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The other central banks of the G3 weighed in this week. First up, the Bank of Japan’s governor, in an interview released Sunday evening, said the BOJ might have enough data to consider ending negative interest rates in Japan. Naturally, FX markets opened volatile at the Wellington open (2 am local), with USDJPY gapping lower from 147.85 to 146.50 levels. However, official pushback over the week stressed that traders were misconstruing governor Ueda’s remarks, and JPY weakness reasserted itself. USDJPY closed Friday night nearly unchanged week on week.
On Thursday night, the ECB raised interest rates by 25 bps, in what was a surprise yet well telegraphed move (Reuters article last week about how the decision was now 50/50). Despite that, the Euro fell as official communications indicated that this was a one and done move, and that the ECB committee was back to wait-and-see mode.
Meanwhile, in the US, we had the all important CPI data release, which indicated that headline CPI increased from 3.4% YoY previously to 3.7% YoY - more than forecasted by economists, which was 3.6%. The increase was mainly attributed to higher fuel prices, though it’s noted that core services were also up. Nonetheless, the market reaction to the print was very muted, as this wasn’t seen as changing the policy decision for the Fed.
It was a muted week in the Malaysian economic news cycle, at least for developments that immediately affected our local markets. Official comments about the possibility of new taxes were taken in stride, and did not have an outsize impact anywhere. The FBMKLCI eked out a slight gain week-on-week but was mostly rangebound. Benchmark MGS yields were stable as well, while our local currency continued to weaken slightly.
12th Malaysia Plan raised the country’s GDP target from 5 to 6% for the five year period between 2021 and 2025. This implies higher government revenue, a key focus point in the government’s plan to maintain a fiscal deficit target of 3 to 3.5% of GDP by 2025. While it remains a tall order with the fiscal deficit likely to come in at 5% this year, the drivers are touted to be new taxes and reduced wastages. Malaysian bond market movements point towards market players preferring to see more substantial evidence of this plan in motion hence the muted action in bonds/sukuk last week.
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It was another rollercoaster week in the cryptocurrency space, starting with broad capitulation across all major tokens on Monday night. It was reported that bankrupt exchange FTX would be seeking court approval to start selling its token holdings (worth about $3.4 billion), to return cash to its investors. This included $360 million in Bitcoin and nearly $1.2 billion in Solana. The market reaction came late, as this news had been circulating for a while, but it came in spectacular fashion with Bitcoin selling off rapidly to breach support at 25,000 for a brief moment.
As cooler heads prevailed, the move was subsequently reversed in almost equally dramatic fashion the next day. Especially after it was revealed that FTX only had approval to sell $100 million of assets each week, though it can go to a maximum of $200 million for an individual asset. Solana still remains heavy though; compared to crypto majors Bitcoin and Ethereum which are somewhat unchanged on the week, SOL is down week on week.
Late Saturday morning, bots detected what looked like a new filing for an Ethereum ETF by Fidelity. Crypto assets were weak into Friday’s close, but this ‘news’ seemed to help erase those losses and turn sentiment around. However, the actual filing so far doesn’t look like one for an ETF, but a refiling for Fidelity’s existing Ethereum Index Fund which is a wholesale one. Given the lack of follow through, the move in prices will probably be faded, though it did seem to give shorts some pause.
We’ve been following the seasonality move in US equity indices with great interest. So far, things have played out as expected, with profit taking across the board over the week and a decent recovery in the major US indices. Part of this profit taking move has also been attributed to Sept 15’s index option expiry date (commonly referred to as OpEx), which also includes the quarterly option expiries - these are some of the highest volumes traded in equity options, and the expiry plus position roll behaviour can have a great impact on the underlying index.
Post quarterly expiry date though, it’s been noted that the seasonality once again turns bearish risk assets all the way to the first week of October. Samples going back to the 1990s show that post September OpEx, the SPX500 has generated a positive weekly return only 22% of the time. Some pretty nice odds there, eh? Risk assets already got a head start on Friday, with a 1.22% drop in the S&P 500. That said, the VIX Index still trades on the low side of the recent range, which might indicate that a cascade lower from short option hedging may not yet happen, and equities can resume upward ascent later on.
This week’s FOMC meeting has been well telegraphed in terms of rate levels. The September meeting is usually accompanied by the Fed’s Dot Plot and Statement of Economic Projections. The dots (which indicate where Fed members see rates in the future) would probably be more interesting to watch, as we are now still mixed over whether rates will rise another 25bps by year end.
Locally, it’s been a boring market. We are still noting signs of agent smoothing in local currency markets - offers remain sticky despite USDMYR grinding higher. The Ringgit remains an underperformer in the region and is likely to remain so.
In crypto, there might perhaps be a bit of correlation on this seasonal weak equity/strong Dollar playbook. However, Monday night’s washout and subsequent bounce seems to indicate that a bottom is in place for now. Barring any big game changers (like the Fed hiking at this meeting or seeing 2 further hikes required), we think that Bitcoin at least will likely see further buy-the-dip type of action. The topside should remain capped for now until the next ETF deadline. That should give aspiring investors time to accumulate some.
Thank you for reading and we’ll see you next week!
Team Halogen
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