Crypto's Decline Looks More Like a Sell-off than a Correction

Cryptocurrency

Summary:

The crypto market lost over 5% in 24 hours, to $1.52 trillion. Bitcoin has remained under pressure since the start of the week after pausing in the sell-off on Saturday and Sunday.

Market picture

The crypto market lost over 5% in 24 hours, to $1.52 trillion. Bitcoin has remained under pressure since the start of the week after pausing in the sell-off on Saturday and Sunday. The persistence of the sell-off has triggered a sell-off in many altcoins, losing with greater amplitude than BTC. Crypto's Decline Looks More Like a Sell-off than a Correction_1

Crypto's Decline Looks More Like a Sell-off than a Correction_1

The very nature of the Bitcoin sell-off makes one look for an institutional trail, as it occurs predominantly during the most active trading hours of US exchanges. Whether this is due to capital flows due to the launch of spot ETFs or a shift in investor interest from the crypto market to equities is entirely possible.

Having fallen below $39k, the Bitcoin price now risks going beyond the typical correction after the rally that started in September. Up to the $37.5K area, Bitcoin may encounter little support. But below that lies an area of prolonged consolidation, where the chances of another long tug-of-war are high. A step down from these levels will make one seriously consider a bearish outlook for cryptocurrencies for the next few weeks or months. Crypto's Decline Looks More Like a Sell-off than a Correction_2

Crypto's Decline Looks More Like a Sell-off than a Correction_2

News background

Most investors who liquidate positions in Grayscale's GBTC will channel funds into other bitcoin-ETFs, which will neutralise the current BTC weakness, Galaxy Digital CEO Mike Novogratz said. Earlier, a number of experts attributed the current bitcoin decline to liquidations of positions in Grayscale's GBTC ETF fund.

According to CoinShares, investments in crypto funds fell by $21 million last week after record inflows since 2021; outflows were recorded after four weeks of growth. Investments in Bitcoin fell by $25 million, Ethereum by $14 million, and Solana by $8.5 million, while investments in funds that allow Bitcoin shorts rose by $13 million.

Crypto fund outflows last week were negligible, although the numbers mask very high trading volumes ($11.8bn), which is seven times the average weekly trading volume in 2023—existing ETFs with higher costs suffered in the US. Outflows from Grayscale's GBTC fund totalled $2.23bn and could not be offset by investments in other ETFs, CoinShares noted.

Bitcoin will fall below $40K due to deteriorating liquidity in the financial system. The decline will continue until 31 January – the announcement of the US Treasury's quarterly borrowing plan expects ex-CEO of BitMEX Arthur Hayes. To implement the strategy, he bought March put options with a strike price of $35K.

Kiarash Hossainpour, founder of Colorways Ventures and The Consensus, said Bitcoin is expected to come under heavy pressure in the first half of the year due to a likely sell-off from former and current large BTC holders such as GBTC, Mt.Gox, Celsius and FTX.

According to platform Crypto.com, the total number of cryptocurrency users grew 34 per cent from 432 million to 580 million at the end of 2023, with Bitcoin and Ethereum leading the way in terms of increased adoption. The number of BTC owners grew by 33% (from 222 million to 296 million) and ETH – by 39% (from 89 million to 124 million).

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Central Bank

Economic

BoJ's Ueda brings yen to life

The yen was the protagonist on Tuesday, coming under some selling interest after the BoJ kept its ultra-loose policy unchanged as expected and lowered its forecasts for core inflation for the fiscal year beginning in April to 2.4% from 2.8% projected in October.

Nonetheless, at the press conference following the decision, Governor Ueda said that they expect the Japanese economy to pick up moving forward and that the likelihood of achieving their inflation 2% objective is gradually rising. He also added that they've heard encouraging comments from big firms on wage hikes, and that a policy change is possible even when there is no update to the quarterly outlook, even though they will have more data to work with in April than March.

Ueda's comments allowed the yen to stage a solid comeback, and take the driver's seat among the major currencies, as investors brought forth their expectations regarding a potential interest rate hike. They are now nearly fully factoring in a hike from -0.1% to 0% in June, while ahead of Ueda's presser, a 10bps hike was factored in for July. They are even assigning a 23% chance to the March decision.

As for the much-discussed April meeting, the first after the ‘shunto' wage negotiations, the probability for a hike has gone from below 50% to slightly above 60%, which means that there is ample room for upside adjustment should upcoming data and speeches by BoJ officials corroborate that view. This could help the yen extend today's recovery.

Dollar slides, stocks gain on China headlines

The US dollar was sold across the board today, perhaps on increasing risk appetite after news hit the wires that China is considering a one trillion yuan worth of fiscal stimulus and a similar sized bond stimulus in order to heal its wounded stock market.

Chinese stocks rose after the report, while the aussie and the kiwi rebounded, which suggests that investors are cheering the stimulus plan. However, global money managers, who have been selling Chinese stocks after the post-pandemic recovery faded, said that it will take a long time and more stimulus to repair the property sector, which accounts for nearly a quarter of China's GDP. This means that today's news may not be enough to turn the tide for Chinese equities.

Wall Street extends rally, gold rebounds

All three of Wall Street's main indices extended their gains, with the Dow Jones and the S&P 500 hitting fresh record highs as high-growth tech firms continued to shine ahead of upcoming corporate earnings releases.

Netflix is reporting results today after the closing bell, while tomorrow it will be Tesla's turn. Apart from earnings announcements, on Thursday, Wall Street investors will also have to digest the first estimate of the US GDP data for Q4, ahead of next week's FOMC decision.

Gold rebounded today, perhaps benefiting from the dollar's slide. That said, with investors notably reducing their bets regarding a March Fed rate cut, it may be hard for today's rebound to evolve into something bigger if Thursday's GDP data and next week's gathering prompt participants to further push back their rate cut expectations.

In the energy world, oil prices gained yesterday on supply concerns after a Ukrainian drone hit Russia's Novatek fuel terminal, forcing it to suspend some operations, at a time when extreme cold weather in the US continues to hold back crude production.

To stay updated on all economic events of today, please check out our Economic calendar

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Damon

Local time on January 15, German Federal Statistical Office (Destatis) data revealed that Germany's Gross Domestic Product (GDP) contracted by 0.3% year-on-year in 2023, marking the second "shrinkage" year for the German economy since 2010, making it one of the worst-performing major economies globally. Despite the sluggish performance in 2023, Germany's GDP remains higher than pre-pandemic levels, growing by 0.7% compared to 2019.

Multiple Factors Contribute to Economic Growth Fatigue

In specific industries, Germany's industrial (excluding construction) economy experienced a significant decline of 2% in 2023. This was mainly influenced by the sharp drop in output in the energy supply sector due to rising energy costs and declining domestic and international demand. Germany holds a dominant position in manufacturing and has a higher dependence on Russian energy, making the impact of the energy crisis more severe than in other European countries. Despite no issues with energy supply over the past two years, it led to a significant increase in manufacturing and industrial costs. Faced with cost pressures, some German companies have chosen to relocate to the United States and other European countries such as Central and Eastern Europe since 2022 to lay out. Undeniably, short-term factors have a significant impact on the German economy.

In contrast, the service sector has played a boosting role in the German economy. Data shows that the German information and communication industry grew by 2.6%; public services, education, and health industry grew by 1%; business services grew by 0.3%. However, overall growth is weaker than in the previous two years.

The construction industry grew by 0.2% last year, but the impact of deteriorating financing conditions on the construction industry is particularly noticeable. Simultaneously, on the supply side, material construction costs remain high. Despite a robust labor market in Germany in 2023, the serious aging of the German population and issues such as shortages of skilled labor will continue to slow down the growth of the construction industry.

In terms of consumption, both household and government final consumption expenditures in Germany declined in 2023. After price adjustments, household consumption expenditure decreased by 0.8%, and government consumption expenditure decreased by 1.7%, marking the first decline in nearly 20 years. This reflects that elevated energy costs and last year's average 5.9% high inflation weakened household purchasing power.

In terms of foreign trade, annual imports contracted by 3.0%, and exports declined by 1.8%. Although prices slid somewhat in the fourth quarter of 2023, costs across various aspects of economic activities remain at high levels, hindering economic growth.

Rate Hikes Dampen Economic Growth

Over the past year, high inflation and high interest rates have continued to suppress Germany's economic recovery. Data shows that Germany's Consumer Price Index (CPI) grew by 3.7% year-on-year in December 2023, a month-on-month increase of 0.5%, with energy prices rising by 4.1% year-on-year, compared to the previous -4.5%.

Persistent high inflation in Germany, coupled with the European Central Bank's (ECB) ten consecutive interest rate hikes since July 2022, has led to inflation rising faster than wage increases, resulting in a relative decline in demand. Meanwhile, the high-interest rate policy has imposed significant cost pressure on corporate financing, limiting business investments.

Currently, signals for interest rate cuts are still unclear. Members of the European Commission and central bank governors of member countries have successively stated that the ECB is unlikely to cut interest rates before the summer. Furthermore, geopolitical conflicts such as the Red Sea crisis have cast a shadow over the European energy market, directly impacting energy prices and influencing the ECB's interest rate decisions.

Simultaneously, a global economic slowdown, combined with weak domestic demand, has led to a poor performance in Germany's external trade. Imports and exports in Germany both significantly declined in 2023, with imports falling by 3.0% and exports by 1.8%, becoming another obstacle to Germany's economic recovery.

Grim Prospects for Recovery

A survey by the German Economic Institute (IW) shows that many large enterprises hold a pessimistic outlook for this year. Global economic weakness, rising interest rates, and the uncertainty of the federal budget are restraining the economic prospects for 2024. The current economic environment is harsh, with insufficient capital investment, high costs, pessimistic outlooks, and high uncertainty. Regarding various economic "hard data," the likelihood of continued decline is greater than the possibility of economic recovery.

At the same time, last year's recession has intensified Germany's "inauspicious start" this year. Nationwide strikes by train drivers and disruptive protests by farmers against cutting fuel subsidies have dealt blows to the German economy.

Germany's poor economic performance and increased fiscal burdens will indirectly affect the ECB monetary policies and the budget arrangements of various countries, further limiting policy space and affecting the ability of governments to support the economy. Except for Germany, Eurozone countries are also facing common problems of inflation and high interest rates, with expectations of divergent economic performances. However, geopolitical impacts, such as the Russia-Ukraine conflict, differ in intensity among different countries, leading to varying economic performances. Some Southern European countries and countries with a higher proportion of the service sector may still maintain positive growth.

"The recessionary conditions which have been dragging on since the end of 2022 look set to continue this year," said Andrew Kenningham, chief Europe economist at Capital Economics. "We forecast zero GDP growth in 2024."

Looking ahead to 2024, the economic outlook for Germany still faces strong uncertainties. One of the most crucial factors for the German economic outlook is whether Germany's inflation level can quickly fall, and when the ECB will start pushing for interest rate cuts. This will directly impact whether Germany's monetary environment can warm up, thereby improving economic conditions.

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Zi Cheng

Traders' Opinions

Economic

The quarterly Bank Lending Survey results are likely to reinforce the ECB's belief that the unprecedented surge in euro interest rates has been fully transmitted to the real economy, and lenders are now anticipating a potential recovery. In the last quarter of 2023, the survey indicated that while credit access continued to tighten, the extent was less than in the previous two years and below banks' expectations from three months earlier.

In the euro zone's major economies—Germany, France, Italy, and Spain—there was no net tightening in credit standards for mortgages, with only Germany experiencing it for corporate loans. Despite an anticipated increase in loan standards this quarter, banks foresee "a small net increase" in demand for corporate credit and mortgages, marking the first positive trend since early 2022, according to the ECB.

Dirk Schumacher, an economist at Natixis, commented that this signals the beginning of a gradual recovery, as standards are not tightening further, and demand is not contracting as rapidly. Additionally, the survey revealed that while consumer credit conditions continued to tighten, terms and conditions for housing loans eased.

Source: ECB Bank Lending Survey

While banks persisted in tightening credit standards, the survey indicates a more restrained pace, expected to further diminish in the early months of 2024. Officials in Frankfurt are currently evaluating the lingering impact of their unprecedented increase in interest rates. Bank lending is a crucial conduit through which they aim to temper economic activity and restore inflation to 2%. However, the objective is to achieve a soft landing for Europe without escalating into a more severe scenario.

Source: ECB Bank Lending Survey

The decrease in loan demand across various categories can be attributed to the overall level of interest rates, as stated by the ECB. Furthermore, a decline in fixed investment has contributed to a reduced demand for loans from businesses, while households have shown decreased interest in loans due to subdued consumer confidence and less favorable housing market prospects.

This quarterly survey, initiated in 2003, coincides with the ECB's upcoming monetary policy decision in two days. The prevailing expectation is that the ECB will maintain the current borrowing costs at 4% for the third consecutive meeting. Additionally, the ECB is likely to resist growing investor expectations for a rate cut as early as April. On the upcoming Thursday, Eurozone will be releasing their interest rates and it is expected to remain the same as previous.

ECB Expects Low Demand For Loans In Eurozone_3

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Freddie Mac released its Economic, Housing and Mortgage Market Outlook - January 2024 report on Monday.

Economy

Seasonally adjusted U.S. GDP for the third quarter came in at 4.9%, which was the fastest growth rate since the fourth quarter of 2021 and among the fastest growth in the last 20 years. Consumer spending growth was revised down to 3.1%, largely due to a decline in services spending, but it remained the largest contributor to economic growth at 2.1 percentage points. After nine consecutive quarters of negative growth, residential investment growth came in much stronger than the initial estimates at 6.7%.

While signs of weakness in the labor market have begun to show and inflation has moderated, the renewed acceleration in home prices and average hourly wage growth remaining as high as 4.1% year-over-year could mean that it may take longer than expected for the Fed to achieve its 2% target.

Housing Market

The housing market has been impacted by rising interest rates in 2023, with total home sales for the year likely to reach their lowest level since 2012. The rate-lock effect, which was the main driver of the lack of existing inventory, continued to push buyers towards the new home market.

The policy shift has spurred confidence among potential homebuyers and homebuilders. The Housing Market Index, which had decreased since August increased in December 2023. While existing home sales increased in November, pending home sales for November were still weak. As more home buyers enter the market amidst the lack of inventory, the pressure on prices could increase further.

Mortgage Market

Mortgage rates have been rising for most of 2023, touching a 23-year high in October. Since the last week of October, rates have continued to fall, largely due to expectations that the Federal Reserve will cut rates while inflationary pressures ease. Despite the decline in recent weeks, mortgage rates are still 13 basis points higher than they were at the beginning of the year. Mortgage activity has also declined. Tighter financial conditions and higher overall interest rates are starting to impact mortgage delinquency rates

Freddie Mac expects the Federal Reserve to cut interest rates later this year if the job market cools enough to keep inflation in check. Under this scenario, mortgage rates are expected to ease throughout the year while remaining within the 6% range. Falling interest rates will breathe some life into the housing market as home sales recover. However, home sales are expected to grow only moderately due to the lack of inventory in the market. Demand for housing will remain high based on a large share of Millennial first-time homebuyers looking to buy homes, which will push home prices up. National home prices are expected to rise 2.8% in 2024 and 2.0% in 2025.

Source: Freddie Mac

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Damon

Economic

In 2023, the market widely expected the US to enter a recession, but there was a surprise. The US now is expected to avoid a recession, and the probability of a "soft landing" is growing. However, the Fed's 550 bps tightening monetary policy did wreak havoc on some markets, especially US regional banks.

At the moment, the market is betting on rate cuts that exceed the Fed's forecast. There is no denying that the inflation outlook has improved and economic conditions have leveled off. But risk assets have rebounded sharply and equity market volatility has fallen to pre-pandemic lows. The question then arises: Have the expectations of a rate cut been priced in ahead of time?

There are several possibilities. On the one hand, the lagged effect of rate hikes has taken a toll on the economy, and recession fears have rekindled. On the other hand, the economy has re-accelerated and pushed inflation higher, hindering the progress of interest rate cuts. It's uncertain where the economy and markets are headed, but 2024 may not go ahead as smoothly as expected. That said, the risk has risen compared to 2023.

There may be more upside in the stock market, but it is not all the time

Given the mixed economic growth situation in developed countries around the world, coupled with slowing inflation, the liquidity backdrop has become the dominant factor. Combined with the fact that central banks will pivot (rate cuts) in 2024, in the absence of a severe recession, the pivot may not be as strong as the market expects (the market is currently betting on stronger rate cuts by central banks). As a result, there may be more upside in global equity markets.

The market is expecting this as well (global equity earnings are expected to grow by 10% over the next 12 months), but it is too optimistic. This is because global economic growth is likely to be below trend, leading to further compression of profit margins. In addition, the combination of high earnings expectations and high valuations, including the high-risk premium of equities to bonds, may also make it difficult for global equities to perform too strongly. Central bank monetary policy, earnings surprises, and the lag of previous tightening will all have an impact on the economy, which creates uncertainty for global equity markets.

As the synchronicity of economic and monetary policy cycles has decreased in recent years, opportunities for regional diversification (taking advantage of differences in monetary policy across regions to reduce risk) have emerged in some regions. Japan, for example, is showing signs of improving profitability due to an increase in nominal growth in the Japanese stock market and a shift in corporate governance. While the Bank of Japan has changed its monetary policy stance to some extent and reduced its control over the yield curve, its monetary policy remains accommodative, especially Japan's fiscal policy. The economy is still in cyclical recovery mode, although valuations are more reflective of improved fundamentals than at the start of 2023.

Will the Economy Slow or Re-Accelerate in 2024?_1

As for European equities, the strength lies in bearish sentiment and attractive valuations, but we expect the macroeconomic and earnings downturn in the region will take time to manifest. As a result, European stocks are likely to decline.

From a sector perspective, consumer discretionary stocks and energy stocks will perform well. The former benefits from slowing inflation and rising disposable income, while the latter is driven by strong fundamentals, including high yields and free cash flow. Stocks in the telecommunications, consumer goods, and healthcare sectors may underperform. The consumer goods sector has weak fundamentals, with low free cash flow and bearish sentiment. The fundamentals of the telecom sector are also weak as the ratio of capex to depreciation is low, and the industry's capital needs are high, which may increase its cost of capital. Healthcare is facing rising costs, declining hospital utilization, and a continued downturn in biotechnology.

Government bonds: Is yield rise excessive?

The US 10-year Treasury yield briefly hit 5% in October last year and then rebounded completely at the Fed's policy meeting in December. There are two views on this: One is that if inflation continues to fall, real interest rates will rise and become more restrictive. Therefore, even if the economy does not slow down, the Fed will need to cut interest rates. The other is that the decline in inflation is not driven by falling demand but by supply factors, including increased labor force participation and immigration, and the continued easing of supply chain distortions.

However, slowing global growth and falling inflation will cause the Fed to consider cutting interest rates, but interest rate markets are betting too aggressively. As a result, US 10-year Treasury yields are likely to recover.

The outlook for crude oil and inflation is positive

The outlook for crude oil is positive, but inflation may still be stickier than the market expects. Supply is expected to remain relatively constrained as the US aggressively replenishes its Strategic Petroleum Reserve (SPR), which will offset headwinds from slowing demand in 2024. In addition, the impact that attacks on merchant ships in the Red Sea may have on prices in the coming months will need to be further observed.

With the recovery of global demand and the escalation of regional conflicts, gold has once again established its position as a potential safe-haven asset and a store of value. Given geopolitical issues and the de-dollarization trend, central banks have been buying gold recently, which is expected to continue.

Summary

The turbulent year of 2023 is over. Over the course of the year, the world's major central banks are nearing the end of their rate hike cycles (except for a few central banks such as the Bank of Japan). The global process of disinflation can be described as "in the same direction, but at different speeds". The same will be true for the easing cycle in 2024. The reason why central banks have signaled interest rate cuts without the unemployment rate rising sharply is to control inflation without a recession, the so-called "soft landing". Cutting interest rates won't solve all problems, but it can help set the stage for the current global economic slowdown and reduce downside risks.

However, the economies of various countries are still facing uncertainties. On the bright side, the easing of financial conditions may push economic growth above trend without putting pressure on inflation. The re-acceleration of China's economy may have spillover effects on the global economy.

On the downside (downside risks), core inflation could accelerate again, causing central banks to delay rate cuts or even raise rates again. In addition, the lagged effect of tight monetary policy on commercial real estate or parts of the banking sector could also cause the economy to "collapse". In addition, the escalation of regional conflicts will also exacerbate macroeconomic uncertainty.

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Central Bank

Stocks

Overnight, the German stock market, the DAX extended its rebound, driven by gains in the tech sector.

Its recovery in recent days has come despite ECB members sounding more hawkish than expected ahead of this week's meeting; despite evidence of slower growth and falls in underlying inflation.

What is expected from this week's ECB meeting?

At its last meeting in December, the ECB kept its deposit rate on hold at 4.00%, as widely expected. The ECB noted that with interest rates at this level, it will make a "substantial contribution" to returning CPI to its 2% goal in 2025. Inflation data for December received in early January showed core inflation cooling to 3.4%, the lowest since March 2022, and headline inflation stayed below 3%.

While this shows that tighter monetary policy settings are winning the battle against high inflation, tighter monetary policy also impacts growth and activity data. Reflecting concerns that the European economy, led by Germany, will enter recession in 2024, the European rates market is pricing in 130bp of ECB rate cuts for 2024.

Nonetheless, in the lead-up to this week's meeting, ECB officials, including president Lagarde, have noted that aggressive pricing of rate cuts is not "helping our fight against inflation". As such, the ECB is expected to keep rates on hold this week and reiterate that rates will be set "at sufficiently restrictive levels for as long as necessary." DAX Rebounds Despite ECB Hawkish Tones; Eyes on Rates and _1

DAX Rebounds Despite ECB Hawkish Tones; Eyes on Rates and _1

DAX technical analysis

In our last update, we noted that a sustained break below support at 16,600/500 would increase the chances that a medium-term high was in place in the DAX at the early January 17,123 high.

However, given the brief time that the DAX spent trading below the bottom of the support band and the three-wave nature of the decline, it is likely that the decline was a correction, and that the DAX can push to new highs in the 17,200/400 area.

In summary, providing the DAX holds above support 16450ish, we expect a retest of the January 7,123 high before a move towards 17,200/400. DAX Rebounds Despite ECB Hawkish Tones; Eyes on Rates and _2

DAX Rebounds Despite ECB Hawkish Tones; Eyes on Rates and _2

FTSE technical analysis

In the final weeks of December 2023, the FTSE broke higher above the 200-day moving average at 7570 before running into a cluster of horizontal resistance near 7750, highlighted on the chart below.

Since then, the FTSE has erased all of its December gains despite a favourable tailwind from US stock indices in recent days, which isn't a particularly encouraging sign.

As such, while the FTSE remains below the 200-day moving average at 7567 (sustained basis), the risks are for a deeper decline in the coming sessions towards range lows, 7300/7200. DAX Rebounds Despite ECB Hawkish Tones; Eyes on Rates and _3