead, perhaps in anticipation of dip buying. Hence while futures traders might be exiting, there could be a transfer of value to long term spot holders
Some ETF sponsors have announced an intention to buy Bitcoin to seed their ETFs in early January, with Bitwise notably saying it would buy up to $200 million as a seed value
The ETFs could be launched and operational much sooner than we think, perhaps within 2 weeks of an approval being granted
Though with somewhat circular reasoning, if everyone thinks it’s buy the rumour and sell the fact, chances are that itself is a crowded trade
And, though unlikely, on the off chance that the SEC delays everyone AGAIN, or outright rejects these applications, it goes without saying that Bitcoin likely loses a significant chunk of its 2023 gains.
As mentioned above, this is an event with no similar proxy in the modern financial era, and could shape the crypto landscape for years to come. Hence, it is imperative that one be informed and ready for this, with a plan to act on the various outcomes - even if that plan is to not act at all. After all, buying the dip on a profit taking selloff is very different from buying the dip in the face of an ETF rejection. Or if price action is nothing but positive, should you chase it? These are decisions that are best made BEFORE the event, so that one can be decisive when the event occurs.
As a reminder of levels:
$48,000 (previous interim high last cycle)
$50,000 (psychological, but also confluence of large call option strikes)
$38,000 (2023 Q4 base and previous breakout level)
$36,000 (consolidation area which should have lots of interest in between)
$32,000 (breakout level now turned support)
A trade that has already been gaining traction ahead of the decision is the rotation from Bitcoin into Ether. In the week, the ETH/BTC cross has started to rebound from its Q4 lows, with Ether hitting a local high of $2,444 against the Dollar. Unless things go south for the Bitcoin ETFs and hits the entire complex, we still think ETH has a good chance at outperforming BTC in the wake of the event).
And it just so happens that our Halogen Shariah Ethereum Fund, currently in its initial offering period, is open for investments starting now and is set to officially commence by the second week of January. Additionally, we will be actively staking the fund's ETH, aiming to achieve validator gross yields in the range of 3.5%-4%.
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.