Market Commentary

Bitcoin

Bitcoin has outperformed both the S&P 500 and the Nasdaq since the start of September. And, as we flagged back in our October 10th piece, it has been acting more like gold than a risk asset in recent weeks.


Its lack of volatility during a time of market turmoil has caught the attention of analysts at Bank of America, who published a note on its growing correlation with gold this week.

Who would have thought that in 2022 we’d be seeing headlines about bitcoin’s relative price stability?

For further context, here’s a comparison between Bitcoin’s 20-day volatility vs. the S&P 500 and the Nasdaq.




Over the last few weeks, governments and central banks have gone on overdrive to keep markets calm. Every Central Bank we highlighted in last week’s dispatch took action. Below is a summary:

The Fed “Leak” on Friday

U.S. Markets opened last week with a bang - up +2% on Monday. But by Thursday’s session indexes had given up most of their gains. Then, a perfectly timed article by Nick Timiraos from the Wall Street Journal at 8 AM on Friday turned the tides.

Mr. Timiraos is one of the closest reporters to the Federal Reserve and is known for breaking news that have impacted markets at strategic times in the past. Many refer to him as “The Fed Whisperer” in the financial media world.

The timely article suggests that the Fed is debating whether to slow the pace of rate increases after its November meeting. Before the publication, the CME FedWatch tool signalled a 97% chance of a 75 BPS increase in November and a 70+% probability of another 75 BPS in the December meeting. Markets rallied after the publication as the odds of a 75 BPS hike in December dropped to 56%.

This “fortunate coincidence” could signal that the Fed does not want a disorderly market going into the midterm elections. This trend could keep markets in a positive mood leading up to next week’s Fed meeting and the midterm elections on the 8th.

Suspected Currency Intervention in Japan

The Japanese Yen has been trading like an illiquid crypto token over the last few days.

The moves on Friday and Monday had investors speculating that the Central Bank was intervening in FX markets to stabilize the Yen.

When asked, the Ministry of Finance remained tight-lipped about the intervention and only stated that they are “monitoring the FX markets 24/7 while taking the appropriate responses”.

A quick summary of what is happening: The Japanese Central Bank has committed to keeping its bond interest rates low through “yield curve control”. This means that the Central Bank will buy as many government bonds as it needs to, in order to fix the interest rate. To do so, it must print Yen. And investors are shorting the Yen at record levels, causing the exchange rate vs. the USD to plummet. To defend the value of its currency, the Japanese Central Bank must sell its USD reserves to purchase Japanese Yen. It is estimated to have sold over USD $50 Billion in the recent intervention.

This trend could continue, as the Japanese Central Bank has a lot of gunpowder, or USD reserves, that it can deploy to defend its own currency.

The British Prime Minister Stepped Down

After a tumultuous few weeks, Liz Truss’ days as the U.K. Prime Minister are over. She is to be succeeded by Rishi Sunak, who won the contest to succeed after Ms. Truss stepped down.

What is happening in England is a great example of how economic instability can quickly translate to political instability. You can bet that patience is starting to run thin with the people of England and the government has come under deep scrutiny. Given the level of political instability, the Central Bank might be cautious on just how much pain it plans to deliberately inflict on the economy going forward.
With so much volatility in markets, and so

much at stake politically in the coming weeks, it looks like governments and central banks are looking for a period of calm in markets. This could bode well for asset prices leading up to the U.S. midterm elections. However, look for the relief to be short-lived, as high interest rates will continue to put pressure on all aspects of the economy post-election.


S&P 500

It will be a week of massive earnings reports in equity markets with the likes of Apple, ExxonMobil, Amazon, Alphabet, Meta, Twitter, Visa, MasterCard and more reporting this week.
The big focus this week will be the start of Q3 earnings season, with reports from heavy hitters like Bank of America, Goldman Sachs, Tesla and Netflix. Many of which could impact bitcoin prices.

So far, earnings reports have been in line with analyst and investor expectations. We’ve highlighted the earnings reports that could mention bitcoin and therefore impact prices in our What’s Ahead section.

As we mentioned in the Bitcoin section, given the timing of last week’s article about the Fed’s rate increase plans, it appears that Central Banks are sensitive to introducing more volatility or negativity in markets ahead of the upcoming election.

With the Fed’s next FOMC meeting scheduled for Nov. 2nd (next week), it would not be surprising to see markets trade sideways for yet another week, as investors await further clarity from the Fed.

We’ll discuss last week’s events in China and how they could become a potential tailwind for U.S. equities in our What’s Ahead section.

Gold

Gold also finished last week higher by +1.82% - largely benefiting from a weaker U.S. dollar index.



The chart above shows how the U.S. dollar index has broken below the ascending triangle that we highlighted last week. Consistent with its oversold condition, the dollar seems poised for a breather at the current levels.

Having said that, the upcoming $120 Treasury bond auction on the 27th could introduce volatility on interest rates, and therefore the dollar.

There is an interesting dynamic going into the bond auction this week: on one hand, investors have little incentive to buy bonds at the moment - with interest rates set to keep rising, albeit at a slower pace. On the other hand, international investors seem jittery after the new Chinese government cabinet was announced - which may drive some of them to swap Chinese bonds for American ones. They could provide a surprising bid on U.S. bonds and keep interest rates at bay.

Keep in mind that there’s also a Fed meeting next week, which could change expectations around interest rates.

Gold will continue facing pressure until Central Banks signal that they will ease off tightening monetary policy.

DeFi

On the DeFi space, another boring and quiet week in terms of price action for both Ethereum and the DeFi both oscillating within a tight range.

No noticeable price changes for these assets that are trading similarly to bitcoin. ETH closed the week at $1364 (+2.82% against BTC), while DeFi Index underperformed both BTC and ETH.

Despite the generalized boredom on crypto price action - ETH's fundamentals after 6 weeks since the most relevant upgrade on the network continue to improve. A severe reduction on ether issuance in the last days:



In addition, the amount of ETH being used to validate the blockchain continue to increase, while the burn (which depends on network usage) even in a bear market with low DeFi activity goes on:



ETH is very close to crossing into the deflationary zone and that could trigger a new narrative for the asset - an interesting development to track for the next few days.

Let's do a deep dive on the stablecoins front - after Tether announcement that they had fully removed commercial papers from their reserves as covered here last week, Maker DAO voted to post USDC with Coinbase:



The proposal went live on Sept. 6th and had 75% of the votes in favor to post $1.6b of MakerDAO's USDC treasury to earn up to 1.5% in rewards on Coinbase's institutional arm.

Maker will need to register a legal entity to proceed with the onboarding process and Coinbase is expected to nearly double its $1.7b in USDC under custody.

Still on stablecoins - since 2020, the market share of Tether has gone from 88% to 48%. In the same time frame, USDC has gone from 10% of market share to the current 32%. But the stablecoin that has been making headlines lately is Binance’s native BUSD - which grew from 0.5% market share to 15.48% in the same time frame.

On September 6th Binance announced its “auto-convert” feature, which automatically turns any USDC, USDP and TUSD on the platform into BUSD. This has made its supply skyrocket even further, with some calling it the start of the ‘Second Great Stablecoin War’.

As the crypto winter heats up, issuers and service providers have figured out that people just want to hold dollars for the time being. And they are rushing to cater to their needs. Expect to see many more headlines around stablecoins in the coming months.

Eventually, this will be bullish for digital asset prices. Stablecoins attract and keep capital on the ‘crypto sidelines’, within a couple of clicks of being deployed back into the markets.


Mining

A new all-time high in bitcoin is probably the last thing miners were looking for in this environment, but it's exactly what they got.


As we’ve covered in previous dispatches, miners are getting squeezed by soaring mining difficulty, rising energy prices, and a big drop in bitcoin prices so far this year.

Wall street analysts have been downgrading Bitcoin mining stocks and rumours keep swirling about some large miners being in financial trouble.



Given the amount of distress that some operators are in, and the fact that winter and higher energy prices are coming, it would not be surprising to see consolidation in the mining industry in the months to come.

What's ahead for the week

The main things to watch out for in the week ahead are:

1. U.S. corporate earnings: Apple, Visa, MasterCard, Alphabet, Twitter, Microsoft, and many more report this week. (we covered this in our S&P section - details below).
2. Upcoming U.S. bond sale and the potential impact it could have on interest rates and the U.S. dollar.
3. Further government intervention to stabilize bond markets.

We’ve covered topics 1 and 2 in the S&P and Gold sections above.

On point #3: We’ve seen that governments and central banks have gone on offense to appease markets recently. Examples are: the perfectly timed Fed article on Friday that sent markets higher, the Japanese Central Bank intervening to stabilize the Yen, and the U.K. government moving to replace the Prime Minister due to social (and market) unrest. These moves have, in fact, stabilized markets somewhat, and a continuation of this trend could add further calm.

Lastly, what happened in China last week was a clear example of why we need bitcoin.

Human rights and property rights are only as good as the democratic government (or forces) protecting it. When a person’s rights are questioned or violated in front of millions of people, it prompts the viewer to question his or her own human rights, as well as their property rights.
Bitcoin ownership has stronger property rights than many asset classes around the world. And, you can be certain that many in China are currently looking for options to protect their property.
Here’s a summary of the economic data and earnings reports for the week ahead:

Tuesday

Q3 Corporate Earnings Reports: Microsoft, Google, Coca-Cola, Visa, UBS, Twitter,

Wednesday

05.30 PM EST - Fed Speech 

Q3 Corporate Earnings Reports: Meta, CME Group

Thursday

05.45 PM EST - Fed Speech

Q3 Corporate Earnings Reports: Apple, Amazon, T-Mobile, McDonalds, Intel, Starbucks

Friday

08.30 AM EST - Personal Consumption Expenditures Index (Inflation in the U.S.)

Q3 Corporate Earnings Reports: Exxon Mobil, Chevron

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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Notice for U.S. Residents: Effective April 4, 2022, U.S. clients will no longer be able to earn interest on any newly deposited funds in their BTC and/or USDC Savings Accounts, where available; however, they will continue to earn interest on their pre-existing balances in their BTC and/or USDC Legacy Savings Accounts.

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