Trading Volumes Surge as Investors Return to Base Metals

Commodity

Summary:

Base metals trading booms as investor confidence returns. LME sees record volumes across all metals, especially copper, driven by bets on manufacturing recovery and energy transition demand. Similar trends on US and Chinese exchanges.

The boom times are back for base metals traders.

Over 17 million contracts traded on the London Metal Exchange (LME) in April, making it an all-time record month in outright volume terms. Expressed in average daily volumes, activity was the second highest on record after April 2018.

That was the month the U.S. government announced import duties on aluminium, a shock to global trade patterns that generated a one-off volume spike on the LME aluminium contract.

This time around the lift in activity has played out across all six of the LME's core base metals contracts.

Even nickel is back in full recovery mode. Volumes dropped precipitously in the aftermath of the LME's suspension of the market and cancellation of trades in March 2022. Activity last month was double that of a year ago and volumes were the highest since February 2022.

This, however, is not just a London phenomenon.

U.S. peer CME Group registered record copper volumes on both futures and options contracts in April.

The Shanghai Futures Exchange (ShFE) saw activity rebound last month after a weak first-quarter performance.

Industrial metals are back on the investment radar and the world's three big metal exchanges are all reaping the benefits. Trading Volumes Surge as Investors Return to Base Metals_1

Trading Volumes Surge as Investors Return to Base Metals_1

LME average daily volumes year-on-year change

LME RECOVERY

LME average daily volumes grew by 35% over the first four months of the year, marking an acceleration of a growth trend that started around the middle of last year.

Activity on the 147-year old exchange, which is owned by Hong Kong Exchanges and Clearing (HKEX) fell every year between 2019 and 2022.

Industrial metals were out of favour with investors. The lack of engagement was exacerbated by a loss of confidence in the LME after the nickel crisis of 2022. Average daily volumes fell by a steep 7.6% that year relative to 2021.

The British High Court vindicated the LME's decision to cancel nickel trades in a November 2023 ruling. That and the exchange's fast-tracking of new nickel brands are generating a rebound in activity.

Nickel futures volumes were 1.34 million contracts last month, compared with a monthly average of 1.33 million over the course of 2021. Options volumes of 195,423 contracts were the highest monthly total since May 2014.

It's not just nickel.

Headline lead volumes grew by 52% year-on-year in January-April, zinc by 44%, tin by 42%, aluminium by 34% and copper by 24%.

Copper's relatively low growth rate reflects the fact that activity started picking up earlier in this market than in the rest of the LME pack.

Indeed, copper is currently the star of the base metals markets. Trading Volumes Surge as Investors Return to Base Metals_2

Money manager positioning on CME copper

COPPER BURNS BRIGHT

LME three-month copper has risen by 25% since February and is now trading above the $10,000 per metric ton level for the first time since April 2022.

The move has been fuelled by investors betting on the combination of a global manufacturing recovery and an energy transition demand booster.

Funds have lifted long positions on the CME copper contract to 132,622 contracts, according to the latest Commitments of Traders report, the highest level since January 2018.

Short positioning, however, is significantly higher than then, attesting to greater two-way speculative activity in the market.

That's reflected in trading volumes across all three metals exchanges.

LME copper volumes, including options, rose above the four-million lot mark last month for the first time since June 2016.

CME futures activity broke the four-million-contract barrier for the first time ever, while the U.S. exchange's monthly options saw volumes almost quadruple year-on-year to 404,739 contracts in April.

There were also fresh monthly records for the CME's newer micro copper contract and its weekly options suite.

China has also turned up at the copper party.

ShFE saw copper futures activity more than double year-on-year to 6.3 million contracts in April, while options activity set a fresh monthly record of 2.5 million contracts.

SHANGHAI TURNAROUND

Trading activity fell across the ShFE base metal board in the first quarter of this year as China's prolonged property slump cast a long shadow over the industrial metals sector.

However, April brought an abrupt change of trend, with volumes up year-on-year across all six base metal contracts.

Copper was the outperformer, but zinc volumes rose by an impressive 76% year-on-year in April, nickel volumes by 61%, aluminium by 59% and lead by 55%.

By way of comparison, the ShFE's steel rebar contract saw activity contract for the eleventh straight month in April, with volumes down by 24% over the first four months of the year.

The hot-rolled-coil contract has fared better but volumes were only flat with year-ago levels in January-April.

The differing fortunes between ferrous and nonferrous contracts suggests Chinese investors are differentiating between those metals most exposed to the ailing property sector and those leveraged to new energy sectors such as solar panels and electric vehicles.

COMMODITIES BACK IN VOGUE

The rush of money into the base metals sector is not taking place in isolation. Investors have also been piling into gold and to a lesser extent silver.

Commodity exchange traded funds, which tend to be dominated by retail precious metals investors, are currently valued at $392 billion, just shy of the record levels hit during the first days after Russia invaded Ukraine, according to analysts at Citi.

The bank estimates more than $30 billion of fund money has washed into the commodity sector so far this year. Total assets under management jumped by 7% month-on-month and 11% year-on-year to $767 billion in April, it said.

Precious and base metals sectors are currently attracting the lion's share of that speculative enthusiasm for hard assets.

The LME, keen to consign a couple of difficult years to the history books, can only hope the trend continues.

Source: Reuters

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Owen Li

Energy

China's imports of major commodities for April show the impact of price trends, with strength where prices were trending down and weakness where prices were moving higher.

The temptation for market observers is to view China's commodity imports through the prism of how the world's second-biggest economy is performing, but it increasingly appears that price movements are a more determining factor, at least in the short term.

For April, there was strength in imports of iron ore, coal and natural gas, while arrivals of crude oil and copper were soft.

While there are still economic factors at play, it's difficult to construct a narrative that explains both the robust iron ore imports and the moderate arrivals of copper, especially because China's property sector is supposedly weak, but industrial output is gaining momentum.

It's more useful to look at the prices that prevailed when China, the world's biggest buyer of natural resources, arranged the cargoes that were delivered in April.

China's iron ore imports were 101.82 million metric tons in April, up 1.1% from March and 12.6% from the same month in 2023, bringing arrivals for the first four months to 411.82 million tons, a gain of 7.2% over the corresponding period last year.

Cargoes that arrived in April would most likely have been booked during February and March, a time in which the spot price for the steel raw material was declining.

Benchmark iron ore contracts traded on the Singapore Exchange dropped to a 17-month low of $98.36 on April 3, having slipped 31.5% from an 18-month high of $143.60 on Jan. 3.

The declining price led Chinese steel mills and traders to buy iron ore, lifting portside inventories from an eight-year low of 104.9 million tons in late October to a near two-year high of 144.6 million by the end of April.

Soft Copper

In contrast to iron ore, China's imports of unwrought copper declined in April, dropping 7.6% from the prior month to 438,000 tons, according to official data released on May 9.

Apart from February's soft imports, April's arrivals of copper were the weakest in a year.

The global benchmark copper price in London hit the lowest so far in 2024 of $8,127 a ton on Feb. 9, and has since rallied 23.1% to end at $10,004 on May 9.

This means that China's copper buyers were dealing with higher global prices for the industrial metal at a time when they were arranging cargoes for April delivery, likely leading them to trim purchases.

The same dynamic can be observed for China's imports of crude oil, which dropped to 10.88 million barrels per day (bpd)in April from March's 11.55 million bpd.

April's arrivals were the weakest since January and imports over the first four months of the year are a mere 2.0% higher than for the same period last year.

Global benchmark Brent crude futures have been trending higher since hitting a six-month low of $72.29 a barrel on Dec. 12, and the rally accelerated from early February onwards after the OPEC+ group of exporters committed to maintain production cuts.

Brent's high so far in 2024 came on April 12 when the contract reached $92.18 a barrel, and it has since moderated to end at $83.88 on May 9.

However, given the lag between when cargoes are arranged and physically delivered, which can stretch to three months, it means China's refiners were buying April delivery crude at a time when prices were rising rapidly.

Looking at two other major commodities, coal and natural gas, also support the theme of prices driving import volumes.

Imports of all grades of coal were 45.25 million tons in April, up 9.4% from March and just short of December's record 47.3 million.

While domestic output has struggled to rise fast enough to meet demand amid hydropower shortages, it's also the case that the main types of coal that China imports have remained relatively low in price.

Indonesian thermal coal with an energy content of 4,200 kilocalories per kg, as assessed by commodity price reporting agency Argus, was largely flat in the first quarter of 2024, trading in a narrow range around $56 a ton, having softened from levels above $80 in the first quarter of 2023.

Spot liquefied natural gas (LNG) for delivery to North Asia was also weakening in the first quarter, dropping from $11.70 per million British thermal units at the end of 2023 to a low of $8.30 in the week to March 1.

China's imports of natural gas, which includes both LNG and pipelines, rose 20.7% in the first four months of the year, with April imports of 10.3 million tons being slightly below March's 10.76 million, but well ahead of the 8.98 million from April last year.

The overall message from China's commodity trade numbers is that while overall economic conditions may set a longer-term trend, movements from month to month reflect shifts in price momentum.

Source: Reuters

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Warren Takunda

Economic

Bond

China's finance ministry plans to start raising 1 trillion yuan ($138 billion) in long-awaited, long-term special treasury bonds this week to raise funds it will use to stimulate key sectors of its flagging economy.

The finance ministry confirmed what four sources had told Reuters earlier on Monday that the 1 trillion yuan ($138.23 billion) of special government bonds would have tenors of 20 to 50 years and issuance will begin on May 17.

The sources who have direct knowledge of the plans said 300 billion yuan worth of 20-year bonds, 600 billion yuan worth of 30-year bonds and 100 billion yuan worth of 50-year bonds would be issued.

China's Premier Li Qiang on Monday urged officials to make good use of the ultra-long special treasury bonds to support the implementation of major national strategies as well as building security capabilities in key areas, state media reported.

China would make coordinated arrangements for key tasks for this year and the next few years, coordinate and make good use of conventional and extraordinary policies, state media said.

The country would also better coordinate government investment and social capital, the report said, citing Li, who chaired the virtual meeting.

Market participants have been waiting for weeks for details of the issuance pipeline of these special treasury bonds, which were first announced during China's parliamentary conference in March.

Given the issuance was foreseen, news of the details caused bond yields to slip slightly. The yield on 30-year bonds fell 2 basis points to 2.55%. It is down 30 bps this year.

Zou Wang, an investment director at Shanghai Anfang Private Fund Management, said that while such a supply of bonds is negative for prices, it had been priced in.

"In addition, the market now expects the central bank to provide liquidity support through cuts in interest rates and reserve requirements," he said.

The finance ministry said 30-year special bonds will be sold in 12 tranches, from May 17 to Nov. 15. It said 20-year bonds will be sold in seven batches beginning May 24, while 50-year bonds will be issued in three tranches from May 17.

Details of the timeline come just after data showed new bank lending in China fell more than market participants expected in April from the previous month while broad credit growth hit a record low.

The expansion of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 8.3% in April, a record low, from 8.7% in March.

China's economy grew at a faster-than-expected 5.3% pace in the first quarter, offering some relief to officials as they try to work through a property downturn and curtail local government debt. However, indicators show that demand at home remains frail, weighing on overall momentum.

The Financial Times reported earlier in the day that Chinese authorities had kicked off plans to sell the long-dated bonds and the People's Bank of China (PBOC) had asked brokers for advice on pricing. ($1 = 7.2341 Chinese yuan)

Source: Reuters

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Warren Takunda

Stocks

Global stocks neared record highs on Monday, in a week where inflation figures could make or break expectations for earlier U.S. rate cuts, while Chinese activity data will test optimism about a sustained recovery in the world's No. 2 economy.

While U.S. inflation data will take centre-stage, reports on Chinese retail sales and industrial output could also have a big impact on overall investor sentiment.

Chinese authorities are also set to sell 1 trillion yuan ($140 billion) in longer-dated bonds to help fund stimulus spending at home.

The improved sentiment has helped lift Chinese blue chips to a seven-month high and the positive vibes carried over into Europe, where the STOXX 600 held near record highs and U.S. stock futures , rose 0.1%.

"U.S. equity traders, along with bond, gold, and dollar traders (well, everyone really), will be looking to start the week by massaging exposures ahead of U.S. PPI, and CPI and retail sales," Pepperstone strategist Chris Weston said.

The MSCI All-World index nudged higher on Monday and is now less than 0.5% away from March's record highs.

Globally, much now depends on whether the U.S. April inflation report will show a moderation after three months of upside surprises. Median forecasts are for core consumer prices to rise 0.3% in the month, compared with 0.4% in March, pulling the annual rate down to 3.6%.

So crucial is the data that rounding to the second decimal place could make all the difference.

"Our unrounded core CPI forecast at 0.27% m/m suggests larger risks for a dovish surprise to a rounded 0.2% increase," noted analysts at TD Securities.

A low number would likely boost bets that the Federal Reserve could ease as soon as July, which is currently priced at only a 25% chance. Equally, a high inflation print could push a rate cut out past September and challenge pricing for 42 basis points of easing this year.

Also due are figures on U.S. producer prices, retail sales and jobless claims, along with final reports on European inflation that should reinforce expectations for a June rate cut from the European Central Bank.

There are a host of Fed speakers this week to update markets on their thinking, including Fed Chair Jerome Powell, who appears with the head of the Dutch central bank on Tuesday.

UPBEAT US EARNINGS

With 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1%.

Once Nvidia reports on May 22, quarterly earnings from so-called Magnificent Seven firms are on track to jump 49%, according to LSEG data.

Companies reporting this week include Walmart , Home Depot and Cisco.

Global share indices have also bounced to record highs in recent weeks, even as markets scale back some of their more aggressive wagers for rate cuts this year.

"A straightforward interpretation of financial market performance is that there is more underlying strength in the global economy than had been anticipated and higher interest rates are reflecting rather than impeding global growth," says Bruce Kasman, head of economic research at JPMorgan.

"We lean in this direction as our 2024 growth and policy rate forecasts both move higher."

The relative outperformance of the U.S. economy continues to underpin the dollar, while only the threat of Japanese intervention is stopping it from re-testing the 160 yen barrier.

The Bank of Japan on Monday sent a hawkish signal to markets by cutting the amount of Japanese government bonds it offered to buy in a regular operation, pushing yields up.

The dollar was holding at 155.87 yen on Monday, while the euro was flat at $1.0777 having faced resistance around $1.0791 last week.

Gold eased 0.5% to $2,347 an ounce, having gained 2.5% last week on demand from momentum funds and talk of ongoing buying by China.

Oil prices held mostly steady, with Brent crude futures up 0.1% at $82.87 a barrel, while U.S. crude was up 0.13% at $78.36.

($1 = 7.2339 Chinese yuan)

Source: Reuters

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Devin

Economic

Investors are racing back into European bank stocks after a surprisingly upbeat earnings season, pushing their shares to multi-year highs, but the bounce has also lured short sellers betting that the optimism is unlikely to last.

The STOXX European banks index climbed past 200 on Friday, its highest level since August 2015, as confidence in the sector's earning power grows while the U.S. Federal Reserve and Bank of England hold back on widely-anticipated interest rate cuts.

But the number of investors making short bets against some major banks is also rising, suggesting they are not convinced that the rebound will last.

The number of funds betting on a share price fall at British bank NatWest Group has almost doubled between Jan. 2 and May 3 from 16 to 31, according to data from Hazeltree, which provides software and other services to investment funds.

Deutsche Bank is among other European banks which have also caught the eye of speculators, Hazeltree said, while 21 investors are shorting Amsterdam-listed ING, up from seven funds at the start of the year.

While the percentage of shares shorted is not tracked, Hazeltree's data is indicative of investor positioning since around 700 asset manager funds contribute to it on an aggregated and anonymised basis, Hazeltree said.

Short sellers are investors who make money from falls in the value of a stock. They borrow shares, sell them and re-buy the stock after the price has fallen, pocketing the difference.

The rise in both short and long investor interest in the European banks reflects increasingly divergent views about the region's economy and the ability of consumers and companies to cope with higher-for-longer borrowing costs, some analysts said.

Others analysts, including Benjie Creelan Sandford, equity analyst at Algebris Investments, said the banking sector's outperformance of the broader European market - by around 10% year to date - had sharpened focus around technical market indicators.

Creelan Sandford said higher measures of momentum reflected in the RSI (relative strength index) may have led some participants to tactically increase short positions.

The RSI can help investors to determine whether a particular security might be overbought or oversold.

"From here individual stock selection will have an increasingly important role to play," he said.

The short selling bets by funds on European banks could also be seen as a protective strategy against potential economic headwinds in the region, said Bruno Schneller, managing partner at Erlen Capital Management in Zurich.

Elevated levels of lending to hedge funds in the U.S. show some are putting cash to work where they see opportunities, Schneller said, after a tendency for many to sit on the sidelines in recent years.

Italian bank Intesa showed the third highest increase in short bets behind HSBC and NatWest, with the number of funds betting short rising from 19 to 26 and a net increase in the value of such bets outstanding, according to Hazeltree. European Banks' Goldilocks Rally Tempts Back Buyers... and Bears_1

European Banks' Goldilocks Rally Tempts Back Buyers... and Bears_1

European Banks Back in the Spotlight

European bank chiefs confirmed they have seen a spike in investor interest this year, following a raft of better-than-expected earnings.

That included NatWest, which attracted the most short-selling interest by value according to the Hazeltree data, as the bank prepares for its escape from state ownership.

While that should be a long-term boon for the bank, the rise in short bets could reflect concerns a mooted retail share sale by the government may not attract much demand.

British banks also face bigger-picture worries about slowing consumer credit demand and mortgage defaults which are set to rise in 2024 as higher costs hit borrowers' ability to repay, according to consulting firm EY.

The region's investment banks, which have played second fiddle to Wall Street rivals, also did well in the first quarter with Deutsche Bank reporting much better than expected profit and Barclays showing progress in its strategy.

European banks' strong quarter also contrasted with a number of the big U.S. banks where costs rose ahead of revenue growth, said Nigel Moden, Banking and Capital Markets Leader for the EMEIA region at EY.

Investors have taken note, Moden said, and European banks' shares rose by an average 2% on results day relative to the European banks index.

One senior banking executive described a rapid rebound in sentiment towards UK bank stocks in the last six months, with rising dividend payouts and modest valuations attracting long-only investors from the United States, Canada and Japan.

"They are flying in to meet us now, whereas six months ago, we were doing all the running," the London-based executive told Reuters.

Source: Reuters

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Warren Takunda

Economic

Cryptocurrency

Bitcoin starts a new week carefully preserving $60,000 support as sentiment walks the line between bullish and bearish.

BTC price action is sticking tightly to a narrow trading range — what could cause a dramatic change of pace?

This week is as good a time as any for crypto market volatility. United States macro data will combine with commentary from Jerome Powell, Chair of the Federal Reserve, in what could prove to be an explosive mix for risk assets.

There is much at stake for Bitcoin bulls, even in this established range — the market has already teased a deeper correction, and traders are already marking levels that could come next.

These focus mainly on bid liquidity below $50,000 — an attractive zone for a longer-term market bottom. On shorter timeframes, however, BTC/USD seems more interested in clearing liquidity to the upside as the week begins.

Cointelegraph takes a look at the current state of play when it comes to BTC/USD performance.

BTC price: It's all about $60,000

A weekly close which went almost unnoticed means that Bitcoin is still firmly in familiar territory as the week’s TradFi sessions get underway. CPI Meets $60K BTC Price Battle: 5 Things to Know in Bitcoin This Week _1

CPI Meets $60K BTC Price Battle: 5 Things to Know in Bitcoin This Week _1

BTC/USD 1-hour chart. Source: TradingView

Data from Cointelegraph Markets Pro and TradingView shows a lack of volatility on BTC/USD into the end of the week.

Crucially, $60,000 has held since being reclaimed on May 3, and for some, this level marks the line in the sand for bulls.

Commenting on a chart uploaded to X (formerly Twitter), popular analyst Mark Cullen flagged a “bullish order block” of bidder interest just below $60,000.

“Bitcoin still holding above 60k and the down trend break,” he wrote.

“That blue OB is going to be the key in the short term, lose it & we revisit the lows & likely much lower. Hold and another leg to take liquidity above the highs at 64-67k is likely.”

BTC/USD charts. Source: Mark Cullen/X

Cullen added that this week’s macroeconomic data releases, specifically the Consumer Price Index (CPI) on May 14, should be pivotal for BTC price action.As Cointelegraph reported, the $60,000 zone represents more than simply bids — key moving averages and other bull market support trendlines have converged there.Popular trader Daan Crypto Trades noted the so-called “bull market support band” still buoying price.“Bounced exactly from the Bull market Support Band last week,” he told X followers over the weekend.

“So far during this and previous bull cycles, it has offered good support. Let's see how we do from here.”

BTC/USD chart with bull market support band. Source: Daan Crypto Trades/X

The support band is formed of two exponential moving averages, or EMAs.

The latest data from monitoring resource CoinGlass meanwhile shows that overnight into May 13, a new $65 million block of bids was placed at around $60,250.

A cloud of ask liquidity which was waiting in the wings above $62,000, meanwhile, is now getting cleared in what could be the next spot price battleground.

BTC liquidation heatmap (screenshot). Source: CoinGlass

The day prior, fellow trader Skew said that he suspected “passive spot buying” being responsible for support nearer to $60,000 not seeing a test.“Overall good spot bid depth $60K - $58K,” part of X comments added.

CPI hits as Fed's Powell due to speak

All eyes are on macroeconomic developments in the U.S. this week as data prints come thick and fast.

CPI forms the highlight when it comes to the inflation debate and risk-asset hopes for interest rate cuts.

Prior to that, however, May 14 will see the Producer Price Index (PPI) print for April, along with a public speaking appearance from Fed Chair Powell.

Powell will discuss the economy during a moderated discussion with Klaas Knot, president of the Netherlands’ central bank, De Nederlandse Bank, at the annual general meeting of the Foreign Bankers’ Association in Amsterdam.

Markets have shown themselves to be highly sensitive to Powell’s tone when it comes to hints as to future policy moves.

The latest data from CME Group’s FedWatch Tool underscores sentiment — traders see barely any chance of a rate cut at the Fed’s next meeting in June, with the likelihood only increasing substantially in September. CPI Meets $60K BTC Price Battle: 5 Things to Know in Bitcoin This Week _5

CPI Meets $60K BTC Price Battle: 5 Things to Know in Bitcoin This Week _5

Fed target rate probabilities as of May 13 (screenshot). Source: CME Group

“If CPI inflation rises again this week, it will mark the third STRAIGHT monthly increase,” trading resource The Kobeissi Letter commented alongside its weekly macro diary dates post on X, describing the upcoming few days as “very busy.”

Long-term holders halt 2024 BTC distribution

Seasoned Bitcoin hodlers are channeling the 2021 bull market, as seen through some on-chain data.In a positive development, long-term holders (LTHs) are in the midst of boosting their BTC exposure after distributing to the market throughout 2024.This is the conclusion of J. A. Maartunn, a contributor to on-chain analytics platform CryptoQuant.

Uploading some of his latest findings to X, he argued that just like in mid-2021, LTH entities are attempting to capture more of the BTC supply.“They see the low price of bitcoin as an opportunity to accumulate coins cheaply, to then reintroduce them to the market during hype phases,” Maartunn explainsin an accompanying analysis on CryptoQuant.

“Interestingly, a trend line can be drawn between the data points from 2018, 2021, and 2024. There's a cyclical trend occurring, as previously described, where long-term holders buy in bear markets and sell in bull markets. However, a broader and more enduring trend is also at play: despite this cyclical trend, an increasing share of bitcoin is steadily being held by long-term holders.”

Bitcoin LTH supply ownership. Source: Maartunn/X

As Cointelegraph reported, both Bitcoin and Ether speculators, known as short-term holders or STHs, form another nearby support level, which has broadly endured throughout the current bull market.

Funding rates reset endures across crypto

Bitcoin and altcoin market observers may not need to wait much longer to see more varied conditions return.

The current picture across derivatives markets shows the extent of neutrality, which now characterizes crypto.

In particular, funding rates remain neutral regardless of near-term price moves — something which makes Bitcoin’s trip to all-time highs in March look like a blip on the radar.

“Crypto Funding Rates now down at neutral levels for longer than they were overheated back in February/March,” Daan Crypto Trades noted about the phenomenon.

CoinGlass data shows a broad funding reset coming at the end of March.

“That's basically how it goes: Slow market, breakout, overheating, reset. Rinse & Repeat,” Daan Crypto Trades added.

CPI Meets $60K BTC Price Battle: 5 Things to Know in Bitcoin This Week _7

Crypto funding rate heatmap. Source: Daan Crypto Trades/X

"Fear and indecision"

While prices act within an established corridor, volatility is already apparent elsewhere in crypto.

The Crypto Fear & Greed Index, the classic market sentiment gauge, is flip-flopping between various states this month.

The lagging indicator uses a basket of factors to determine impulsive tendencies among crypto traders, with extreme readings suggestive that the market could see a knee-jerk reversal.

Fear & Greed is at 57/100 as of May 13 — a fairly neutral reading and a strong contrast to the 71/100 seen on May 6 — inches from the “extreme greed” zone.

CPI Meets $60K BTC Price Battle: 5 Things to Know in Bitcoin This Week _8

Crypto Fear & Greed Index (screenshot). Source: Alternative.me

In new analysis last week, research firm Santiment likewise attributed a drop in Bitcoin on-chain activity to “fear and indecision” on the part of traders.

An accompanying chart revealed that an aggregate bag of on-chain actions had dropped to levels last seen in 2019.

“Bitcoin's onchain activity is approaching historic lows as traders have dramatically slowed transactions in the 2 months since its alltimehigh,” Santiment wrote.

“This isn't necessarily a sign of more $BTC dips, but rather a signal of crowd fear and indecision.”

Bitcoin on-chain activity chart. Source: Santiment/X

Source: Cointelegraph

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Damon

Forex

Political

Economic

In 2024, the world will witness a global election year with many countries heading to the polls. Historical patterns suggest that incumbent governments tend to adopt expansionary fiscal and monetary policies prior to elections to boost economic growth and enhance their chances of reelection. Additionally, incumbent governments may also take measures to appreciate their currency before elections, again in a bid to improve their reelection prospects. However, new governments coming into power often inherit challenges left by their predecessors, such as depleted foreign reserves and current account issues, leading to a high likelihood of currency depreciation.

Recent elections in some emerging markets and developing economies (EMDEs) have once again demonstrated that currency depreciation is more likely to occur after elections rather than before. For instance, Nigeria, Turkey, Argentina, Egypt, and Indonesia all experienced currency depreciation following their respective elections last year.

Election-Depreciation Cycle

Fifty years ago, Nobel laureate William Nordhaus published a seminal paper that initiated comprehensive research into Political Business Cycles (PBC). Political Business Cycles refer to the phenomenon where governments tend to engage in fiscal and monetary expansion in the year leading up to elections, aiming for the re-election of the incumbent president or at least the incumbent party. The purpose is to accelerate output and employment growth before elections to enhance the government's reputation, with costs such as debt issues and inflation often emerging after the elections.

Subsequently, Nordhaus also introduced a predictive model for exchange rate cycles, particularly applicable to EMDEs, in his groundbreaking 1975 paper. Countries typically take measures to support the value of their currency before elections. To bolster currency value, countries may tap into their foreign reserves, while after elections, they might allow their currency to depreciate.

Additionally, new governments may intentionally pursue currency depreciation. Depreciation can exacerbate inflation before people become dissatisfied, allowing the blame to be shifted to the previous government. Alternatively, a severe balance of payments crisis may occur shortly after elections, leading to currency depreciation. In either scenario, governments have an incentive to accumulate international reserves early in their term and then use these reserves more freely to defend their domestic currency value as their term approaches its end.

The likelihood of political leaders stepping down within six months after significant currency depreciation is nearly twice as high as in other circumstances, especially in presidential democracies. While currency depreciation can improve trade balance to stimulate the economy, it can also exacerbate inflation in import-dependent countries as it raises the cost of imported goods. Moreover, in EMDEs, depreciation typically has adverse effects on economic activity, particularly for domestic borrowers holding debt denominated in US dollars, as currency depreciation amplifies their debt burden.

Cases

In the past two years, developing countries have been facing pressures on their balance of payments, with a key factor being the Fed's substantial interest rate hikes in 2022-2023, and its current intention to maintain high rates for longer than expected by the market. This has led investors to prefer investing in US Treasury bonds rather than loans and securities from developing countries.

Nigeria is a typical case in point. The country held presidential elections on February 25, 2023. The incumbent president had long used foreign exchange interventions, capital controls, and multiple exchange rates to prevent the depreciation of the national currency. However, two weeks after the inauguration of the new president, Bola Tinabu, on June 14, the government devalued the national currency by 49%, from USD/NGN=465 to USD/NGN=760. But this measure was insufficient to restore its balance of payments, and in January 2024, the government abandoned exchange rate controls again, leading to another currency depreciation of 45%, from USD/NGN=900 to USD/NGN=1418.

Another example is Argentina, where Javier Milei emerged victorious in the elections on November 19, 2023. His campaign policy advocated significantly weakening the government's role in the economy and abolishing the central bank's ability to print money. Just two days after Milei announced his inauguration, the official value of the Argentine peso depreciated by 78%, from USD/ARS=367 to USD/ARS=800. At the same time, he made substantial cuts in government spending, such as energy subsidies, quickly achieving a budget surplus and implementing comprehensive reform measures. Although Argentina's current inflation remains high, the Central Bank of Argentina successfully stopped the loss of foreign exchange reserves after the currency depreciation.

The last example is Egypt, where Abdel Fattah al-Sisi began his third term on April 2, 2024, amidst a prolonged economic crisis. Despite the economic crisis, the al-Sisi government in Egypt ensured an overwhelming victory in the elections in December 2023 by postponing potentially unpopular economic measures and preventing opponents who could threaten his re-election from running. Subsequently, on March 6, 2024, the value of the Egyptian pound against the US dollar dropped by 45%, from USD/EGP=31 to USD/EGP=49.

Elections and Exchange Rates

Certainly, there is no necessary connection between elections and exchange rates. India is currently undergoing elections, and Mexico will hold elections in June, but neither country seems to require significant currency adjustments.

However, Venezuela is planning to hold presidential elections in July, where major opposition candidates are not allowed to run, potentially undermining the legitimacy of the election. Moreover, due to long-term mismanagement characterized by recent hyperinflation, the economy is in chaos. The Venezuelan government not only restricts political opposition but also limits foreign exchange transactions. As a result, its forex market may take some time to regain balance.

To avoid depreciation, these countries have taken measures beyond just their foreign exchange reserves. They typically employ capital controls or multiple exchange rates rather than allowing financial markets to operate freely. Despite these measures, the phenomenon of depreciation after elections still exists; these measures simply delay the government's need to address macroeconomic fundamentals.

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Risk Warnings and Disclaimers

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