Macro market update - Traditional & Crypto
Hello everyone! In this idea we'll talk about the current macro environment and give updates on the most important markets.
Although I am not a political analyst and definitely not an expert on the Russia/Ukraine conflict I need to start from there, as the situation seems to be getting worse by the day. For now, there is no clarity as to what will happen next, even though some sort of agreement/resolution is still possible, probabilities currently seem stacked in favor of a war breaking out. Of course, the impact this would have on markets would be significant and that's something markets are already pricing in. The key issue here is that the markets were already severely stressed due to high inflation (shortages), world economy drowning in debt and all sorts of issues, while bond yields were going higher. Therefore, it isn't just that conflict in isolation, it is the conflict at a time where nothing seems to be going right. Again, I have no idea what will happen or how other countries will try to interfere if Russia invades Ukraine, however there is no way there won't be all sorts of issues, especially around energy markets and especially in Europe. Just the uncertainty around energy prices which could cause another inflation spike, at a time where people are demanding governments and Central banks to do something about inflation, while markets are overvalued and are trending down, is not a good combination.
With the current events it looks like the probability of the Fed raising rates by 50 bps in March has come down significantly. It is pretty normal to expect the Fed to not try and push things at this stage and even slow down a bit, as they don't want to spook the markets even more. From now on they can blame the fact that they aren't raising rates on the uncertainty caused by external factors which affect the global economy. The fact is that inflation was set to slow down dramatically in 2022 as demand has been going down, liquidity has been drying up and supply chain issues have eased significantly. Hence the Fed raising rates wouldn’t really do much to slow down inflation and it would be just a political move. At the same time, they know they won't really be able to raise rates above 2-3%, while the market is already indicating that in 2023 they will have to cut rates. The yield curve is already inverting and the 2y10y spread is already at 40bps. Essentially they’ve been trapped and a war would be able to get them out of their hole is a war. Why? Because in my opinion bond yields could fall dramatically as investors try to get into the most safe and liquid instruments, while the government will force the Fed to do anything it can to support it and tell it to forget fighting inflation.
In the short term however, we could see a spike in bond yields (2y to 2-2.5% and 10y to 2.5-3%) as the market might initially anticipate higher inflation due to more spending by the government and higher inflation due to higher energy prices. Now the truth is that even though I do expect yields to come back down eventually and resume their long-term downtrend, I could easily be wrong and yields just go up from here. We are at a situation where oil prices could skyrocket and supply chains break down again, while governments trying to print their way out of this hole. At that stage I think the market will want to mostly hold US treasuries as they are the safest and most liquid instruments and it will refuse to create money (banks won’t be willing to lend to anyone other than the government). That would be the point where the market doesn't want to take risks and would be willing to not try and beat inflation. Someone might be now thinking 'well that's crazy, you always have to beat inflation'. Well, that's not always the case and certainly not the case for everyone. At situations like this most people are losing no matter what, as when there are shortages, waste of resources, unnecessary deaths and destruction, there are less winners than usual. Most people are used to living in an environment when the pie is growing, not shrinking... At the same time, it is clear that in the long term the ones that have to lose the most are bond holders, either nominal or real terms, although in the short term they might see tremendous gains once bonds bottom (yields top). The reason behind this is that there is no easy way to get out of this massive debt - low growth environment the global economy is in, without a massive fiat currency devaluation.
So let's go through the charts one by one, starting with bonds. It's very clear that we are getting closer and closer to the key resistance. Bonds are at support (yields at resistance), but the strongest support is 6-7% lower (~50 bps). It is unclear what the bond market is signaling for now, but bonds and stocks going lower would a major sign of trouble in the short term.
Commodities do look pretty strong, with Gold finally starting to shine, although until we get a close above 1960 we could expect some chop. My view on Gold is that it could get even all the way down to 1350 until it really breaks above 1960, however a breakout looks more and more likely.
Oil is also looking pretty strong, even though it might be somewhat overvalued here. It is very clear that there supply of oil is pretty low and barely keeps up with demand, despite the fact that demand has gone down. A war would probably have a massive impact on the market, with Oil potentially making new ATHs in 2022-2023. Like I had mentioned before, the 90-110$ region has a decent amount of resistance, so we could continue to see some chop in that area. Based on the current price action, buying at 75$ would be best potential buy as it would be very hard to see lower prices. 55$ is also possible, but we'd need to see the global economy crash, while a war doesn't happen for it to get down there.
Natural gas in Europe seems to have stabilized, and we could see it go down in case there are no sanctions on Russia or because the US starts exporting some of it to Europe. However we are seeing NatGas slowly trying to go higher in the US, and based on the current price action it looks like it will trade above 6.5$ in 2022-2023.
The USD is at a weird place as against most developing market currencies it seems to be very strong, but against most developed market currencies weaker than expected. Unfortunately I wasn't able to share a index I created of the USD vs developing markets, but I am able to share an index of the USD vs developed markets, as the DXY isn't the best index out there. Based on it it is clear that the USD is trending higher in the medium term, but it has been going sideways for a very long time and has reached an area of resistance where it could potentially reversed. At the end of the day, there is a need for a weaker dollar and this current set of circumstances could definitely lead into a weaker dollar in the short term. Personally I don't believe that the USD is done, I do believe it has more upside and that it is the strongest currency out there... However I also do see the potential of it going much lower as 1) US prints more than the rest, 2) US rates fall harder than the rest, 3) Everyone tries to get away from the dollar strandard.
Stocks aren't in a great place, as the Nasdaq 100 just made a new low and is flirting with its 400 DMA, the S&P 500 retested its lows and the 300 DMA, while the Russell 2000 looks like it just finished its throwback after a massive distribution and could fall another 15-20%. It is currently very clear that stocks are in a short-medium term downtrend, which is very close to turning into a full blow bear market if they continue lower. In my opinion the long term uptrend is intact, and as the market just managed to sweep some major lows and bounce, this could be the bottom. Or at least I should say it has to be it, or I see stocks going down another 10-20% before they full bottom. At the moment the S&P looks the strongest index out of the 3 and could potentially bottom around 3900-4000. This is the first place I'd be looking to buy, even if it is just for a bounce. For Nasdaq it is very unclear to me where the bottom might be, however for the Russell it is very clear that a potential bottom could come in the 1600-1740 zone. Essentially expecting for the 'vaccine' trade to reverse and buy the retest of the 2018-2020 highs.
The one chart that is telling me there is more pain coming, is the VIX. Based on the current setup it looks like Volatility is in an uptrend and that there is a need for an explosive move higher before it reverses. It would actually be very odd for it to top here, after slowly going higher. In my previous analyses I talked about how I expect the VIX to get to 48 before it reverses, as given the current circumstances it is impossible for me to imagine that we won't see the market extremely fearful due to major changes in the world. Things aren't all that great and there is a lot of change going on in all sorts of directions, therefore I expect to see some sort of shock before I believe the bottom is in for stocks. Again, it is possible that things might have bottomed here, as we got a dip while the stock market was closed and some major lows have been swept, yet it is very hard to imagine that in 2022 we won't get a major crash, unless the Fed doesn't raise rates, resumes QE and there is no war.
Finally, the Crypto market is in a similar state as stocks. The two have been heavily correlated since November and they probably will continue being correlated until we get a major crash. At that point I do see Crypto bottom first and the rally much harder than stocks, as it will benefit the most from an environment of sanctions, high inflation and more money printing. In my opinion, Bitcoin will probably be the one that performs the best over the next few weeks / months, as it is the one that has been going sideways the longest, while it is the safest and most liquid asset in crypto, with the strongest narrative in such an environment (digital gold).
BTCUSD has been in a very clear downtrend and the rejection at 46k just confirmed that until we close above all the major moving averages, anything between 20k and 28k is possible. Going lower would be pretty hard and the most likely scenario over the next few weeks / months, is a bottom at 24-25k. Won't go into more detail here as I've done so twice before and I definitely recommend people to read my previous analyses on the crypto market.
Although I am not a political analyst and definitely not an expert on the Russia/Ukraine conflict I need to start from there, as the situation seems to be getting worse by the day. For now, there is no clarity as to what will happen next, even though some sort of agreement/resolution is still possible, probabilities currently seem stacked in favor of a war breaking out. Of course, the impact this would have on markets would be significant and that's something markets are already pricing in. The key issue here is that the markets were already severely stressed due to high inflation (shortages), world economy drowning in debt and all sorts of issues, while bond yields were going higher. Therefore, it isn't just that conflict in isolation, it is the conflict at a time where nothing seems to be going right. Again, I have no idea what will happen or how other countries will try to interfere if Russia invades Ukraine, however there is no way there won't be all sorts of issues, especially around energy markets and especially in Europe. Just the uncertainty around energy prices which could cause another inflation spike, at a time where people are demanding governments and Central banks to do something about inflation, while markets are overvalued and are trending down, is not a good combination.
With the current events it looks like the probability of the Fed raising rates by 50 bps in March has come down significantly. It is pretty normal to expect the Fed to not try and push things at this stage and even slow down a bit, as they don't want to spook the markets even more. From now on they can blame the fact that they aren't raising rates on the uncertainty caused by external factors which affect the global economy. The fact is that inflation was set to slow down dramatically in 2022 as demand has been going down, liquidity has been drying up and supply chain issues have eased significantly. Hence the Fed raising rates wouldn’t really do much to slow down inflation and it would be just a political move. At the same time, they know they won't really be able to raise rates above 2-3%, while the market is already indicating that in 2023 they will have to cut rates. The yield curve is already inverting and the 2y10y spread is already at 40bps. Essentially they’ve been trapped and a war would be able to get them out of their hole is a war. Why? Because in my opinion bond yields could fall dramatically as investors try to get into the most safe and liquid instruments, while the government will force the Fed to do anything it can to support it and tell it to forget fighting inflation.
In the short term however, we could see a spike in bond yields (2y to 2-2.5% and 10y to 2.5-3%) as the market might initially anticipate higher inflation due to more spending by the government and higher inflation due to higher energy prices. Now the truth is that even though I do expect yields to come back down eventually and resume their long-term downtrend, I could easily be wrong and yields just go up from here. We are at a situation where oil prices could skyrocket and supply chains break down again, while governments trying to print their way out of this hole. At that stage I think the market will want to mostly hold US treasuries as they are the safest and most liquid instruments and it will refuse to create money (banks won’t be willing to lend to anyone other than the government). That would be the point where the market doesn't want to take risks and would be willing to not try and beat inflation. Someone might be now thinking 'well that's crazy, you always have to beat inflation'. Well, that's not always the case and certainly not the case for everyone. At situations like this most people are losing no matter what, as when there are shortages, waste of resources, unnecessary deaths and destruction, there are less winners than usual. Most people are used to living in an environment when the pie is growing, not shrinking... At the same time, it is clear that in the long term the ones that have to lose the most are bond holders, either nominal or real terms, although in the short term they might see tremendous gains once bonds bottom (yields top). The reason behind this is that there is no easy way to get out of this massive debt - low growth environment the global economy is in, without a massive fiat currency devaluation.
So let's go through the charts one by one, starting with bonds. It's very clear that we are getting closer and closer to the key resistance. Bonds are at support (yields at resistance), but the strongest support is 6-7% lower (~50 bps). It is unclear what the bond market is signaling for now, but bonds and stocks going lower would a major sign of trouble in the short term.
Commodities do look pretty strong, with Gold finally starting to shine, although until we get a close above 1960 we could expect some chop. My view on Gold is that it could get even all the way down to 1350 until it really breaks above 1960, however a breakout looks more and more likely.
Oil is also looking pretty strong, even though it might be somewhat overvalued here. It is very clear that there supply of oil is pretty low and barely keeps up with demand, despite the fact that demand has gone down. A war would probably have a massive impact on the market, with Oil potentially making new ATHs in 2022-2023. Like I had mentioned before, the 90-110$ region has a decent amount of resistance, so we could continue to see some chop in that area. Based on the current price action, buying at 75$ would be best potential buy as it would be very hard to see lower prices. 55$ is also possible, but we'd need to see the global economy crash, while a war doesn't happen for it to get down there.
Natural gas in Europe seems to have stabilized, and we could see it go down in case there are no sanctions on Russia or because the US starts exporting some of it to Europe. However we are seeing NatGas slowly trying to go higher in the US, and based on the current price action it looks like it will trade above 6.5$ in 2022-2023.
The USD is at a weird place as against most developing market currencies it seems to be very strong, but against most developed market currencies weaker than expected. Unfortunately I wasn't able to share a index I created of the USD vs developing markets, but I am able to share an index of the USD vs developed markets, as the DXY isn't the best index out there. Based on it it is clear that the USD is trending higher in the medium term, but it has been going sideways for a very long time and has reached an area of resistance where it could potentially reversed. At the end of the day, there is a need for a weaker dollar and this current set of circumstances could definitely lead into a weaker dollar in the short term. Personally I don't believe that the USD is done, I do believe it has more upside and that it is the strongest currency out there... However I also do see the potential of it going much lower as 1) US prints more than the rest, 2) US rates fall harder than the rest, 3) Everyone tries to get away from the dollar strandard.
Stocks aren't in a great place, as the Nasdaq 100 just made a new low and is flirting with its 400 DMA, the S&P 500 retested its lows and the 300 DMA, while the Russell 2000 looks like it just finished its throwback after a massive distribution and could fall another 15-20%. It is currently very clear that stocks are in a short-medium term downtrend, which is very close to turning into a full blow bear market if they continue lower. In my opinion the long term uptrend is intact, and as the market just managed to sweep some major lows and bounce, this could be the bottom. Or at least I should say it has to be it, or I see stocks going down another 10-20% before they full bottom. At the moment the S&P looks the strongest index out of the 3 and could potentially bottom around 3900-4000. This is the first place I'd be looking to buy, even if it is just for a bounce. For Nasdaq it is very unclear to me where the bottom might be, however for the Russell it is very clear that a potential bottom could come in the 1600-1740 zone. Essentially expecting for the 'vaccine' trade to reverse and buy the retest of the 2018-2020 highs.
The one chart that is telling me there is more pain coming, is the VIX. Based on the current setup it looks like Volatility is in an uptrend and that there is a need for an explosive move higher before it reverses. It would actually be very odd for it to top here, after slowly going higher. In my previous analyses I talked about how I expect the VIX to get to 48 before it reverses, as given the current circumstances it is impossible for me to imagine that we won't see the market extremely fearful due to major changes in the world. Things aren't all that great and there is a lot of change going on in all sorts of directions, therefore I expect to see some sort of shock before I believe the bottom is in for stocks. Again, it is possible that things might have bottomed here, as we got a dip while the stock market was closed and some major lows have been swept, yet it is very hard to imagine that in 2022 we won't get a major crash, unless the Fed doesn't raise rates, resumes QE and there is no war.
Finally, the Crypto market is in a similar state as stocks. The two have been heavily correlated since November and they probably will continue being correlated until we get a major crash. At that point I do see Crypto bottom first and the rally much harder than stocks, as it will benefit the most from an environment of sanctions, high inflation and more money printing. In my opinion, Bitcoin will probably be the one that performs the best over the next few weeks / months, as it is the one that has been going sideways the longest, while it is the safest and most liquid asset in crypto, with the strongest narrative in such an environment (digital gold).
BTCUSD has been in a very clear downtrend and the rejection at 46k just confirmed that until we close above all the major moving averages, anything between 20k and 28k is possible. Going lower would be pretty hard and the most likely scenario over the next few weeks / months, is a bottom at 24-25k. Won't go into more detail here as I've done so twice before and I definitely recommend people to read my previous analyses on the crypto market.
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