Week of Sep 5, 2022

Central Banks From Europe, Canada, Australia, Chile & More Are Set To Raise Interest Rates This Week

The Bitcoin Economic Calendar 🗓

Market Commentary 📺👇

Bitcoin

Australia, Canada, Chile, The European Central Bank, and at least 5 other central banks including Malaysia, Peru and Poland, are scheduled to raise interest rates this week. The move comes as governments globally attempt to tame down inflation and prevent their currencies from weakening against an already soaring U.S. dollar. 

Investors are anticipating a 50 bps hike from Chile and Australia, and 75 bps hikes from Canada and the European Central Bank. This is all happening ahead of the Fed’s September 21st meeting.

The moves come on the heels of a weakening global economic backdrop, particularly in the EU - which we will break down in the S&P 500 section. In both Canada and Australia, property prices in the main real estate hubs like Toronto and Sydney have already started falling due to increasing mortgage rates. This will likely accelerate with higher interest rates.

This type of self-inflicted pain by central banks is effectively them choosing between the lesser of 2 evils. If they don’t raise interest rates, their currencies will continue to devalue vs. the U.S. dollar - making asset prices soar locally and pushing inflation higher.

The Federal Reserve is set to meet later this month on September 21st, and the CME FedWatch tool shows investors pricing in a 60% probability of a 75 bps rate hike.  

These types of races usually end with one or more central banks being unable to “keep up” due to political pressure and economic pain. Looking at the macro backdrop, it looks as though Europe is in for a tough winter and the European Central bank is just starting on its rate hike cycle. This has many macro investors positioning themselves short vs. the Euro. 

It feels like a long road ahead, but the same CME FedWatch tool shows that about 75% of investors believe the Fed funds rate won’t go above 4.00% into July 2023. With the overnight rate currently at 2.50%, that means that two (2) 75 bps rate hikes or three (3) 50 bps rate hikes would get us there. Assuming a 50 or 75 bps hike in September, the Fed would be within “shooting range” of most investors’ expectations of their target rate. Investors have been long awaiting for visibility on when the Fed will stop tightening, and they are starting to get it.

That being said, markets could remain under pressure as other Central Banks globally tighten their rates leading up to the Fed’s interest rate decision on September 21st. 

In other bitcoin-specific news, the deadline for public commentary to Biden’s Digital Asset Executive Order is today. This could generate headlines in the week ahead. 

S&P 500

While the desire from central banks to raise interest rates and defend their currencies is clear, they have to carefully balance those goals with the political cost associated with these measures. Although Central Banks are supposed to be “apolitical”, their actions have very real consequences to domestic politics. As examples - the U.S. unemployment rate ticked higher last week for the first time, as it heads into midterm elections this November. And in the EU, protests are erupting over high costs of fuel - and the interest rate hikes haven’t even started. 

That being said, last week’s down move by the S&P 500 brought it to 3,924 - which is very close to the upper bound of estimates by the leading U.S. equity strategists. As a reminder, this range is between 3,600-3,900. 

The move coincided with the Bank of America’s Bull & Bear Indicator moving higher since October 2021. 

While there is still quite a bit of uncertainty in markets, inflation seems to have turned a corner in the U.S. and the Fed appears to be back in the driver seat. The economy and jobs market have so far held up well. 

With the S&P 500 about 20% from the highs, and about ~8% from the low end of the year-end estimates at 3,600, the trade setup starts looking more interesting for investors. 

In simplified terms, investors believe that the market is within shooting range of turning a corner. This is relevant because the 1-year correlation between the S&P 500 and bitcoin remains at 50.2%.

There are several risks that could get in the way of this potentially “clear” outlook - the main one being what is happening in the energy markets. 

The subject is overly complex to break down in a few paragraphs, but in overly simplistic terms: the G7 coalition agreed to impose a price cap on Russian oil in an attempt to cap Russia’s revenues. 

Russia responded by shutting off the natural gas supply to Europe via its main pipeline, the Nord Stream gas pipe - sending natural gas prices soaring in Europe.

Governments globally have also depleted their strategic oil reserves in a bid to bring prices down, and they will have to replenish these reserves, putting additional pressure on oil prices going forward. 

They are trying to destroy demand as fast as they can by raising interest rates, but they may hit a political wall. The U.S. has an important midterm election this November, and riots and protests are starting to erupt in Europe. It’s a big game of political chicken between central banks, politicians, and the electorate.

Gold

The U.S. dollar has continued to strengthen and gold has remained under pressure. It closed last week just above $1,700/oz - which is a key psychological level that has held twice since 2020. 

With Central Banks decidedly set to raise interest rates, this will effectively improve the real return of most reserve currencies - which will continue putting tremendous pressure on gold prices in the weeks and months to come.

DeFi

Ethereum had a very strong week vs. BTC, rising by +8.22% in BTC terms, as more investors look to position themselves long ahead of the upcoming Merge to proof of Stake. The DeFi Index also showed some strength in BTC terms on the weekly close, but not enough to outperform ETH.

The next crucial milestone on Ethereum transition is the upcoming Bellatrix, expected to occur today (Sept. 6th):

The Ethereum mainnet Merge is going to happen in two last parts: the Bellatrix upgrade and the Paris upgrade. 

The Bellatrix upgrade brings Ethereum’s consensus layer (the Beacon Chain that introduces the Proof of Stake mechanism to Ethereum) – into a state that is “ready to merge”. 

The Paris upgrade will update the execution layer and complete the transition to proof-of-stake, expected to occur around Sept. 15th. This upgrade depends on the amount of computing power committed to securing the network and will be triggered once the threshold is reached. 

For more details, the Ethereum Foundation provides a very illustrative scheme about these final steps:

At the time of the Merge, Ledn clients can expect temporary delay in processing USDC deposits and withdrawals during a brief maintenance window. 

All other Ledn services will be unaffected, and there is no action required on your part as a Ledn client. We will continue to provide any updates as needed, and be here to answer any questions or concerns you may have. 

On the NFT front, last week we covered a $200 M raise by Limit Break to build Web3 games in the middle of the current bear market. A few days ago, another investment round was announced, signalling that there is still appetite from institutional investors: Proof Collective, the company behind the Moonbirds NFTs, confirmed on Aug. 30 that it had raised $50M in a Series A funding round led by venture capital firm a16z.

The main idea around this new raise is to launch a third NFT collection of 20,000 profile pictures (PFPs), called Moonbird Mythics, and a token to be named $PROOF. The General Partner at a16z, Sriram Krishnan, confirmed during an interview last week to "...believe that the next generation of massive mainstream media franchises will be community-owned and governed, and $PROOF is one of those companies demonstrating just that".

The next few days are likely to be very busy with new developments in the Ethereum community. We will continue to keep you posted! 

Mining

Last week, news broke that SBI Holdings, the Japanese securities and banking giant, ended its mining operations in Russia by cutting ties with BitRiver, citing sanctions imposed by the U.S. back in April of this year. 

The company disclosed that they're now selling their mining equipment located at BitRiver's mining facility in Russia. Compass Mining, the Texas mining firm, also cut ties with the firm earlier in the year. For context, BitRiver is one of the largest crypto mining firms in Russia. Similar to how DeFi protocols can be sanctioned, The United States Treasury can also target mining companies.

Meanwhile in the East, miners located in Texas seem to be having a hard time securing more energy to expand their operations. The results of the most-recent heat wave have prompted Ercot, the state's grid operator, to slow down the issuance of new permits for miners. 

Due to the 2021 Texas-mining rush, even small energy sites are no longer available, so Texan miners are now struggling to build new energy infrastructure to continue growing. This has also resulted in some firms having to fire sale energy equipment they're not able to install and power-up. 

As contrarian as it may sound, even though Bitcoin's price broke the $20,000 mark during the weekend, difficulty is poised to increase by around 7% this week. In a nutshell, inefficient mining operations have been squeezed out of the equation after the most recent mining capitulation.

What's Ahead

The week ahead will deliver interest rate decisions from over 8 Central Banks worldwide, including Australia, Canada, Chile and the European Central Bank among others. 

Chile’s highly anticipated vote on a new constitution was celebrated over the weekend yielding a resounding “no” result. 

As we’ve been covering here for several weeks, Chile’s currency had come under pressure given the newly elected president and his ambitious plan for social programs. 

The result will likely lead to a rally in the Chilean Peso and equity markets. As the Chilean Peso had been very oversold relative to its commodity exporting peers in the region like Brazil and Mexico. 

The result should also alleviate supply concerns in some commodity markets, such as Lithium - of which Chile accounts for 33% of the global supply. This, in turn, should benefit companies that operate with lithium batteries. For our macroeconomic enthusiasts, this is a great example of how an election in Chile potentially benefits a car company in the U.S.

This does not mean that Chile is done with its plans for a new constitution. The newly elected president has already signalled that they will likely try a second attempt to get it through.

Looking at the week ahead, we get interest rate decisions.

While the week ahead is light with data, Fed officials are out in full force with 7 speeches throughout the week. 

Tuesday

10.00 AM EST - Fed Speech - Cleveland Fed President, Loretta Mester

Time TBD - Australian Central Bank Interest Rate Decision (Expected 50 bps increase)

Time TBD - Chilean Central Bank Interest Rate Decision (Expected 50 bps)

2.00 PM EST - Fed Speech - Michael Barr, Vice Chair for Banking Supervision

Wednesday

8.00 AM EST -  Interest Rate Decision, Bank of Poland

2.00 PM EST - Interest Rate Decision, Bank of Canada (Expected 75 bps increase)

Thursday

12.15 PM EST - European Central Bank Interest Rate Decision

9.10 AM EST - Fed Speech - Chairman Jerome Powell Speech at Cato Institute

12.00 PM EST - Fed Speech - Chicago Fed President Charles Evans

2.00 PM EST - SEC Commissioner Gary Gensler Speech

Friday

10.00 AM EST - Fed Speech - Chicago Fed President Charles Evans

12.00 PM EST - Fed Speech - Kansas City Fed President Esther George

12.00 PM EST - Fed Speech - Fed Governor Chris Wallace

It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.

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About the author

Mauricio Di Bartolomeo

Mauricio is the co-founder and Chief Strategy Officer of Ledn.io. He grew up in Venezuela where he and his family learned about Bitcoin. Now based in Canada, Mauricio holds HBA and MBA degrees from the Richard Ivey School of Business in London, Ontario in Canada.