What impact could this have on the crypto industry?
October 2, 2023
Global Macro Highlights
📈 10-year US Treasury yield reaches level not seen in more than 15 years
⛽ Oil Prices ‘Melt Up’ in a March Toward $100 a Barrel
💰 US Core PCE inflation softens to 3.9% as forecast
Risk assets performed poorly this week once more, led by continued gains in 10y US Treasury yields. The 10y benchmark hit a high of 4.67%, levels not seen since 2007 right before the Global Financial Crisis. US equity markets remained under pressure too, with the S&P 500 making a quarterly low of 4238. Throughout the slide, the VIX index (a measure of option prices and volatility) also continued to increase.
Despite the continued rise in the back end of the yield curve, oil prices were unable to move materially lower, with Brent Crude prices finishing the week above $92, a ‘mere’ 4% off the month’s highs. In sympathy with the risk off trade, the Dollar was strong, peaking on Wednesday vs. the EUR and AUD, but was unable to hold those gains into the week’s close.
US economic data was mixed over the week, with Durable Goods orders coming in marginally above expectations, but PCE data (the Fed’s preferred gauge for inflation) missing the MoM survey mark by 0.1%. The latter print did help support markets slightly over the event, but ultimately was not enough to power through momentum and sentiment.
US equity benchmarks closed near their week’s lows, ahead of a funding deadline that could have seen another shutdown of the US government. Ahead of the Oct 1 deadline, US lawmakers came together to pass another short term funding bill that kicks the can down the road till Nov 17 this year.
Malaysian Markets Highlights
🇲🇾 Ringgit ends lower, hitting 4.70 against greenback as US bond yields soar
If last week was seismic for the sleepy quiet town that has been the MYR bond market year-to-date, this week featured a comparatively mild aftershock with yields rising 1 - 2 basis points across most tenures, except for the ultra longs where the 30y MGS yields closed the week 4 basis lower.
These moves did not derail the government or corporate bond index from clocking in positive returns this week, instead merely putting a small dent on coupon/profit rate related returns.
On Wednesday, USDMYR finally breached the 4.70 level as the overnight strength in the Dollar was a bit too much for intervention activities to make sense. Agents stepped away, but came back 100 points higher. The sojourn above 4.70 was short lived, as quarter end rebalancing activity by offshore names helped take the pair back below the psychological level.
Crypto Market Highlights
📈 Bitcoin Tops $27K as rates and oil retreat; Ether outperforms on ETF hopes
🪙 Major TradFi player VanEck readies Ethereum Futures ETF
💰Michael Saylor’s MicroStrategy spends $150 Million to add to Bitcoin stockpile
As expected, crypto majors continued to trade in their defined ranges over the week, but sentiment was certainly more positive in the space. While the SEC officially delayed their decision on approving a spot Ether ETF, the delay was purportedly to expedite the approval of existing ETH futures ETF applications. The ETFs start trading this coming Monday. Furthermore, it was reported that a group of US lawmakers had penned a letter to SEC chair Gensler pressuring him to approve existing spot ETF applications. Though the demands have been ignored for now, such a move is no doubt positive for crypto sentiment.
Bitcoin plunged to $26,000 to start Monday off, but over the week saw upswings to hit a high just over $27,300 as the news hit the wires. As expected, Ether prices benefited more from the news, as ETH powered above resistance at $1,650, to trade as high as $1,688.
In other news, former 3 Arrows Capital founder Zhu Su was arrested in Singapore on Friday night, after he had fled the country following the implosion of his fund in May 2022 as a casualty of the Luna/Terra USD debacle. The news spawned the launch of the ZhuSu memecoin, which initially traded up nearly 20x the launch price before quickly falling, as most memecoins do.
What we are monitoring for the week ahead
What does all of this mean? Our thoughts
Though some evidence of buying flows could be observed anecdotally in US equity indices, it was far from enough to support the market in the midst of rising yields and volatility. The latter metric is of particular note, as passive funds also weigh their allocations by underlying volatility, to reach a targeted portfolio volatility that is within their mandates and tolerances. A higher vol metric thus reduces the amount a portfolio manager might need to reallocate in a rebalancing action, and can even result in more selling to get the portfolio within the volatility target.
Despite continued hawkishness from Federal Reserve speakers and the dot plots showing otherwise, the market only prices a paltry 35% chance of one more hike by year end (based on Fed Fund futures). It’s likely that the market thinks that even with an additional hike being telegraphed, the Fed should be near the end of its rate hiking cycle, and perhaps that’s keeping the front end semi-anchored. The steepening of the back end is likely more in reaction to the higher-for-longer plus soft landing expectations.
We’re near the end of the seasonal weakness in US equities this month, though the higher interest rate regime likely still proves to be a challenge. In terms of seasonal performance though, Q4 has generally been a good period for risk assets, as investors and investment managers chase performance into the end of the year. This holds particularly true for the years preceding a US presidential election (which is this year), with outsized returns in October.
We show the bar plot below for S&P 500 average monthly returns (though bear in mind the pre-election sample size is small in the chosen period).
It’s still a bit early to call for a seasonally bullish end to the year, despite the seasonal trends holding up well so far. Despite the US government avoiding another shutdown (for now), it’s a good idea to recall what happened the last time they passed an emergency funding bill, back in June this year.
In the wake of that, Fitch downgraded the US sovereign debt rating, citing concerns surrounding governance and political impasse. Renowned investment manager Bill Ackman then publicly announced he was going short 30y US treasuries, which accelerated the selloff. He was on record this week as saying 10y treasury yields could hit 5% soon. While some of this is probably him talking up his book, the latest stopgap funding bill still ticks the same boxes that triggered the last round of events. Given everything that’s happened, we will be observing the transition in longer-end rates closely as we navigate the macro environment.
Moves in the MYR bond market seem to suggest that the correction, from what has generally been a great 2023 so far, is not done. Any good financial textbook will tell you that a bond investor will seek refuge from rising yields by keeping their duration short, and a great way to express that view is the Halogen Shariah Ringgit Income Fund which features a duration of just around 6 months. This short duration should minimise any pain from yields rising, while also being faster to benefit from the higher returns because it is frequently reinvested (by virtue of the short time period to the maturity of the sukuk).
Cryptocurrency markets continue to display resilience despite the soggy environment in traditional markets. We acknowledge that much of that is likely due to sentiment surrounding hopes of a spot ETF approval in Bitcoin (conditional on which, Ether would have a much higher chance of having its own spot ETF). The DeFi space was also buoyant, led by Maker DAO, Frax Finance, and Chainlink, all of which have some form of relation to the Real-World Asset narrative that’s also benefiting from higher US interest rates.
As Bitcoin continues to trade in this range of $25,500 to $27,500, we still look for opportunities to buy at the lower side of the range. The next deadline for the SEC to approve (or delay) the various ETF applications is October 16th. Though we do think that, given the SEC’s unfriendliness to crypto as a whole, a delay is more likely than not, we also acknowledge the asymmetry of the payoff. Another delay likely sends Bitcoin back to trade between $25,000 to $26,000, and perhaps maybe even below that to $23,000. Approval, on the other hand, likely sends Bitcoin above its recent high of $32,000, perhaps closer to $40,000. Even if the move becomes a buy the rumour, sell the fact type of action, the long run flows supporting the move likely mean Bitcoin will find it hard to trade back at these levels, for so long as the macroeconomic environment doesn’t worsen.
Did you know that Bitcoin has its own seasonality too? While the sample size is smaller given its shorter history, seasoned crypto traders fondly refer to the October seasonality as ‘Uptober’. While average monthly returns this month are eclipsed by those in ‘Moonvember’, October has a decent mean return over the period observed, while its percent positive hit rate is the 3rd highest of the year. Such effects are worth keeping in mind as an additional filter for making buying or selling decisions.
Thank you for reading and we’ll see you next week!
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