Market Commentary – October 6th, 2022

Crypto Market

At the time of writing, Bitcoin is trading at $20,025 USD and Ethereum at $1,360 USD. Bitcoin prices remain remarkably stable, in a multi-month consolidation between $18k and $20k. It is extremely rare for Bitcoin prices to stay stationary for so long, suggesting heightened probabilities of volatility on the horizon.

Bitcoin mining hashrate reached new all-time-highs this week. The cost of production for Bitcoin is rising at a time where miner revenues have only just recovered from the recent capitulation. By numerous models, it is likely that the average cost of Bitcoin production hovers just below current prices; any significant price decline could turn an implied income stress, into acute and explicit stress for Bitcoin miners. 

Crypto remains in equities’ orbit, although correlations have moderated. Crypto’s correlation to the S&P and Nasdaq are off their highs from the sector low in prices seen in June. Bitcoin’s 90-Day correlation to risk assets like the S&P 500 and NASDAQ is ~0.5, down from historic highs in June of ~0.6.

As reported by The Block, crypto regulation is coming to the European Union. On October 5th, the European Council approved the Markets in Crypto Assets (MiCA) proposal and sent it to the chair of the European Parliament Committee on Economic and Monetary affairs. If it passes through another round of voting, the bill is set to become law sometime in early 2024. The MiCA proposal is the most comprehensive crypto regulation framework yet introduced in Europe, with its overarching goal being to standardize crypto regulation among the 27 EU member states.

Macro

The United Nations warned the U.S. Federal Reserve that its actions of rapidly-increasing interest rates is harming economies worldwide. IMF managing director Georgieva followed the United Nations, saying the Fed has a high responsibility to consider the impact of its actions on the rest of the world.

Federal Chairman Jerome Powell doesn’t appear phased by the United Nations and IMF warnings. Powell acknowledged the Fed, when determining appropriate monetary policy for the U.S., also considers how its policies affect the global economy. However, he said the Fed would continue to raise interest rates as needed to bring inflation back to its target. Therefore, fighting inflation appears to be more important than global financial stability and the United Nation’s wishes, at least for now.

On Tuesday October 4th, the market got a jolt higher from weak BLS JOLTs and ISM manufacturing data. Both suggested a softening U.S. labor market, which could help alleviate inflationary pressures in the economy and give the Federal Reserve cover to increase interest rates less aggressively. While the decline was significant, the number of job openings is still extremely high at about 30% above pre-pandemic levels.

Equities, Fixed Income, FX and Commodities

Equities

September non-farm payrolls data are due tomorrow, Friday October 7th. US markets initially saw some buyer interest earlier in the week, but stocks moved lower as treasury yields backed up. Focus remained clearly on the US jobs market as two slightly more tepid readings came in ahead of the big report tomorrow. Fed speak remained hawkish which again coincided with stock market weakness.

Fixed Income, FX & Commodities 

The Organization of the Petroleum Exporting Countries (OPEC+) and its allies, including Russia, plan to cut production by two million barrels a day, the largest reduction since the pandemic began. Oil and energy prices surged on the news. The White House has accused OPEC+ of aligning with Russia after Saudi Arabia led the group in agreeing deep oil production cuts, prompting a backlash from countries already battling surging energy inflation triggered by Moscow’s invasion of Ukraine.

USD gained some strength ahead of Friday’s non-farm payrolls report while bond yields face opposing pressures from hawkish central banks and weak economic growth.

News we’ve been reading

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