Bitcoin 

Central Banks around the world will be busy this week, with announcements from the Federal Reserve, the European Central Bank, the Bank of England, and the Swiss National Bank all announcing interest rates decisions this week. The Bank of Canada started last week by increasing interest rates by another 50 basis points.

In this week’s dispatch, we’re going to focus on 1) what investors could expect from this week’s announcements, and 2) how high interest rates have been impacting bitcoin markets.

Before we dive into investor positioning going into the meeting, let’s put the current interest rate cycle into context by comparing it to previous ones.

As you can see from the chart above, this is the most aggressive hiking cycle that the Fed has ever embarked on. And it has cooled off many parts of the economy, in particular, capital markets, real estate, crypto and used cars. Several analysts believe that the Fed has raised rates too much already. But that’s not the entire picture.

Perhaps the datapoint that highlights the Fed’s challenge most accurately is the comparison between job openings and the number of unemployed people in the U.S.

The U.S. labour market is more imbalanced than it has been in decades, with almost 2 job openings for every unemployed person in the U.S. today. And there are more jobs per unemployed person now than there were a year ago!

This is incredibly tight! And many Fed officials say that until there is more slack in the unemployment market, inflation could remain high. If you have certainty to earn income, you’ll spend with the same certainty. Fed officials have been already quoted saying that they don’t believe inflation can come under control without causing some harm to the economy.

The tightness in the labour market among other factors, is one of the reasons that inflation has remained reluctantly high in the U.S. Inflation data for November will be released this Tuesday and is expected to come in at 7.1% year-over-year, vs. 7.3% a month ago. Core inflation is also expected to drop from 6.3% last month to 6.1%.

In terms of positioning, trading instruments like “fixings” are signalling that investors expect November inflation to come in at 7.2% - which is slightly below analyst expectations of 7.3%. 

Now, the big question: “How are investors positioning themselves for the Fed decision?”

Looking at the CME FedWatch tool, over 70% of investors believe that we’ll get a 50 basis points increase in December, bringing the overnight rate to 4.25%-4.50%. 

Based on Powell’s most recent speech, it would not be surprising for him to compliment the decision to raise rates by “only” 50 basis points with some choice words for markets. The last thing he and the Fed are looking for is a year-end rally in asset prices. He may suggest that “more rate increases” may be necessary in the new year and could also hint at the fact that rates could “remain high until the job is done”.

Looking into 2023, over 50% of investors expect another 50 Basis points hike on February 1st - bringing rates to 4.75%-5.00%, and over 40% of them believe another 25 basis points interest hike is coming on March 22nd, bringing rates to 5.25%. 

The good news is that most investors believe that interest rates will peak at 5.25%, and over 50% of investors believe that the Fed will start cutting interest rates again in September - projecting that interest rates at the end of 2023 will be down to  4.75% again.

Now, let’s talk about how high rates are impacting bitcoin and equities. 

Have you heard the following phrase recently?

“Why would I be invested in X when I can get a 4% return on U.S. treasuries?”

I know I have, and it’s no surprise. Earning 4% risk-free and with very short term commitment is a very attractive proposition in this market. This largely explains why U.S. treasuries have become such a black hole for investment capital recently.

The natural next question is “where are you getting the money to invest in treasuries?” - and the answer is almost always, from selling a riskier asset.

To illustrate this phenomenon, let’s look at a couple of charts:

First up is the Aggregate Exchange Traded Volume for bitcoin over the last 12 months.

As you can see, the total volume traded on exchanges has been dropping progressively and is currently at its 12-month low. As bitcoin price has been dropping, people have been trading less and less bitcoin. This is evidence that liquidity, or capital,  has been drained from this market and moved into other sectors.

To compliment this view, let’s look at more data on who has been buying U.S. treasuries.

No surprise, households (which includes hedge funds) bought A LOT of treasuries last quarter. Over twice as many treasuries as sold by the Federal Reserve in the same quarter, to be precise. 

You may say “but the number also includes hedge funds - how do we make sure it wasn’t them?”. Well, as pointed out by Joseph Wang, an ex Fed member, hedge funds usually fund their purchases through the reverse repo facility, which remained flat during Q3.

So, it’s fair to assume that households and international investors have been diving into treasuries. To do so, they have been draining capital from many other asset classes.

Another way that high rates are impacting bitcoin and asset prices in general is mortgages. Many of you may have heard of friends that are paying down their mortgages or lines of credit because the monthly interest costs have become astronomical. Many times, people have to sell other assets to come up with this capital - again draining liquidity from other markets to pay down debt.

Lastly, let’s look at the shape of the Bitcoin futures curve to see how investors are pricing bitcoin for the end of December and into Q1 2023:

As you can see, bitcoin for December, March and June delivery are all trading below the current spot price, with the only outlier being Binance contracts. This is consistent with the conservative projections for global liquidity and equity markets as we’ll in the next section.

S&P 500 

A few weeks ago Goldman made headlines by stating that the U.S. economy could gradually reduce its “overheating” without causing a recession. The proverbial “Soft Landing” is possible in their eyes. 

In their own words, the cover page reads that “an extended period of below-potential growth can gradually reverse labor market overheating and bring down wage growth and ultimately inflation, providing a feasible if challenging path to a soft landing.”

This is reflected in their strategists’ targets for 2022 and 2023. Their head of U.S. equities strategy, Mr. David Kostin, predicts that the S&P 500 will close 2022 and 2023 at 4,000 points. He is effectively calling for 12 more months of sideways.

However, this relatively rosy outlook is not shared by everyone within Goldman, in particular, their CEO.

Mr. Sachs went on record last week saying that he just sees a 35% chance of the Federal Reserve avoiding a recession in the U.S. In other words, he sees a 65% chance of a recession in the U.S.

Goldman Sachs’ year-end target for the S&P 500 is very close to Morgan Stanley’s forecast of 3,900 as well.

While both investment banks expect very similar levels to close out the year, they see trouble in the horizon for corporate earnings in 2023.

While many analysts are still projecting gains for the S&P 500 in the next year, Mr. Michael Wilson at Morgan Stanley believes that analysts are being too optimistic about the earnings prospect of U.S. companies. He argues that competitive pressure will mount and margins will compress in 2023, leading to lower-than-predicted earnings and keeping markets in check. For context, Mr. Wilson was recently voted as the #1 strategies by an institutional investor survey. 

Keep in mind that, just because 2 very smart strategists agree that the S&P will close near current levels, it doesn't mean that the next 2 weeks will be smooth sailing. This week’s inflation reading and Fed decision has the potential to reintroduce volatility in the markets.

Gold 

As chatter about the Fed reaching “peak interest rates” investor chatter about gold has been increasing. While interest rates are set to rise further in the near term, long term portfolio allocators are drawing up their investment thesis for sometime in 2023.

Another strong argument for going long gold soon is the nature of U.S. dollar rallies. The chart explains this better than I could, so here it is:

Two things that stand out in this chart. 

1) the U.S. dollar index moves in whipsaw fashion. In other words, sharp rallies are typically followed by periods of sharp declines. It’s possible that it could rally further given where rates are headed, but sooner or later, the trend reverts. This is when gold rallies - and the moment investors are trying to anticipate.

2) The U.S. dollar index has an inverse correlation with gold prices, as we’ve often written about. 

DeFi

The stablecoins wars between USDC, USDT and BUSD are heating up. Months after Binance stopped supporting USDC by autoconverting balances to BUSD, Coinbase released a campaign offering free conversions from USDT to USDC. 

The message to clients sent last week highlights USDC’s reserves and references the stablecoin as a “trusted stablecoin”. 

The move also highlights just how much platforms are betting on stablecoins for their futures, and how far they will go to promote and defend them.

Mining

Last week’s difficulty reduction came a little too late for some miners. 

Argo Blockchain, the publicly traded mining company out of the U.S., has made headlines after its shares were suspended in the UK and U.S. markets last week. It has since announced that it is close to restructuring its debt without having to file for bankruptcy.

Argo is not the only miner fighting for survival.

Current market conditions might go on for a while, and we may see more miners restructure, merge, or capitulate.

The Week Ahead 

The week ahead will be huge. This morning we will get CPI or inflation for the month of November in the U.S., and tomorrow we will get another interest rate decision by the Federal Reserve.

In other news, last night the Royal Bahamian Police arrested Mr. Sam Bankman Fried under instructions of the U.S. 

As you’ve probably heard by now, the prosecutors from the Southern District of New York confirmed that he had been charged and that the indictment would be unsealed today. The New York Times reported that the charges included wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering.

This comes after Mr. Fried had allegedly refused to appear in a congress hearing and moments after the current FTX CEO John Ray made damning statements. He said that FTX U.S. was not operated as an independent entity, that there were millions in loans extended to insiders, and much more.

As if the week was not eventful enough, the FTX saga will continue to grab headlines. Here’s a summary of the events and data that could move markets in the week ahead:

Tuesday

08.30 AM EST - Consumer Price Index (Inflation) for the month of November. Expectation is for 7.3% year-over-year inflation, which would be a drop from last month’s 7.7%. Core inflation is expected to come in at 6.1% vs. last month’s 6.3%. On a month-over-month basis, the expectation is for a +0.3% increase, which would represent a big drop from last month’s +0.4%. 

Wednesday

02.00 PM EST - Federal Reserve interest rate decision. Expectation is for an increase of 50 basis points. Expect Jerome Powell to offer sobering words to markets.

Thursday

04.00 AM EST - Swiss National Bank interest rate decision

08.30 AM EST - U.S. Unemployment reading: Initial and continuing jobless claims.

10.15 AM EST - European Central Bank interest rate decision

10.30 AM EST - Bank of England interest rate decision

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.

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.