Bitcoin Plummets to $65K: Is the USD's Surprising Strength to Blame?
Bitcoin Plummets to $65K: Is the USD's Surprising Strength to Blame?
Digital Asset Market: Bitcoin slumped after several sharp sell orders hit futures during Asian trading, and due to an increase in the value of the dollar. The dollar index reached its highest point since mid-November, causing a decline in demand for assets like bitcoin and gold. The dollar strengthened due to reduced Fed rate cut expectations, and positive data from the Institute for Supply Management's manufacturing purchasing manager's index (PMI). The PMI showed an unexpected expansion in factory activity for the first time since September 2022. This weakened the argument for Fed rate cuts and led to a decline in the market's expectation of rate cuts.
Macro Economics: The volatility landscape of the market underwent significant changes over the Easter long weekend. On one hand, US equity futures have taken a hit and bond yields have spiked to 4.36%, amidst fears that the Fed may not slash rates in June. Meanwhile, WTI has surpassed $85, a level not seen since October, due to a combination of factors including Iran's vow of retaliation against Israel's alleged airstrike on its embassy in Syria, the attack on a Russian Oil Refinery by Ukraine, and lower supply from Mexico. In addition, tensions have escalated with North Korea's launch of a suspected ballistic missile, which ultimately failed and apparently landed outside of Japan's economic zone. As Fed Chair Powell is set to speak on Wednesday, speculations are rife that any rate cuts may be delayed as recent strong economic data emerge. Moreover, even the usually resilient Bitcoin is on a downward spiral. The rise in oil prices can be attributed to the shortage in supply and current geopolitical tensions between Israel and Iran. Key events to keep an eye on include the JOLTS job openings report, scheduled speeches from four Fed officials, and updates on European and US inflation. Lastly, market players are concerned about how central banks will navigate the delicate task of balancing their expected easing cycles.
Equities: US stock markets fell for a second day on Tuesday amid surging bond yields, lowered expectations for an interest rate cut by the Federal Reserve in June, and oil prices amidst tensions between Israel and Iran. Investors grappled with the possibility that interest rate cuts may be delayed. The Dow Jones Industrial Average and the S&P 500 both fell, while the technology-heavy Nasdaq Composite dropped even further. US bonds continued to struggle, with the benchmark 10-year Treasury yield rising to its highest level in 2024. The second quarter has started off slowly after a strong first quarter, as manufacturing data and higher prices have cast doubts on the possibility of rate cuts. An update on job openings and commentary from Fed officials will be closely watched for any insight into the Fed's future decisions. The failure to increase payments for private Medicare plans surprised the industry and led to a drop in health insurer stocks, while Tesla stock also stumbled after delivering fewer cars than expected in the first quarter.
The Fed and US Treasury: Fed Chair Powell, who is due to speak again on Wednesday, said Friday that officials are awaiting more evidence prices are contained, adding that it wouldn’t be appropriate to lower rates until officials are sure inflation is in check. Former Federal Reserve vice chair Richard Clarida says that stubbornly high inflation could force the central bank to be more cautious with its plan to cut interest rates this year. He believes that the Fed needs to carefully monitor prices and be prepared for the possibility that inflation may not decrease as expected. While markets are expecting three rate cuts this year, Clarida warns that the Fed should be more data-dependent and not commit to a set number of cuts. He also notes that financial conditions are actually looser than they were before, and that the Fed's actions could potentially improve the economy but make it harder to lower inflation to the desired 2% target.
Investors have also started accepting ‘delayed rate cut expectation’. Steve Eisman, made famous by "The Big Short" when he bet against the housing market in 2007, also believes that the Federal Reserve should not cut interest rates this year, despite the central bank's plans to do so. He argues that the economy is currently strong and any rate cuts could lead to a stock market bubble. He also suggests that if the Fed is patient and waits for data to indicate weakness, they could avoid causing any market disruptions. Eisman's views come in the midst of conflicting signals from the Fed and the markets, with some investors clamoring for rate cuts while others worry about inflation and a potential bubble. Nevertheless, Eisman remains firm in his belief that no rate cuts are needed at this time.
Geopolitical: While Iran and Hezbollah vow to retaliate over the Damascus consulate attack, and US distances its from any prior knowledge of the attack, Ukrainian drones have attacked a major oil refinery in Russia, causing a fire in the primary refining unit. Despite pressure from the White House to stop these attacks, Ukraine continues to target Russian oil infrastructure. The US is concerned about the impact of these attacks on global oil prices and has urged Ukraine to halt them. This is the latest in a series of attacks by Ukraine on Russian oil facilities, leading to a significant reduction in Russia's refining capacity.
View from our desk
Bitcoin recently experienced a decline to the $65K level, a movement attributed to the strengthening of the USD. This strengthening was a direct result of diminished expectations for rate cuts, spurred by positive PMI data and an unexpected expansion in factory activity for the first time since September 2022. Despite this downturn, there is significant support for Bitcoin at the $65K level, suggesting a stabilization of its price. The market's reaction indicates a belief that there are no underlying reasons for any further significant drops in Bitcoin's value, pointing towards a potential consolidation phase at this price point.
The financial markets have witnessed a resurgence of volatility, fueled by the same recalibrated expectations for rate cuts and exacerbated by escalating geopolitical tensions. A notable incident contributing to this volatility is the bombing of the Iranian embassy, an event with far-reaching implications that have yet to be fully recognized by mainstream media. While the United States has endeavored to maintain a distance and avoid direct conflict with Iran and its proxies, the potential for escalation remains high, contingent on the responses from Iran and Hezbollah. This delicate geopolitical landscape adds a layer of uncertainty to the market, influencing investor sentiment and market dynamics.
Back stateside, the unfolding economic scenario, marked by a mix of CPI and PMI figures, seems to have provided the Federal Reserve with the 'data' it was seeking to justify a delay in reducing interest rates. This development aligns with our previous forecasts that an unforeseen event would postpone the Fed's rate cut plans. Currently, the real estate market is grappling with a funding shortfall and diminishing supplies, leading to soaring housing prices nationwide and making affordability a pressing issue. This economic backdrop, characterized by tight monetary policy and housing market challenges, underscores the complex interplay between macroeconomic indicators, Federal Reserve policies, and broader market trends.
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