Avantis Macro Series #5: Risk-On
In this week’s macro series, we explore positive economic data, increased risk appetite (with November being one of S&P’s best performing month in 100 years), and demand / supply dynamics for DXY, crude and crypto. As always, please note that this is for educational purposes only, and nothing written here constitutes financial advice.
Market Overview
Risk appetite is back in the market as the searing cross asset rally continues and economic data continues to be favorable for the end of the hiking cycle. SPX return in November has been one of the biggest meltups in the last 100 years! Bond yields have dropped, corporate bonds (both high grade and high yield) have rallied and even small caps have managed to post a stellar month.
The dollar decline has been another tailwind for risk assets with the DXY down more than 3% in Nov, the biggest monthly decline in a year. VIX is also back to pre pandemic levels as risk aversion fades in the market. The drop in crude is another big positive in the inflation fight, even though it bodes ill for the global growth outlook.
Governor Chris Waller’s (FOMC member) comments on Tuesday about current policy being well positioned to get inflation back to 2% further reinforced the market’s assumption that rate hikes are over. Moreover, he alluded to ‘insurance cuts’ in 2024 to ensure that the Fed doesn’t passively overtighten real rates.(Real Rates=Nominal Rates-Inflation. As inflation falls, real rates rise for the same nominal) The market is now pricing in 120 bps of cuts in 2024. Chair Powell also spoke on Friday and was expected to push back on the market’s bullishness. He did keep 2 way policy risk in play by saying that the Fed’s actions will be data dependent, however the lack of an overtly strong pushback compared to expectations was taken as a positive sign by the market.
Data released this week was favorable from a risk asset perspective as well. The US economy is still going strong with upward revisions to Q3 GDP growth at 5.2%. This is supportive of the soft landing narrative, where the Fed can achieve control over inflation without causing a deep recession. Meanwhile core PCE inflation (0.2% MoM, 2.5% YoY) was in line with expectations and continues its downward trajectory.
Inflation in the Eurozone also had the coolest print since Jul 2021 at 2.4% headline inflation. Monetary policy has worked very well over this hiking cycle in Europe and the signs of victory for the ECB in this inflation fight are mounting, even though policymakers are still cautious and remain watchful about wage growth and possible spikes in energy markets. This bolsters the case for a friendlier global rate environment for risk assets in 2024 with the market pricing in the first rate cut in the first half, with four 25 bp cuts priced in over the full year.
Crude
This was an eventful week for crude with an OPEC+ meeting on Thursday. This meeting was especially important given producers were looking to finalize output targets for 2024 amid concerns that the market faces a potential surplus from rising output from US (700–800k bpd more than expected) and other producers. Output from Iran has also recovered as the US relaxes its enforcement of sanctions and Russian exports have held steady contrary to expectations and their OPEC+ commitments. Meanwhile demand growth is expected to be cooler amid a darkening global economic outlook.
Coming into the meeting, there was a lot of friction over potential output quota cuts by African members ( mainly Nigeria and Angola) which even led to a postponement of the meeting from 25th to 30th Nov. However backchannel diplomacy prevailed and producers agreed to an output cut approaching 2 million barrels per day with Saudi extending its 1 million bpd voluntary cut in place since July and Russia agreeing to cut 500k bpd. Brent had been rallying over the past couple of days in anticipation of the cuts and spiked further on the announcement , but the market expected more and was disappointed which led to a price retreat to $81.
Crypto
The bid for risk assets has been quite evident in the ongoing crypto rally as well (crypto is still a risk asset class), and even though it has its own narratives around ETF approval, the change in the macro perception has played a big part in Bitcoin’s rally from 28k-38k.
There has been significant interest from tradfi capital and this has led to the OI on CME futures surpassing Binance. Asset managers have boosted their BTC long futures positions by about 1 bio since the start of Nov.
Microstrategy has continued to add to its position with 16,130 BTC in total purchases (~600 mio) in Nov. This brings its total holdings to about $6.5 bio. Meanwhile the GBTC discount has become a ‘live betting line’ on ETF approvals and has narrowed to 8% as the market expects an approval for conversion to ETF by Jan 2024.
Not much happened with crypto majors this week through Thursday. Bitcoin continued pushing against the 38k level while the market waits for ETF news though the monthly close above 37k is clearly bullish. BTC pushed ahead on Friday after the monthly close and was trading around the 39k handle which prefaces a move to 40k if it holds.
ETHUSD price action was quite steady as well around the 2100 level while ETHBTC continued in a narrow range around 0.054. Sol also took a breather after its searing rally over the last month and consolidated around the $60 level. Meanwhile Celestia, the other main player in the monolithic vs modular blockchain scaling barbell narrative (SOL and TIA) has continued to do well and is pushing towards a 7 bio FDV.
Read more from the author (and our macro researcher), Fractalmonk: https://medium.com/@fractalmonk999
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