Week of Tuesday December 14th to Monday December 20th 20201
Market Commentary 💬
It’s been a volatile December and it looks as though volatility will continue until at least early January when more investors return back to their desks.
Last week Bitcoin managed to close the week +1.34% higher, at $50,123 - above the important $50k mark. However, it came under pressure again on Monday morning and has since traded to below $48,000.
Diving into bitcoin’s recent price volatility, we can see that the 10-day realized volatility has spiked from 51% to the current 78%. At the same time 1-month realized price volatility has gone from 57% to the current 70%.
The volatile holiday season that we and many others anticipated has lived up to the expectation, and it may continue to do so until the first or second week of January.
An event that will most likely accentuate the current volatility is this week’s FOMC meeting being held by the Fed. We’ll discuss this in more detail in the following section, but we have seen bitcoin prices react to macro indicators as of late.
The above graph compares how both bitcoin and the U.S. dollar index reacted to the November inflation announcement last Friday. The price action seen on both is akin to the type of reaction you see when enough algorithms are programmed to place trades on respective assets based on news headlines.
Looking further ahead into the new year, there was an interesting projection from the Bloomberg ETF team last week around bitcoin and crypto. In their view, digital assets will usher in “Phase 5.0” of ETFs. As per Eric Balchunas, Bloomberg ETF analyst, there are over 78 digital asset ETFs worldwide at the moment, and there are 42 more pending applications in the U.S. alone.
Those 78 funds currently hold about $66 billion in assets. The Bloomberg ETF team projects that this number will reach $1 trillion in the next 10 years. That’s an increase of over 10x for the next 10 years.
The current breakdown is skewed heavily towards bitcoin and ethereum. This trend is likely to continue until there is more regulatory clarity around additional assets that allow them to list into ETF structures.
S&P 500 📊
December has continued to be a volatile month so far - with the S&P 500 roaring back to hit a fresh all-time high last week.
The market closed at the sessions’ high on Friday, which typically is a sign of continued momentum into Monday. This was not the case, however, as confirmed Omnicron variant cases in the U.S. and nervousness about Wednesday’s FOMC meeting sent markets back down. The “risk off” mood is perhaps best exemplified by GameStop, which dropped more than 13% on Monday.
While the new variant may be in the media, investors may be more concerned about the actual gap between inflation and interest rates.
As Lyn Alden pointed out last week in a tweet, the gap between real inflation and the Federal Funds Effective rate has never been higher. This gap will likely be closed by the Fed raising the funding rate in an effort to bring down inflation.
We can see this play out in the structure of the U.S. treasury yield curve.
We can see from the above graph that the curve has gotten steeper over the last 6 months, with the yield on the 2-year note going from just a few basis points to the current ~1%. This structure can be further impacted by Wednesday’s press conference being held by the Fed.
Outside of the U.S., there is also uncertainty and volatility in debt markets. Last week Evergrande, the distressed Chinese property developer, formally defaulted on its debt.
Their bond stumbles and their stock was also hit. However, investor concern has not stopped there.
The MSCI China Stock index is down ~20% year-to-date - trading very close to the lows for the year. Recent news points to foreign investors starting to cut back on their exposure - this could create contagion in the broader Chinese markets.
Investors will likely continue to tread carefully until Wednesday’s press conference by Jerome Powell. If the Fed decides to accelerate the tapering, we may be in for a red holiday season in the markets.
Gold 🥇
Gold finished last week essentially flat, -0.02% at $1,782/oz. Even though U.S. treasury yields rose considerably last week, so did the U.S. benchmark inflation rate - reaching 6.8% and driving the real returns of U.S. treasury bonds lower.
While this type of dynamic typically works out in gold’s favour, the recent rally and strength in the U.S. dollar has been able to negate the effects.
Moreover, investors may be unwilling to enter into a gold position in the current macro backdrop. If the Fed potentially accelerates it’s tapering plans and tries to get ahead of inflation, gold stands to be out of favour until that tide turns.
DeFi 🔄
The DeFi index and Ethereum both finished last week lower and have been under pressure so far this week. Price wise, last week they finished lower by -4.94% and -1.49% respectively.
There were a few events last week that highlighted some interesting dichotomies within DeFi.
It all started when Amazon Web Services reported issues with its U.S.-east 3 servers. These are servers that are mostly used by internet companies to service clients within the north-east united states.
Ironically, Amazon going down impacted more than one “decentralized” protocol - one of them was the very popular DyDx.
This is interesting for a few reasons: for one, a “decentralized” protocol should not rely on a third party web hosting service provider. Second, DyDx is a derivatives exchange that does not conduct KYC - it is theoretically banned from serving U.S. clients. Why would its servers be in a facility set out to service the U.S.?
Lastly, it would not be a week in crypto without an NFT headline. This week’s comes courtesy of Nike:
They bought an NFT shoe designer to build their shoes in the metaverse. Brands continue to bet on the space - it started out with art & entertainment companies, but we seem to be moving into fashion and others.
Difficulty Commentary ⛏
The most recent difficulty adjustment from last Friday brought difficulty up by +8.93% to 24.7 THs - just inches away from the previous all-time high of 25 TH. We can now safely say that Bitcoin hashrate migration from China has been effectively replaced.
The mean hashrate for the Bitcoin network actually broke its all-time high last week - a very healthy sign.
Things remain quiet in the mempool with transaction times and cost still at optimal levels.
What's ahead for the week 📰
All eyes will be on the FOMC meeting this week. Everyone wants to know what the Fed plans to do (or not do) about inflation.
The U.S. unemployment rate dropped to 4.2% last week, from 4.6%. It is now very close to its pre-pandemic levels of 3.8%, and given the structural changes that the pandemic introduced, we may very well be at the new “natural” rate” of unemployment in the U.S.
The Fed’s mandate is to foster an environment for full employment and to meet it’s inflation targets. It has already hit one of them, unemployment - now it can squarely focus on inflation.
Poetically, as the Fed is looking to let interest rates rise, the U.S. government just signed a bill to extend the debt ceiling so that it can borrow more money from its Central Bank. This highlights just how hard it will be for the Fed to keep rates high. The U.S. government debt is at record levels, and raising rates will put a lot of pressure on the government’s bottom line.
As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:
Tuesday:
Federal Reserve’s FOMC meeting begins.
Wednesday:
8.30 AM EST - U.S. Retail sales number for November. The interesting note here is that retail sales are expected to show a 0.8% growth vs. last month’s 1.7%. While it is not useful to extrapolate one report, it will be interesting to see if this is a trend that continues.
2 PM EST - Federal Reserve FOMC meeting announcement
2.30 PM EST - Jerome Powell Press Conference
These 2 events will be the most significant for the market in the coming week. A decision to accelerate the tapering process could certainly introduce volatility in the markets.
Thursday:
8.30 AM EST - Initial and Continuing Jobless claims.
While employment data is closely followed by the Fed, given how close they are to their target, and how far away they are from their inflation target, it is likely that inflation will be the force driving the Fed’s decisions in the near term.
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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