After the FED minutes this week, and some rebound in the markets, the last few days have seen a fairly sharp relapse in cryptocurrencies, gold, and in part indices. Bitcoin (BTC) fell more than 10%. Also, the CAC 40 recorded its first week down after 6 consecutive weekly periods in the green. Now it’s time for stabilization. Despite everything, short positions reached new records. During the FOMC, the monetary policy committee specified that it would become appropriate to gradually reduce the pace of rate hikes. This perspective is not only in line with our previous analysis of the neutral rate (Inflation falling: The markets salute! – Tremplin.io). But it also reinforces the idea of a certain gradual return of economic visibility by the course of 2023… We will endeavor here to decipher the recent macroeconomic outlook as well as the market phenomena on gold, stocks and bitcoin.
Monetary policy: the FED sees the end of the tunnel
In his report of Federal Open Market Committee (FOMC), the FED recalled this week the effective decline in inflation. As a reminder, inflation fell over one month by 0.6 points in the United States in July. This decline, albeit moderate, was nevertheless driven by the significant reduction in the price of energy and transport. Clearly, monetary policy today remains framed by several factors.
- First, the FED seeks to maintain a sufficiently restrictive short-term interest rate hike… ” Despite this, with inflation high and expected to remain so in the near term, some participants pointed out that the real fed funds rate would likely still be below neutral levels in the near term after this meeting’s policy rate hike. »
- Next, the Fed seeks to preserve job stability and an objective of reducing inflation. In a context of technical recession (Cryptocurrencies facing recession… – Tremplin.io), it becomes clear that the job market is threatened by a slowdown in activity. Therefore, with the maintenance of employment, and the possible reduction in inflation, the rise in rates could slow down. “Participants felt that as the monetary policy stance tightens, it would likely become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative monetary policy adjustments on economic activity and inflation. »
In this optimistic scenario, however, we must stress the time needed to restore inflation stability. In this sense, the outlook set out by the FED is not immune to a sudden new economic or political crisis.
Market stabilization or relapse?
Despite the recent rebound in the markets, the bearish positions of investment funds are at record highs. According to CNBCthe funds’ short positions reached the equivalent of $107 billion for the S&P 500. In other words, caution is at its maximum among players in global finance. The fact that there is no major liquidity crisis, or any sign of economic recovery with lower inflation, leaves all scenarios open.
Traditionally, we notice that there is an excellent symmetry between the recent variation of the markets on the one hand, and the past variation of certain periods on the other. However, the indications of the past are not enough to give us an idea of the variations to come. In June 2022, we could put forward a cyclical index that averaged all these past phases. The graph below illustrates this index of past prices of the CAC 40. We are currently close to 24% of the graph.
In a scenario ” normal “, there would be downside risks until September, before a potential resumption of the movement observed in recent weeks. However, there would not be a marked bullish recovery before 8 months to 9 months still in this same scenario. Nevertheless, the strength of the selling pressure, and the importance of the economic figures to come, justifies the caution of the funds. The start of the new school year should thus give us a better understanding of the trends to come. Furthermore, the risk of a bear market lasting and powerful, even a crash, is not excluded by some analysts.
Cryptocurrencies and bitcoin (BTC) down
Despite a rebound of more than 30% between mid-June and mid-August, bitcoin (BTC) now seems to be retesting support zones. Over the space of a week, Bitcoin fell more than 12%. Indeed, from the beginning of June, we had identified a major bearish target in the $20,000 to $22,000 area (Bitcoin (BTC): Hurst’s methodology in technical analysis (2) – Tremplin.io). Therefore, it is likely that the strong rebound of the summer has validated a first break in the downtrend. Moreover, the economic context also seems to support this hypothesis.
The real question that arises among investors is therefore whether bitcoin (BTC) is in the accumulation phase? Indeed, the low volumes of bitcoins traded since June did not support the hypothesis of a lasting rebound. But at the same time, major indicators confirm the technical validity of this move. (Read more Bitcoin: 8 indicators to know that precede a low (cafedelabourse.com)).
Now, bitcoin (BTC) has erased in a few days the equivalent of more than 50% of the rebound triggered in June. Thus, three scenarios stand out:
- First, the return to the support of $20,000, for example, would mark the formation of a potential double bottom of monthly magnitude. This would project bitcoin (BTC) beyond $28,000 thereafter by technical target. But this prospect of a strong bullish rally would take many months to form.
- Second, the breakout of supports around and below $20,000. In this case, we would have to deal with a configuration of continuation of the corrective movement. This scenario would, however, run counter to short-term cyclicality.
- Finally, a scenario of stagnation in the price of bitcoin (BTC) between $20,000 and $24,000 globally. This neutral zone could confirm the gradual exit from the medium-term downtrend. However, the impetus could be insufficient in this scenario (disinterest of market players).
Gold follows market correction
Much like bitcoin, gold was carried away in a rapid correction. In the first two weeks of July, gold fell more than 5%. Despite a timid rebound afterwards, gold followed the same movement as bitcoin this week. We know that gold and bitcoin have quite different behaviors, but their synchronization in times of inflation deserves to be underlined. How to explain this movement, while inflation is at its highest?
First, there is a structural explanation. Gold demand fell more than 8% year-on-year. In particular, the World Gold Council (WGC) reports a sharp decline in investment demand. On the other hand, the gold mining supply increased by more than 4% over one year. This inevitably results in a contraction in the price of gold. The fact that gold is down despite the technical recession also demonstrates the importance of available liquidity for gold buyers.
Finally, we must underline an important remark. As with the $20,000 zone on bitcoin, gold is following major support around $1,700 ($1,680). According to some internal reports at several banks, some mining companies are currently having difficulty selling profitably gold priced below $1,700 (Mining companies: what behavior towards gold? | Or.fr). And indeed, it appears that the $1,700 area has been acting as support for almost 18 months.
In euros, gold remained stable over the month and has even risen slightly since early August (+0.8%). Indeed, the markets are also worried about the situation in the euro zone. The euro weakened significantly this week and remains close to new all-time lows.
The worrying weakening of the euro (EUR)
8.9% inflation in the euro zone in July (against 8.6% in June). Despite the very marked rise in prices, the ECB does not show the same rigor as the American central bank. The key rate of the ECB stood at +0.5% in July, against 2.5% for the FED. A gap of 200 basis points splits the world’s two leading economies. What explains such a discrepancy? Why, despite such strong inflation, has the ECB not reacted more strongly? In addition, it is important to specify that the ECB does not have the prerogatives of its mandate for the stability of employment.
As a result, the euro lost just over 2% over the week, pushing the euro towards a new potential historic low. However, some short-term rebound signals could appear. Indeed, the German trade balance appeared to return to positive territory in June at €6.4 billion. Conversely, France recorded a new trade deficit record of -€13.1 billion for the month of June 2022 alone. The trend for the euro remains very negative in the long term, however. Indeed, as we pointed out, the euro is plagued by trade deficits and the failure of the banking system. ECB “emergency meeting”: is there a risk for the euro? – Tremplin.io.
As pointed out the economist Patrick Artus in a recent note, “The ECB will have a hard time reducing inflation as long as eurozone demand is supported by fiscal policy”. The weight of public debt and public spending in the euro zone is too great to support a restrictive monetary policy.
In conclusion
All in all, this week reinforced sustained caution in the markets. The FED report confirmed our scenario of approaching the neutral rate. As a result, the FED now sees the prospect of lower rate hikes. But the uncertainty on the markets remains very great. The funds’ short positions reached an all-time high. These positions confirm a first week of decline after more than a month and a half of rising markets.
Thus, bitcoin (BTC) fell more than 10% in the space of a few days. This movement confirms a strong decline, but insufficient to call into question the medium-term stabilization of prices. Thus, this decline in the price of bitcoin confirms a neutral trend, alternating between rebounds without volumes, and corrections. Cryptocurrencies could thus play a pioneering role in the probable trend that we will observe at the start of the school year.
But the bearish contagion is also affecting gold. The caution of investors and the lack of liquidities effectively mark the decline in investment demand. At the same time, the strength of the supply reinforces the importance of the threshold of $1,700 an ounce. In euros, gold nevertheless continued to perform. Indeed, the weakening of the euro continues. The presence of irreversible budgetary policies, and the absence of a strong fight against inflation on the part of the ECB, and the poor economic figures, propel the euro close to historic lows. In any case, caution on the markets is reaching a maximum and a trend signal should logically emerge in the coming weeks. The extent of the current economic and financial mechanisms could have major and brutal consequences on the markets.
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