Diving into Macro indicators that point to more future private spending. What happens if the real return of the 10-year treasury bond goes positive? Insights from the upcoming Coinbase IPO.
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The Bitcoin Economic Calendar:
Week of Monday March 1st to Sunday March 7th.
Market Commentary:
Bitcoin: It was a whipsaw week for Bitcoin closing down -21% at $45,240,. As with most other markets, Bitcoin was down significantly, in part influenced by a series of market dynamics that we we will go into. Somewhat serendipitously - the market focus for the week that passed was the rising yield on the 10-year U.S. treasury note which we covered last week. As we mentioned, the long-term implications of a rising yield on the 10-year note is inflation expectations - which are typically bullish for bitcoin prices. However, the rising yield on the 10-year note does create a lot of headwinds for both equities and bond markets, and the knee-jerk reaction of some participants is to "trim their entire long portfolio", which can hurt most asset prices - including bitcoin. We will cover this at length in our Whats Ahead section, but for now - we wanted to highlight a few more indicators that signal the increased potential of inflation in the U.S. economy.
There are 2 very important indicators for "future" inflation. These are "purchases" that lead to more purchases. For example, when you purchase a home, typically you need to do future spending to equip the house, etc. Similarly, when a business spends in capital goods orders, they typically need more staff, new facilities, etc. That's why it's important to look at housing market activity and capital goods spending.
As we can see from the headline above, U.S. housing prices are growing at double digits for the first time in years. Combined this with the fact that the U.S. savings rate came in at 20.5% for the month of January 2021, and you have a U.S. consumer that has a lot of firepower.
Additionally, business capital spending is considerably higher than a year ago. With the Fed pledging to keep rates low, and pushing for a return to full employment, there seems to be growing potential that the U.S. economy continues to pick up steam. This will eventually put upward pressure on inflation, which is ultimately good for Bitcoin. We'll cover what we're seeing in the futures and options markets for Bitcoin in our Whats Ahead section.
S&P 500: As we covered above, most markets came down last week due to the increasing yield on the 10-year treasury note. The S&P 500 was down 2.34% at 3,812. This dynamic happens for several reasons, at a high level, rising yields mean higher borrowing costs for corporations, higher future inflation, an it also means a potentially stronger dollar - because the "real return" of the 10-year bond, which is the bond's return minus inflation, becomes higher. As we can see from the chart below, the real return on the 10-year bond is still negative, but the recent move brings it much closer to "breaking even" and showing a real positive return to its holders.
This makes holding your assets in dollars more attractive, and it can cause divestment from other asset classes to find "safety" in a real return in dollar terms from the U.S. government. Having said all of this, the signs abound that the U.S. economy is firing in all cylinders and shows no signs of slowing down.
As we covered last week, Biden's stimulus package passed in congress last week and is heading to the Senate where it may face some headwinds. However, assuming policy markers can find a compromise and pass the bill through this week, investors' focus should swiftly shift to the downstream consequences of the money hitting "the street" and what that will do to asset prices and the economy in general. More on this in our What's Ahead section today.
Gold: Somewhat consistent with what we had written about last week, Gold was unable to recover after breaking that important support level, and headed further down to find support $7 away from the $1,725 level that we had highlighted, closing the week at $1,732, down -2.85%. Needless to say, this doesn't make the chart look any better. It will be interesting to see if gold is finally able to catch some footing at these levels or continues to head further south. Considering other macro indicators, gold looks poised to continue underperforming bitcoin in relative terms.
DeFi: As with most other crypto markets, the DeFi index had a significant down week, closing down 20%. Ethereum also had a bad week down over 25% and closing just above its previous 2018 all-time high. There is an interesting dynamic brewing between Binance Chain and Ethereum, with Binance's CEO going into the offensive last week calling Ethereum "a chain for rich people" that were soon to be "poor".
While competing smart contract protocols is not a bad for DeFi in general, given the current network effect that Ethereum has, any significant down price moves in the protocol level will impact DeFi significantly, as ETH itself is used as collateral for many protocols. When ETH goes down, the "total value" locked in these protocols also drops - causing investors to want to sell their tokens as well. An interesting dynamic to keep our eyes on.
Difficulty Commentary
Not much has changed on the difficulty front. We are still scheduled to have the next adjustment come in this upcoming Friday and should bring the difficulty level down just a touch. On the mempool side of things, it has not gotten any better. In fact, the size of the mempool went up considerably last week and its currently at around 80 million bytes. This means transactions are taking longer than normal to get confirmed and it will be more expensive to transact. This type of network congestion is typical during volatile price movements. Plan your upcoming transactions accordingly.
What's ahead for the week:
There are 2 important market dynamics at play. 1 - what the rise of bond yields/interest rates will mean for U.S. companies and the U.S. consumer, and 2 - the downstream effects of stimulus and pent up spending in the U.S. consumer.
To cover the first point, there are real implications for the real return of the 10-year treasury going positive. As we covered above, may investors "sold" their dollars because of the negative real rate of return - they would get less dollars than what they put in if they bought U.S. government bonds. This drove them to make a flurry of investments everywhere else, but as the return to hold dollars goes back into positive, it may suck some of that liquidity back from markets.
On the second point, economic indicators are pointing to a very strong balance sheet at the U.S. consumer level. Indicators of future spending such as the housing market and capital goods orders are looking better than they were at pre-pandemic levels, which is causing a bit of a perfect storm for future inflation expectations.
So, where do we go from here? It depends (on the Fed). In his most recent appearance before the senate banking committee last week, the Fed chairman Jerome Powell stated that there is still a long way to go before reaching full employment in the U.S., which is the Fed's main driver to keep interest rates low and support fiscal stimulus.
In addition to Biden's $1.9 T stimulus package, there's another $3-4 Trillion dollar infrastructure package in the works from the Biden administration due to the devastating effect that winter storms have had in the U.S. With so many indicators pointing to future inflation, the narrative that the Fed may have to move to tightening monetary policy sooner than expected continues to build. The Fed has been very, very vocal that they will not act or taper before inflation is "consistently" over 2%. Looking at the data, inflation for January came in at 1.4% annualized - meaning that the Fed still has a lot of room to go before it has to act.
Looking back at the crypto markets, the Coinbase IPO draws closer by the day, and insightful information continues to surface. For one, they have left the door open to potential token offerings, and interestingly its valuation is rumoured to be close to $100 billion at its public listing. To put things in perspective, Goldman Sachs has a market capitalization of $110 billion. This would make Coinbase one fo the largest and most prestigious financial institutions in the world, by market capitalization. This could be seen as a "changing of the guard" signal for traditional finance.
On the Futures and options world, we still see a healthy contango on the Futures curve tapering at the $51k level in June. On the options front, we see some interesting open interest in the $100k level for the March 26th expiration. On the perpetual swaps funding rates, we see that the recent downturn "washed" some of the premiums down. Perpetual swaps funding rates for Bitcoin are still positive across most major platforms (more people are long than short), however, the funding rates are considerably down from their 30-day moving averages, which is typically a healthy sign for the market going into the week.
As always, we'll keep you posted on any relevant news throughout the new year 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