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Today’s Stories:
Bitcoin Rises to $38.8K for the First Time Since May 2022
GDPNow - Federal Reserve Bank of Atlanta
China’s Xi Seen Delaying Key Economic Plenum, Defying Norms - Bloomberg
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This episode was hosted by Noelle Acheson. “Markets Daily” is executive produced by Jared Schwartz and produced and edited by Eleanor Pahl. All original music by Doc Blust and Colin Mealey.
Audio Transcript: This transcript has not been edited and may contain errors.
It’s Friday, December 1st, 2023 and this is Markets Daily from CoinDesk. My name is Noelle Acheson, CoinDesk collaborator and author of the Crypto is Macro Now newsletter on Substack. On today’s show we’re talking about the crypto market rally, energy prices, how they impact bitcoin, and more. So you don’t miss an episode, be sure to follow the podcast on your platform of choice, and turn on notifications. And just a reminder, CoinDesk is a news source and does not provide investment advice.
Now, a markets roundup.
December is starting off positive in crypto markets. Earlier today, bitcoin reached its year-to-date high of $38,800 dollars. Ether briefly passed above 2,110 dollars. According to CoinDesk Indices, at 9am Eastern time this morning, bitcoin was trading up 1 and three quarters of a percent at 38,357 dollars. Ether was up two and a quarter percent, trading at 2,080 dollars.
Elsewhere, Avalanche is up 6.5%, Lido DAO token is up almost 6%, Polkadot is up almost 5%. According to bitcoinmonthlyreturn.com, the largest crypto asset by market cap climbed 8.8% in November, higher than the average November gain since 2014 of 6.4%. In case you’re curious, the average December gain over the same time period is almost 9%.
In macro matters, Federal Reserve officials are trying to dampen the market’s expectations of rate cuts by May 2024. Several central bankers has been out in public over the past few days, stressing that a pause is warranted, but that rate cuts were not being talked about.
It doesn’t seem to be working. Futures are now pricing in a 30% probability of two rate cuts by May, up from 8% just a month ago. They’re also pricing in a 25% probability of three rate cuts by June. My take is that the economy would have to be in really bad shape with skyrocketing unemployment for the Fed to react that drastically. The stock market does not seem to be pricing that in.
I’ve talked about the Atlanta Fed GDPNow model before on this show – the last time was on the November 9th show if you want to go and give that a listen for some background. Well, that model – which has been more accurate than economist forecasts so far this year – is pointing to GDP growth in Q4 of 1.8%. And earlier this week, the US third quarter GDP growth was revised up. You may remember that it came in at 4.9% year-on-year growth, up from 2.1% in the second quarter. Well, it turns out that was wrong, the correct figure is 5.2%.
So, growth is slowing, from 5.2% down to maybe 1.8%, which is no surprise. But to go from here to a sharp enough recession to warrant two rate hikes within the next five months – to me, that feels like a stretch.
Later today, we hear from Fed Chair Jerome Powell - a lot depends on what sort of tone he adopts, and we could see some strong market moves. Meanwhile, there are some signs that traders are adjusting – earlier today, the US 10-year yield was off its recent lows, back to 4.3%.
In stocks, US indices were mixed yesterday. The S&P 500 was up four tenths, Nasdaq slid two tenths, and the Dow Jones jumped 1 and a half percent. All closed November with solid gains, led by the Nasdaq which climbed almost 11%. The S&P 500 rose 9% in November, as did the Dow Jones, delivering its best month in more than a year. Futures today are pointing to a weak opening.
European indices closed November on a positive note, with the FTSE 100 up four tenths, the German DAX up three tenths and the Eurostoxx 600 up a half a percent. For the month of November, the German DAX was up almost 10%, its steepest monthly gain since October of last year.
Asian markets closed November on a weak note. Bloomberg reported earlier that Chinese President Xi Jinping may postpone a party congress held every five years to plan the country’s economic agenda. Traders are not taking this to be a good sign. In trading today, Japan’s Nikkei index dropped almost two tenths, the Shanghai Composite was flat and the Hang Seng slumped 1 and a quarter percent, to finish at its lowest point so far this year.
In commodities, oil prices dropped yesterday despite an announcement from OPEC+ of further reductions to production quotas. The cuts would further reduce production by 900,000 barrels a day as of January. This adds to the 1.3 million barrels-a-day cut already in place from Saudi Arabia and Russia, which will be extended into the first quarter.
Prices dropping on this news may sound surprising, since in theory, production cuts should boost the oil price. But, it turns out that these production cuts are voluntary, which is confusing the market as it’s not clear whether they will end up being adopted. Angola, for example, has already said that it has no intention of complying. This hints at dissent and discord within OPEC+, which is rattling the market.
Another cause for market concern is the message that OPEC+ thinks that demand will be weak enough to warrant this measure. In other words, OPEC+ thinks the price is heading down. Yesterday, the Brent crude benchmark fell 2%. Today it is recovering some ground, up half a percent to trade at 81 dollars a barrel.
Gold is still holding at 2,040 dollars an ounce, and is headed for its third straight weekly advance.
Stay with us – after the break I’m going to address listener questions about energy prices and bitcoin.
Welcome back! By now, you probably know that on Friday’s, I pick a reader question to attempt to answer. Many thanks to all of you who have reached out, I do love finding out what you’re interested in. A couple of the questions this week had to do with the oil price, which - as I explained before the break - is heading down.
So, the paraphrased question I’m going to tackle is: Would lower oil prices be good or bad for bitcoin?
This is a timely question indeed, especially if you think oil prices will continue to drop. 81 dollars a barrel isn’t particularly low, especially compared to the 72 dollars a barrel we saw at the start of the summer. But if indeed we get lower global demand next year due to a slowdown, and especially if OPEC+ doesn’t get much internal coordination to support the price, it’s not a stretch to expect prices to trend down over the next year.
Looking at charts to detect historical patterns isn’t very helpful, because recent history has been distorted by geopolitical events. And going back further in time, the bitcoin market was small and relatively isolated from macro forces.
So, that means we have to think through what the effects of lower oil prices on bitcoin could be going forward. Most of them are positive, and there are two angles to look at.
First, there’s the mining angle. Since energy is one of the main recurring costs of mining bitcoin, lower electricity prices make bitcoin mining more profitable – this means a couple of things, both of which are good for the network.
If miners are more profitable, they have less incentive to sell their newly mined bitcoin in the market. This should lessen a significant source of selling pressure. Also, if mining is more economical, more miners will come online, further distributing the security of the network.
Second, there’s the macro angle. Another way lower oil prices are good for bitcoin is through lower inflation. This may sound counterintuitive, because bitcoin is supposed to be an inflation hedge, and so surely with lower inflation, demand for bitcoin would drop?
The thing is, while in theory bitcoin should be an inflation hedge, because it has a verifiable and programmatic hard cap, it hasn’t typically acted like one. Inflation shot up last year and bitcoin, well, bitcoin didn’t. In previous cycles, bitcoin soared even though inflation wasn’t a problem.
So, bitcoin in theory can be an inflation hedge, but it is also many other things.
One of its buckets is that of risk assets, or assets that have long duration and relatively high volatility. These tend to be driven by monetary liquidity – when there’s plenty of money sloshing around the system, it has to go somewhere. Since lower inflation is in theory accompanied by lower interest rates, risk assets become relatively more attractive, especially bitcoin which doesn’t have to worry about corporate risk or possible hits to earnings expectations.
In sum, lower energy prices leads to lower inflation which should lead to lower interest rates and higher monetary liquidity. Good for bitcoin.
To take the other side, it can be argued that lower oil prices are a sign of low demand which usually stems from low global economic growth. And unexpectedly low growth could cause a sharp stock market correction, which could drag crypto markets down as well. Any such correction should be short-lived, however, as sentiment settles and the more positive forces take over.
But, having said all that, bitcoin and energy prices themselves are influenced by so many factors that establishing a clear relationship between them is tough. In markets, things are rarely simple. The theory may make sense, but markets get hit by so many variables that short-term moves sometimes make no sense at all. That’s one of the reasons I find them so fascinating, and why it’s so much fun exploring them with you every day.
Thanks for listening - That’s it for today’s show!
