Super Bitcoin goes ballistic, Fed signals are atrocious

Morning Note

Bitcoin moves higher, threatening $13,000, whilst stocks and gold have dipped as Fed policymakers tempered expectations for a July cut.

Bitcoin has gone ballistic: it is building up a head of steam and there’s no point trying to stand in the way. Bitcoin futures began ramping from 11pm last night as they jumped to $11,600 before driving up to almost hitting $13,000 and then paring gains a touch to trade at $12,770 at send time. Look for these little pullbacks along the way as potential entry points, but there is every chance now we see this top the all-time highs and make $20k. 

Causes can be found in many places – the halving in 2020 is one that is being talked about increasingly as bearing on price action now. Facebook’s Libra whitepaper also looks to be a spark. The biggest players are looking at cryptocurrencies afresh and don’t want to miss out. There’s a ‘haven’ play too as nominal and real yields have retreated sharply, reducing the opportunity cost of holding (or HODLing) bitcoin. And the liquidity injection from central banks has forced a range of assets like gold, bonds, the yen etc, so bitcoin is just being swept along by those macro currents.  Whatever the cause, the momentum is powerful right now.

Other major cryptos were firmer with gains for Ripple, Litecoin, Dash, Ether and Bitcoin Cash. Our traders remain roughly 80-90% net long on these assets.

Stocks ease on Fed

Stocks dropped after the Fed chair Jay Powell asserted the central bank’s independence from politics and cautioned against short-termism affecting monetary policy, in a speech that appeared to try and temper expectations for a rate cut in July. At least it looked like he was saying the Fed is by no means sure to cut – we should remember the recent dot plot did not suggest a cut would come until 2020.  

On top of this we had uber-dove James Bullard, who lest we forget was the sole dissenter at the June meeting in voting for a cut, saying that he did not think a 50-basis point cut in July was warranted. This left the market less confident in getting the two-for-one 50bps cut in July – expectations down from around 40% to 26%.  

The market has baked in rate cuts that the Fed is yet to see as completely necessary. As we noted last week after the FOMC statement, there’s yet optionality for Powell and co. In last week’s statement the Fed refrained from explicit references to cuts. The median dot plot showed no cuts this year. The market is ahead of itself again. 

SPX declined 1% to 2917, while the Dow gave up 180 points as Wall Street had its worst day in almost a month. Asia has been softer overnight. Futures indicate European shares are being dragged lower by the Fed’s less-dovish language and by the broader market fears we are seeing around trade and geopolitical tensions in the Middle East. As we head into the rest of the week, the G20 and the Trump-Xi meeting will be front and centre. A bit of de-risking ahead of the meeting is also to be expected.

Dollar gains

The Fed’s jawboning lifted the greenback as yields fired a little, with the dollar index climbing back to 95.75. EURUSD was softer, losing the 1.14 handle to trade around 12.1360. Sterling also eased, with GBPUSD down to 1.2670. Boris Johnson goading Jeremy Hunt to say he would take Britain out on Oct 31st with or without a deal is not really helping. Whatever the claims ahead of the poll, the eventual winner would in any event have to face the cold granite of EU negotiations (or lack of, given the EU says it won’t reopen the deal). Dollar firmed up against the yen but remains near 6-month lows.

Gold softer

A stronger USD hit gold, which has retreated from its six-year highs above the big $1433 level to trade around $1406. You would think that gold will need to hold $1400, or it could reopen a move to $1380. Gold’s enjoyed such a strong run that it would make sense to see a pullback – the bull run may not be over by any means. As we noted yesterday in our commodity strategy, the 14-day RSI and standard MACD indicators were showing the market as extremely overbought. 

Oil higher on API data

Oil rose to highest in a month as we saw stockpiles drop 7.5m barrels according to API. This was well ahead of expectations for a c2.5m drop and has given bulls some reason to cheer. Although fundamentals remain weak, prices have pushed up around 10% in the last fortnight largely on Middle East tensions. Brent was last around $65.30, sitting on the 38.2% Fib retracement of the 2019 top-to-bottom decline, after pushing to $66. WTI was holding the $59 handle.