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Global markets were roiled this week, caught between risk aversion over the Israel/Palestine conflict, fiscal worries in the US, and earnings season. Federal Reserve officials were also busy on the wires this week, and their remarks mostly leaned dovish. Fed chair Jerome Powell was notable in echoing the stance that higher long term rates have helped tighten the economy as they have wished, though he did push back that further tightening could be warranted if inflation expectations started to accelerate again.
While the Fedspeak was dovish and the market sold Dollars after Powell's speech on Wednesday, long end yields started to rise quickly after that ahead of a fresh 20y treasury auction. In stark contrast, risk aversion started to gain steam as public outcry rose over an explosion at a Gaza hospital that same day. Correlations broke down as both oil and gold rallied hard, despite higher treasury yields. Without the flight to safety flows into safe haven bonds, the move in gold was outsized. Gold closed the week higher by some 7.6%. Naturally, stocks were also weak and the Dollar strong.
It didn't help that one of the Magnificent Seven stocks failed to pull its weight this week. Tesla's Q3 earnings missed analyst expectations by some 9.8%, and Elon Musk painted a pretty gloomy picture on the performance outlook. Tesla shares ended the day down 9.3%, and seemed to singlehandedly tank the major indices despite the rest of the M7 having relatively stable performances that day.
Geopolitics and the continued rise in US treasury yields drove the Dollar higher over the course of the week, and our Ringgit was one of the worst hit in the region. USDMYR traded to a high of 4.7830 on Friday, eclipsing last year's high and now at levels not seen since the Asian Financial Crisis in 1998. We suspect that intervention agents were previously working to stabilise the price below 4.75, but ultimately stepped aside after the Dollar started to gain traction in the wake of the Gaza hospital attack. As a result, USDMYR now trades in a new higher range, with the topside likely to be 4.80 as a psychological level.
The weak Ringgit and higher US Treasury yields prompted Malaysian Government Securities to give up the gains of last week. The 10-year government bond yield in particular retested 2023 highs.
Specific to corporate bonds, Country Garden Real Estate Sdn Bhd was downgraded further to B3 (from BBB3) by RAM Ratings amid reports that China-based parent company Country Garden Holdings Company Ltd is unable to meet its offshore debt obligations due to severe liquidity stress affecting the company and the Chinese real estate industry at large.
This resulted in the Refinitiv BPAM Government All Bond Index falling 0.56% this week, and this spilled over to the Refinitive BPAM Corporate All Bond Index which fell 0.11%. Despite this challenging environment, the Halogen Shariah Ringgit Income Fund managed to generate a positive return of 0.04% owing to its conservative approach to market risk and credit risk.
Cryptocurrency markets remain decoupled from traditional finance ongoings, and this week's price action in particular made that clear.
Late Monday night, Cointelegraph tweeted that Blackrock had received approval from the SEC to launch its ETF. The tweet did not quote any sources, but Cointelegraph has generally been accepted as a reputable news source, and the market reacted in explosive fashion. Bitcoin price immediately jumped from the low 27000s to hit a high of 30000 within minutes. Some $100 million of short sellers in Bitcoin perpetual swap contracts were liquidated in that move.
However, cooler heads were questioning the veracity of the news. And it turned out that they were right to be skeptical. Official sources quickly came out to deny the Cointelegraph news. Naturally, Bitcoin's price quickly reversed, now liquidating long chasers who thought it was the real deal. Cointelegraph's reputation also plummeted in equally dramatic fashion. Even the SEC couldn’t resist but to weigh in on the matter.
Since then though, crypto markets have been well supported, as market participants seemed to wake up to the eventuality of a spot ETF. Bitcoin and other crypto majors have performed well despite the week's other events. Crypto sentiment also got another boost Friday with two pieces of headlines. First was the SEC dropping its lawsuit against the founders of Ripple, which helped boost the price of XRP some 8 percent over the news. RP some 10% after the headline dropped. Other tokens also on the SEC’s ‘securities’ list like MATIC and SOL were also boosted. The second was JPMorgan analysts going on record to say that they think a Bitcoin ETF approval would be coming within months. Naturally, Bitcoin continued to trade bid, with the token breaking 30000 on Friday evening before retreating.
Doom and gloom continue to be ongoing themes in the market right now, as the escalating conflict in the Middle East meets worries over US fiscal discipline. It’s not like the rise in long end treasury yields has been small either, but it’s pretty rare when both yields and gold rise together in such dramatic fashion. Correlations breaking is never a good thing though, especially because it implies that a lot of ‘tried and tested’ positions could end up being hit, resulting in further derisking.
All of this boils down to volatility. With the financialisation of volatility as both an input into portfolio building as well as an investable/tradeable product, swings in both implied and realised volatility now have marked effects on the overall direction of the market. Derisking activities happen in a positive feedback loop until enough position cleansing has commenced to slow it down.
The VIX is now above 21, which surely has had an impact on portfolio rebalancing. So far though, the rise in S&P500 implied volatility has frequently outpaced the underlying asset’s realised volatility, as the selldown in US equities has been relatively measured. Analysts seem to think that there’s still a chance volatility risk premium has become attractive enough to attract sellers, which should lead to a buffering of underlying volatility as hedges get monetised.
Tactically, pockets of opportunity for reversals might exist. Bank of America analyst Michael Harnett has flagged that investor sentiment is screening as extremely bearish across various metrics, which has almost always led to tactical rallies in the past based on their models. A technical selldown in S&P500 to low 4200 levels would be the final cherry on the top to start timing a reversal.
Of course, that relationship wouldn’t hold if an exogenous shock gets applied to the markets e.g. if the Middle East conflict starts to ramp up even more. Under those circumstances, prudent risk management becomes even more important. Given how US President Biden is also pushing for aid packages to both Ukraine and Israel, we think US treasuries won’t be representative of the flight to safety play. Gold would still continue to hold up well though.
We would have expected Bitcoin to trade back to its previous price levels in the aftermath of Cointelegraph’s blunder, based on similar fake rumours in the past. However, it really does seem that the market has been jolted out of a stupor following the explosive price movement. Bitcoin price was well supported, even in the immediate aftermath of long chasers being liquidated. Bitcoin closed Monday above its level before the fake news landed.
Onchain metrics seem to support the notion that there are more spot buyers looking to hold Bitcoin longer term now. Data showed an increase in the number of whale Bitcoin wallets plus outflows of Bitcoin from exchanges into non-custodial wallets, a sign of investors removing supply from circulation with the intention to hold for the longer term. On the other hand, the market cap of stablecoins surged over the week, a sign of interest from investors looking to deploy cash in the crypto space. If that wasn’t enough, the Bitcoin options market also had a huge wake up call, with short-dated implied volatilities nearly doubling.
We hope our readers have managed to accumulate some exposure to Bitcoin by now, whether through us or on their own. With Bitcoin now trading near 30,000 once more, the risk reward of entering here is clearly much less attractive, especially with the current geopolitical environment. While we still think there’ll be a chance to enter at better levels, we think dips will be shallow from here - again, barring an exogenous market shock. As always, manage your risk prudently when investing, and if you decide to ‘FOMO’ into the market at these levels, at least do it with a small amount that you are mentally prepared to take a hit on.
If a Bitcoin ETF is not far along the horizon, it’s safe to say that an Ether one should follow soon. For now, long BTC and short ETH has been the focus of crypto relative value traders. The trade has performed really well, but ETH will definitely have its day in the sun. Hence, if one is underinvested, it also makes sense to buy the laggard (ETH) for now in anticipation of that moment. If you’ve yet to dip your toes there, do stay tuned about updates on our next fund: the Halogen Shariah Ethereum Fund.
Our local currency remains weak amidst this environment of high US yields, a weak Chinese economy, and geopolitical tensions. Unfortunately, we doubt it is going to get better anytime soon. Malaysia still lacks a domestic catalyst that would drive growth locally beyond its regional peers, and/or make it a more attractive destination for foreign portfolio and direct investments. It’s likely that things don’t get better till the divergence between the US and Chinese economies reverse. Given the state of things, we could be in this regime for a fairly long period of time (at least by market standards).
This likely means that volatility in the Ringgit bond markets is set to continue with rising yields in the US will cause most investors to demand competitive (read: higher) yields for local bonds while the narrative of economic deceleration may cause some to lock in high yields for the long term. We continue to recommend the Halogen Shariah Ringgit Income Fund as a proven refuge from said volatility.
In light of that, we hope our readers and prospective investors have been active in making sure that their investment portfolios are well diversified, both in terms of asset class and currency exposure - something that cryptocurrencies actually help us solve.
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.