Navigating the Waves: Bitcoin Halving Introduces Mempool Congestion Amid Rate Cut Uncertainty
Digital Asset Market: Bitcoin's 200-day simple moving average, which is an important indicator of the cryptocurrency's long-term trend, is reaching an all-time high. For most traders, this suggests strong bullish momentum, and it is on track to surpass its previous peak of $49,452 set in February 2022. Past data show that the most intense phase of the bull cycle tends to occur after this average surpasses its previous peak, leading to significant price increases.
Tether, the company behind the stablecoin USDT, has announced that it will freeze accounts linked to sanctioned entities following reports that Venezuela's state-run oil company was using the cryptocurrency to bypass U.S. sanctions. These sanctions, which were reimposed due to Venezuela's failure to implement electoral reforms, make it difficult for the country to increase its oil exports. To avoid having funds frozen in foreign bank accounts, PDVSA has apparently been using USDT for its oil transactions and requires new customers to hold cryptocurrency in a digital wallet. Due to the sanctions, companies looking to do business with PDVSA had to use intermediaries to make their payments in USDT.
Macro Economics: China's government has announced a new incentive plan to boost the adoption of clean technologies, expected to be a major stimulus program this year. It aims to encourage businesses and households to switch to electric vehicles and upgrade appliances and machinery. This comes amid growing trade tensions with the US and Europe, with China's electric vehicle industry playing a significant role. Details of the program, including the amount of government spending, are still unclear. On the other side, the preliminary US and European PMIs showing strong signs of stagflation, suggest a slowdown in the pace of economic growth, with both manufacturing and services sectors weakening. This is accompanied by rising prices, driven by higher wages and input costs. The data points to a potentially bumpy path to meeting inflation targets, with concerns about the outlook leading to businesses cutting jobs at a rate not seen since the 2008 financial crisis. This combination of slower growth and higher inflation is likely to discourage rate-cuts and may indicate a need for rate hikes instead.
Equities: The stock market saw a strong rebound as Wall Street braces for earnings from the "Magnificent Seven" mega cap companies including Microsoft, Alphabet, Tesla and Meta. Tesla Inc. broke its seven-day losing streak, while the broader market was lifted by a rally in tech heavyweights. Investor confidence was further boosted by a drop in Treasury yields and anticipation for the record-breaking $69 billion sale of two-year notes. The tech sector's earnings due after close today, are seen as a crucial test for the current bull run in equities. Legacy automaker GM also reported strong Q1 results and raised its guidance, while audio streamer Spotify swung to a profit and beat earnings expectations.
The Fed and US Treasury: The US government debt saw increased demand as the Treasury's record two-year note auction was deemed successful despite not hitting the desired 5% coupon. This came as benchmark rates declined following reports of slower business activity. Most economists believe that the Federal Reserve will wait until September to cut rates, with some even predicting a rate hike by the end of 2025. Strong economic data and concerns over controlling inflation have led to a shift in conversation from "when" to "whether" the Fed will cut rates, while overall economic growth is expected to average at 2.3% in 2024.
Geopolitical: The Senate returned to Washington to vote on $95 billion in war aid to Ukraine, Israel, and Taiwan, which is now headed to President Joe Biden’s desk. The aid would go towards Ukraine’s desperate need for new, more powerful weapons as they battle against Russia’s advances. The legislation has been delayed due to differences between conservatives who believe that Congress should be dealing with U.S-Mexico border migration and others who view U.S. involvement as necessary. However, the vote is expected to pass, providing Ukraine with more options against Russia and including other legislation proposals with bipartisan support. Of this $95 Billion, about $61 Billion is for Ukraine and replenishing US weapons stockpiles, $26 Billion for supporting Israel, and $8 Billion for Taiwan and countering China.Â
The US is discussing imposing sanctions on Chinese banks that are aiding Russia's war efforts, but no concrete plan has been announced. The US is hoping to use diplomacy to address the issue and maintains that it does not yet have a plan for sanctions. Secretary of State Antony Blinken is set to visit China this week. The White House and Treasury Department have not commented on the matter. Cutting banks off from access to the dollar is a last resort measure and could have significant impacts on both China's economy and its relationship with the US. The types of banks that may be targeted and the potential impact on China's economy are unknown. The US has previously sanctioned smaller Chinese banks over various issues, but has been hesitant to target major banks.
View from our desk
The Bitcoin halving event that occurred last Friday introduced significant transaction delays, with the mem pools becoming notably congested and causing substantial settlement challenges throughout Friday and Saturday. However, by Saturday, the system had stabilized, allowing operations to resume normally. This recovery has solidified a bullish sentiment for Bitcoin at our desk, and we now view the upward trajectory of Bitcoin’s 200-day moving average as likely to reach a new all-time high soon. This trend is expected to provide robust momentum, serving as a compelling signal for potential investors to consider increasing their market exposure.
In broader economic forecasts, economists have noticed a notable shift regarding the timing of anticipated interest rate cuts. Previously expected in June or July, the consensus has now moved to September. Contrary to the general market optimism, we at 1Konto remain skeptical about the likelihood of a rate cut occurring this year. Our cautious stance is further influenced by today’s market sentiment, which is temporarily buoyed by expectations from upcoming Big Tech earnings reports. We anticipate that the enthusiasm might not last, reinforcing our conservative approach towards the current broad market conditions.
Currently, the market is experiencing a period of stagflation, which we predict will continue for some time. The persistence of inflation has surprised many economists, proving stickier than initially expected. Despite this, both the market and the economy have shown an impressive level of resilience. As we have indicated in our earlier briefs, we are navigating through uncharted territory. This enduring economic resilience underscores the importance of maintaining a strategic, informed, and cautious approach in our investment strategies, especially in these unpredictable economic climates.
For those interested in the full report, it’s worth a quick read: Jamie Dimon’s Letter to Shareholders
Happy Trading!
The 1Konto Team
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