After the FED minutes this week, and some rebound on the markets, in the last few days there has been a fairly sharp relapse in cryptocurrencies, gold, and partly indices. Bitcoin (BTC) fell more than 10%. Also, the CAC 40 recorded its first week down after 6 consecutive weeks 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 be appropriate to gradually reduce the pace of rate increases. This view is not only consistent with our previous analysis of the neutral rate (Falling inflation: Courtesy of the markets! – Cointribune). But it also reinforces the idea that there will be a gradual return to economic visibility during 2023… We will try here to explain the recent macroeconomic outlook as well as market phenomena on gold, stocks and bitcoin.
Monetary policy: the Fed sees the end of the tunnel
In his report on Federal Open Market Committee (FOMC), the FED recalled this week the effective decline in inflation. As a reminder, monthly inflation fell by 0.6 points in the United States in July. This reduction, albeit moderate, was due to the significant reduction in the price of energy and transport. It is clear that there are still some aspects to monetary policy today.
- First, the Fed seeks to maintain a fairly restrained short-term interest rate hike… ” Despite this, with inflation high and expected to remain so in the short term, some participants indicated that the actual fed funds rate is likely to be below neutral levels in the short term following this meeting’s policy rate hike. »
- Then, the Fed seeks to preserve job stability with the objective of reducing inflation. In the context of the technical recession (Cryptocurrency facing the recession… – Cointribune), the job market is clearly 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 tightened, it would probably be appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative monetary adjustments on economic activity and inflation. »
In this optimistic scenario, however, we must emphasize the time required to restore inflationary stability. In this sense, the view set out by the FED is not immune to a sudden new economic or political crisis.
Market stabilization or relapse?
Despite the recent reversal in the markets, the bearish position of investment funds is at an all-time high. According to CNBC, the funds’ short positions reached the equivalent of $107 billion for the S&P 500. In other words, caution is on the alert among players in global finance. As there is no major liquidity crisis, or any sign of economic recovery with lower inflation, all scenarios are left open.
Traditionally, we observe a remarkable symmetry between the diversity of recent markets on the one hand, and the diversity 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 gave the average of all those degrees in the past. The graph below shows this index of the CAC 40 prices in the past. We are currently close to 24% of the graph.
In case “normal”, there would be downside risks until September, before the movement seen in recent weeks could resume. However, there would still not be a significant bullish recovery before 8 months to 9 months in this same scenario. However, the strength of the selling pressure, and the importance of the economic figures to come, justify the caution of the funds. The start of the new school year should give us a better understanding of the trends to come. In addition, there is the risk that bear market permanent and powerful, even an accident, which 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) appears to be repeating support zones now. Over the space of a week, Bitcoin fell more than 12%. In fact, since the beginning of June, we had identified a major bearish target in the area of $20,000 to $22,000 (Bitcoin (BTC): Hurst methodology in technical analysis (2) – Cointribune). Therefore, the strong summer rebound probably validated the first break in the downturn. Furthermore, 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? In fact, the low number of bitcoins traded since June did not support the hypothesis of a sustained rebound. But at the same time, major indicators confirm the technical validity of this move. (Read more Bitcoin: 8 indicators to know before a low (cafedelabourse.com)).
Now, bitcoin (BTC) has been wiped out in just a few days, accounting for more than 50% of the June-triggered rebound. Therefore, three cases stand out:
- First, $20,000 back on support, for example, would mark the formation of a potential double bottom of monthly volume. This would then project bitcoin (BTC) above $28,000 according to a technical target. But it would take many months to create this prospect of a strong bullish rally.
- Second, break out the supports around and below $20,000. In this case, we would have to deal with a configuration of continuation of the corrective movement. This would be the case against the short-term cycles, however.
- Finally, a case of stagnation in the price of bitcoin (BTC) between $20,000 and $24,000 worldwide. This neutral zone could gradually depart from the curve to confirm a medium-term downturn. However, the motivation may be insufficient in this case (indifference of market players).
Gold continues the market correction
Much like bitcoin, gold underwent 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 very different behaviors, but their synchronization in the time of inflation needs to be emphasized. How to explain this movement, although inflation is at its height?
First, there is a structural explanation. Gold demand fell by more than 8% year on year. In particular, the World Gold Council (WGC) reports a sharp decline in investment demand. On the other hand, gold mining supply increased by more than 4% in one year. This is the inevitable result of a contraction in the price of gold. The fact that gold has declined despite the technical downturn also shows the importance of liquidity available to gold buyers.
Finally, we must emphasize an important statement. As with the $20,000 zone on bitcoin, gold is following major support around $1,700 ($1,680). In some internal reports by various banks, some mining companies would have difficulties, at the moment, to profitably sell gold whose price is lower than $1,700 (Mining companies: what behavior towards gold? | Gold .Fr). And indeed, the $1,700 area seems to be acting as support for almost 18 months.
In euro, gold remained stable during the month and has even increased slightly since the beginning of August (+0.8%). In fact, the markets are also worried about the situation in the eurozone. The euro fell sharply this week and is still close to new all-time highs.
Worrying weakening of the euro (EUR)
Inflation 8.9% in the euro area in July (against 8.6% in June). Despite the significant rise in prices, the ECB does not show the same intensity as the American central bank. The ECB’s main rate was +0.5% in July, against 2.5% for the FED. A gap of 200 basis points separates the world’s two largest economies. What explains such a discrepancy? Why, despite such strong inflation, has the ECB not responded more strongly? In addition, it is important to specify that the ECB does not have mandated competences in relation to employment stability.
As a result, the euro lost just over 2% during the week, sending the euro towards a potential historic low. However, some signs of a short-term rebound may appear. Indeed, Germany’s trade balance appeared to be returning to positive territory in June at €6.4 billion. Conversely, France recorded a new trade deficit record of -€13.1 billion for June 2022 alone. However, the trend of the euro remains very negative in the long term. Indeed, as we have 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? – Contribution.
As economist Patrick Artus points out in a recent note, “The ECB will have a difficult time reducing inflation while supporting eurozone demand from fiscal policy”. Public debt and public spending in the euro area are too large to support a restrictive monetary policy.
Overall, this week reinforced continued caution on the markets. The Fed report confirmed our case for approaching the neutral rate. As a result, the FED now sees the prospect of lower rate hikes. But the uncertainty on the markets is still very great. The short funds position reached an all-time high. These positions confirm the first week of decline after more than a month and a half of rising markets.
Thus, bitcoin (BTC) fell more than 10% in a few days. This movement confirms a strong decline, but not enough to question the medium-term stabilization of prices. Therefore, this decrease in the price of bitcoin confirms a neutral trend, alternating between rebounds without volume, and corrections. Cryptocurrencies could therefore play a leading role in the trend we are likely to observe at the beginning of the school year.
But the bearish contagion is also affecting gold. It is the warning to investors and the lack of liquidity that shows a decrease in the demand for investment. At the same time, the strength of supply reinforces the importance of the $1,700 per ounce threshold. In euro, however, gold continued to perform. Indeed, the weakening of the euro continues. Due to the presence of irreversible budgetary policies, and the lack of a strong fight against inflation on the part of the ECB, and the poor economic figures, the euro is encouraged close to historical levels. In any case, a warning on the markets is reaching a maximum and a trend signal should logically emerge in the coming weeks. The size of the current economic and financial mechanisms on the markets could have large and brutal consequences.
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Author of several books, economic and financial editor of various sites, over many years I developed a real passion for the analysis and study of markets and the economy.