Week of Monday July 5th to Sunday July 11th.
Market Commentary:
Bitcoin: Surprisingly, bitcoin had one of its least volatile weeks so far this year. Prices ranged from a low of $32,700 to a high of $36,623 before settling the week at $35,289, +1.70% higher.
Interestingly, we saw ethereum (+17.21%) and the DeFi index (+21.31%) both outperform bitcoin to the upside this week - by a long shot. More on this in our DeFi section.
As we’ve covered here before, bitcoin tracks inflation expectations. So much so that throughout 2021 bitcoin has been more correlated to U.S. 10-year treasury bond yields than it has to the S&P 500, or to gold.
For clarity, the orange line is the U.S. 10-year treasury yield, the blue line is the S&P 500 and the yellow line is gold.
Because bitcoin tracks inflation expectations, we pay a lot of attention to inflation data and asset prices, as well as the market forces that drive them.
Recent economic data like May’s Personal Consumption Expenditure reading of +3.4%, the -5.9% drop in new home sales for the same month, and lumber prices in free-fall, have all strengthened the Fed’s view that inflation could be transitory. This has appeased inflation expectations and caused treasury bond yields to settle.
That said, certain signals still point towards potential inflation. For example, while new home sales volumes dropped in May, home prices continue to soar. The National Home Price Index is at its highest level since the mid 80s.
There are also other factors that may cause a resurfacing of the inflation narrative. One such factor is the amount of pent up savings in the U.S. consumer:
There are about $2.4 Trillion of accumulated savings in excess of pre-pandemic levels that could be getting spent in the immediate future. This would cause monetary velocity to jolt back to life and may drive asset and consumer prices even higher.
We’ll cover what we are seeing in the bitcoin derivatives markets in our What’s Ahead section.
S&P 500: The S&P 500 soared to 4,349 this week - up +1.47%. It reached a new all-time high for the second week in a row. The Nasdaq also reached a new all time high at 14,727 - up +2.67%, capping 3 consecutive weeks of record-setting closes.
As we’ve been covering here, the rotation back to technology from industrials and commodities continues to play out. The leaders for the move higher last week were companies like Apple (+5.15% last week), Amazon (up +3.22% last week), Facebook (up +3.93% last week), and Google (up +1.35%). Amazon and Apple are dollars away from their all-time highs while Facebook and Google are in uncharted territory at all-time highs of their own.
Another tailwind for equities was that treasury yields on the 10-year note dropped -6.71% during the week, settling at 1.42%. That’s the lowest level since February 22nd this year. It also closed the week at the session lows, and just below a recent support level - which could mean more downside ahead this week.
Earnings season for Q2 reporting is off to a light start and it will really pick up 2-3 weeks from now. According to data from FactSet, the number of S&P 500 companies giving positive guidance is at an all time high. There could be fireworks in some Q2 earnings announcements, which would be very positive for markets.
All signs point to a roaring U.S. economy and a positive earnings cycle for Q2. U.S. equity markets seem to be in great shape, and U.S. equities are quietly leaving all others in the dust. The chart below compares the U.S. MSCI index to Emerging Markets, European Union, Japan and the U.K.
As you can see from the chart above, U.S. equities are performing almost 3X better than the next global index (the Emerging Markets index). This trend may continue for the foreseeable future.
A strong earnings season could reinforce the inflation narrative as companies would have to compete for talent
Gold: Gold had a positive week, up +0.39% at $1,787/oz. The price action contradicted what many thought going into the start of the week. However, from a technical standpoint, it did close the week bumping into the trendline resistance. The chart still looks fragile going into this week.
As Lyn Alden pointed out recently, gold continues to have an almost perfect inverse relationship with the real return of the U.S. 10-year note. (real return means the interest rate minus inflation).
As we can see from the above graph, the real return for the 10-year U.S. treasury note is currently negative. When the real yields rise, it means that the interest rates are rising faster than inflation - gold suffers. When the real yields drop, inflation rises faster than rates, and gold thrives.
This implies that as the “real return” of treasuries gets more attractive, investors leave gold for the safety of treasury bonds with a real yield.
DeFi: Both the DeFi index and Ethereum caught a bid this week and had a great week. The DeFi index finished the week +21.31% at 7,577 - and ethereum was higher by +17.21% at 2,324.
Institutional appetite around ethereum continues to mount. This week the news broke that Skybridge Capital, Anthony Scaramucci’s fund, is planning to launch an ethereum fund as well as file for an ETF. Until now, most of the ETF conversation has gravitated around bitcoin. It will be interesting to see if this has an impact on how the SEC approaches ETF applications for digital assets.
As we highlighted last week, there is a seismic shift happening in stablecoins. In line with our comments last week, reports are now surfacing projecting that in a couple of weeks, Tether’s overall supply dominance could fall to under 50% of stablecoins on the Ethereum network.
Parallel to this, we continue to see exponential growth in USDC supply. Investors seem to be talking with their feet. It would not be surprising to start reading about Tether’s redemption mechanism and redemption scrutiny in the coming days and weeks. This could introduce volatility to bitcoin and crypto markets in general.
Difficulty Commentary: If you don’t already know - there was a large downwards difficulty adjustment in the bitcoin network last week. Specifically, mining difficulty dropped by -28%. Kudos to the CNBC editorial team for the headline below, as it captured the nature of difficulty adjustments beautifully.
After 54% of the mining hashrate left the network, the protocol adjusted to make blocks 28% easier to find. This means that the remaining miners are now, on average, more profitable than before, and it incentivizes new hash power to come online. This will happen in more welcoming jurisdictions, hopefully with less corruption, cleaner energy sources, and a better long-term plan.
Looking at the mempool, while transaction costs have come up a bit, we are still at a very reasonable 57 sats/vbyte for next block confirmation at time of writing.
What's ahead for the week:
As the summer begins in full swing we are starting to see the bitcoin futures curve start to steepen:
It’s similar to what is happening in the treasury bond curve but on a month-not-years basis. What this means is that the market expects prices to start tracking higher soon. The only real backwardation left in the curve is Deribi’t Jul’y contract. All other contracts are trading higher than spot by some degree (or in contango).
Another interesting point is that perpetual futures funding rates have been hanging around the negative for the last few weeks.
This means that there are more leveraged shorts than long in the market right now. And we have seen what happens when too much conviction builds on one direction. All the market needs is a little spark to send the shorts running for cover.
As usual, lets look at the market-moving data and events that are happening this week:
Monday:
U.S. Holiday.
Wednesday:
10.00 AM EST: Job Openings in the U.S.
2.00 PM EST: Fed’s FOMC meeting minutes.
The market will likely react to the minutes announcement as there is typically additional detail provided in the minutes that was not included in the official press release.
Friday:
10:00 AM EST: Wholesale inventories.
The estimates is for an increase of +1.1% - a lower number than this would signal that inventory is cycling through, which could put upward pressure on inflation. A higher buildup would mean that there could be deflationary pressures in the future as wholesalers look to “move” their builtup inventory more aggressively.
Sunday:
9.20 AM EST: Fed Vice Chair for Supervision Randal Quarles gives a speech on Financial Stability and Climate change.
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 @hodlwithLedn
Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
Source: https://www.bankofcanada.ca/rates/
U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
Source: https://apps.newyorkfed.org/markets/autorates/fed%20funds
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