Market Commentary – November 29th, 2022

Crypto Market

At the time of writing, Bitcoin is trading at $16,300 USD and Ethereum at $1,207 USD. The cryptocurrency market has continued to consolidate after a chaotic few weeks, with prices trading within a narrow range. As the dust settles following the collapse of FTX, the aggregate response of Bitcoin holders is slowly becoming clearer. A key question is whether the recent sell-off can be better characterized as simply a continuation of the bearish trend, or perhaps a trigger of a deeper psychological shift amongst investors.

Among all Bitcoin holders, the entities holding < 1 BTC (also labelled as Shrimp) have recorded two distinctive ATH waves of balance increase over the last 5-months. Shrimps have added +96.2k BTC to their holdings since the collapse of FTX, and now hold over 1.21M BTC, equivalent to a non-trivial 6.3% of the circulating supply.

One consistent event which motivates the transition from a bear back towards a bull market is the dramatic realization of losses, as investors give up and capitulate at scale. November has seen the fourth largest capitulation event on record, recording a 7-day realized loss of -$10.16B. This is 4.0x larger than the peak in Dec 2018, and 2.2x larger than March 2020.

With such a chaotic year to date, the resolve of Bitcoin holders has been firmly tested to a historic degree throughout 2022. So much so there are barely any precedents. Those few analogues that exist in Bitcoin history, albeit small in sample size, turned out in hindsight to be the points of absolute seller exhaustion.

Macro

In recent weeks there has been some cooling in the economy. Right now it’s difficult to say whether the cooling is purely healthy or represents the start of a recession. There may be evidence  that the inflationary period that the market has been experiencing since 2021 is in transition. The ultimate magnitude of the cooling will largely depend on Federal Reserve policy. The Fed continues to signal that they have not seen enough drop in inflation to justify a change in direction for interest rates and so remains hawkish. The Fed is planning to slow the pace of increases but was very clear that their focus is on how high to raise rates and how long to keep them there. There have been some signals from Fed Governors that rates may need to remain high throughout 2023.

German inflation data released this week showed some easing, bolstering some calls for slower ECB rate hikes. US Treasury yields rose ahead of speech from Fed Chairman Powell tomorrow. S&P CoreLogic Case-Shiller National Home Price Index recorded its third consecutive monthly decline, falling 1% in September. Merchant data from the long US holiday weekend and cyber Monday showed the US consumers continued to spend at a robust pace.

Capital markets do not appear to be pricing in prolonged higher interest rates. The S&P 500’s current multiple is 21.4x trailing 12-month earnings, equivalent to a 4.2% earnings yield. This compares to a 3.7% 10-year treasury yield. Both are very low compared to a mid-7% annualized inflation rate. If the Fed raises rates to positive real levels, there is still significant re-pricing required.

Equities, Fixed Income, FX and Commodities

Equities

Chinese equities rally after the Chinese Securities Regulatory Commission announced it would end ban on local share sales by listed property developers from Monday, Nov 28th. Shopify Merchants’ Black Friday & Cyber Monday weekend sales at $7.5B +21% year over year showing US consumers are continuing to spend on consumer goods. 

Fixed Income, FX & Commodities

Crude prices on Monday briefly dropped below the level at which they started the year. Given the spike in oil prices has been the source of a lot of pain, it’s worth taking a step back to consider the implications. FX markets awaiting for clues of potently policy divergence among central banks. EUR/USD stayed below the 1.04 handle as inflation appeared to be near or at a peak for the region. CPI may provide ECB with confirm to hike by only 50bps at the December meeting

News we’ve been reading

Disclaimer

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