Market View
Markets have continued to chop sideways amidst a higher than anticipated inflation print and a reduction of expected Fed rate cuts this year. Less than three months ago, markets had priced in 6 rate cuts for 2024 via Fed Funds Futures that were anticipated to start in March. Now as we go to publish, the Fed Funds Futures market is pricing in less than 2 cuts in 2024, which are predicted to begin in September. Although reflation concerns and “higher for longer” rates are often regarded as transition catalysts to risk off environments, bitcoin (and risk assets more broadly) have actually continued to outperform.
Market sentiments around higher CPI prints have been primarily manifested in short term market movements that have recovered relatively quickly (see Table 1). None of the 3 preceding bitcoin downturns on CPI print have taken more than 24 hours to reclaim its pre-print prices. That is not to say we think the market is disregarding the risks of inflation. In fact, we believe that gold’s continued strength in reaching new weekly highs – breaking previous highs set last week – underlines the market’s repricing of inflation risk (as well as other sources of geopolitical uncertainty).
We think that one part of bitcoin’s continued strength comes from the marginal impact to price that the global markets have on the asset class. That is, economic environments and outlooks beyond the US play a meaningful part in bitcoin’s overall price discovery. Despite bitcoin trading volumes and hourly price variance being the largest in US market hours, most of the net buying has actually occurred outside of the US trading day (see Chart 1). The potential approval of spot bitcoin ETFs in Hong Kong next week could accentuate this trend and enable BTC access to even broader pools of capital.
Separately, we also think that the liquidations of bankruptcy proceedings largely taking place in US vehicles have contributed to the negative price performance in US hours following the launch of spot ETFs. Many of these technical overheads have since cleared out, however, painting a more constructive outlook going into the halving next week.
That said, regional variations in bitcoin buying doesn’t fully explain the continued strength of risk assets more broadly. The Nasdaq 100, for example, is again trading near all time high levels despite also dropping after the CPI print on April 10 (though the recovery was on the back of a cooler than expected PPI print). We think there are several confounding factors at play here including expectations on the deflationary nature of AI, the weakness of the commercial real estate sector, and rising national debt payments with the threat of fiscal dominance – all with the backdrop of a potentially contentious 2024 election. Combined, we think there is reason to believe that quantitative tightening could begin to taper off soon, which would be net constructive for the markets. The uncertainty around continued tight monetary policy in the event of an administrative change may also play a role in expectations for larger future rate cuts into 2025.
Beyond this, we think that an underappreciated contributor to continued risk-on positioning is the absence of a clear value proposition for capital rotation to alternatives like longer dated bonds. On October 19, 2023 when the US 10 Year yield reached 5%, the implied number of rate cuts by end 2024 was 2.4. Although the implied number of cuts by 2024 year end has now fallen to 1.7, the 10 Year yield is currently at 4.58%. (There were 3 implied rate cuts for 2024 when US10Y yields were last at this level on November 13, 2023.) Given that $6.4T is already deposited into US Money Market Funds, there doesn’t appear to be a clear relative value play at hand here.
Altogether, we think this could strengthen support for bitcoin near current price levels. Indeed, even as bitcoin remains roughly flat in returns since one month prior, perpetual funding rates have come down from 66% annualized to approximately 12% annualized (see Chart 2). As the market sustains these price levels with decreased funding rates, that indicates to us a more spot driven demand supporting asset movements and a reduction in market euphoria. This could reduce the likelihood of liquidations magnifying moves to the downside, and indeed, we have seen dips get more aggressively bought. We further think the prolonged normalization of bitcoin at these price levels has turned dips from being seen as panic selling moments to buying opportunities given the constructive narratives around bitcoin and broader cyclical positioning.
