Weekly overview on the global market | 27.02.23

Introduction

Over the past few weeks, the sentiment in the bond market has changed considerably. After the extreme publication of CPI, PPI and business activity data, as well as after the release of employment data, the money market has significantly changed its views on future meetings and the probabilistic distribution of rate values at different timestamps throughout 2023.

We are seeing bond markets throughout February laying down a tougher scenario than was previously laid down and expecting higher rates for a longer period. In turn, stocks from the S&P500 to Asian and European markets react to this risk off trend with a delay, nevertheless, we have observed at least a halt in growth or a bearish trend over the past few weeks. In turn, the crypto market hardly reacts to these changes. Over the past few weeks, we have observed a high sensitivity of cryptocurrencies to all positive news and movements in the stock market. At the same time, the negative on the classic market was almost completely ignored by the crypto market until recently.

We expect further development of the negative trend caused by the revaluation of the bond market, but we do not expect a rapid fall. In the baseline scenario, we expect a gradual return of correlation with classical markets and the gradual development of a negative risk-off trend with volatile corrections.

Technical analysis

BTC remains in an uptrend on the daily timeframe, while on H1 and H4 it moves in a local bearish trend. Based on the assumption that the crypto market will eventually restore a two-way correlation with the classical market. With each day of a deeper fall in bonds and stocks, as well as changes in the state of the money market towards a greater probability of high rates, the pressure on BTC will increase, and the probability of showing prices above 25,000 will decrease.

Looking back at the recent negative dynamics, we expect that BTC will soon turn into a technical downtrend, including on the daily timeframe, while the reversal will not necessarily happen quickly and most likely it will take some time. In this regard, despite the uptrend on high timeframes, we are already talking about the future trajectory of BTC in terms of a bearish view and are looking for favorable entry points for a set of hedging short positions.

Statistical boundaries for the current week

Resistance zone - 25800-26700

Support zone - 21800-21200

In addition to BTC, let's also consider the S&P500. After a prolonged resistance on the statistical quarterly deviation, the index turned down and is in a bearish trend, which implies a reaction to moving averages, previous lows and the statistical zone of interest of bears (red zone).

Global macro

February ends with a significant revaluation in the bond market. Unlike the beginning of the month, now the market has significantly changed its assessment of the rate level at the end of 2023. At the beginning of February, the consensus embedded in the market transactions in the money market implied a rate at the level of 425-450bp by the end of the year. Now the market is laying the rate at 525bp as the most likely scenario by the end of 2023. This shift of the distribution to the right contributes to the growth of yields on the bond market and the strengthening of the USD. We expect that in 2023 the trend of the distribution shifting to the right will continue, as it has been throughout 2022, despite periods when the narrative has changed to a positive one.

Throughout 2022, the market assumed lower inflation than its actual values, as well as the fact that inflation will remain at high values for a short time. We see how both of these narratives, although resurrected from time to time, are broken by the reality in which inflation has a very broad base and sticky components that do not allow it to decline as quickly as the market wants it to. Moreover, over the past few months, the Fed has been methodically reminding that current market expectations do not match their expectations, and that the regulator expects a higher rate and inflation for a longer period. Further downtrend and risk off in the market will depend on the market's awareness of the real picture and the inconsistency of data and expectations.

An important factor in the current reassessment of the further trajectory of the rate is the CPI inflation statistics. At the beginning of the month, the market predicted a faster rate of inflation and, accordingly, a closer moment of rate reduction. However, such assumptions implied that inflation would continue to decline at the same pace, while the latest release showed its actual stop at almost the same level as in December. Such dynamics caused doubts in the market about the established consensus and contributed to the revaluation.

We believe that one point in the dataset is not enough for a large-scale revaluation, and that the market will need an even greater discrepancy between actual inflation and expected inflation embedded in real money market transactions. In our baseline scenario for 2023, we expected that inflation (Core CPI) would stop declining and reach a plateau in the summer near the 4.5% mark, followed by a large-scale reassessment of risk by the market and a risk off period. However, such a plateau may occur earlier at higher levels if inflation in volatile components, such as energy, also stops declining, and we can see a risk off period much earlier.

At the moment, the market is no longer laying a decline in 2023, while a month ago it was laying from one to two declines in the fourth quarter. At the moment, the market has listened to the forward guidance from the Fed and has become closer to the rhetoric of the regulator, laying three increases of 25bp and then a plateau until the end of the year at 525bp. Nevertheless, we believe that the data on inflation and the labor market will aggravate the picture and force the distribution table to move in a more aggressive direction. We expect that a stop in rate hikes may occur between 600bp and 700bp or higher, depending on the stability of the inflationary trend. in any case, this assessment is much more hawkish than the market is laying now, so we stick to a negative view of the market, despite the January rally.

Summary

During February, the money market and the bond market significantly reevaluated the upper limit on the Fed rate for 2023, as well as the number of hikes. Thus, the market realized and accepted the “higher for longer” narrative of the regulator regarding keeping the rate at high level to fight inflation. In turn, inflation by various metrics significantly diverged from market expectations throughout the month, which probably caused the revaluation.

We expect that the trend of the discrepancy between the actual hot data on inflation and the decline in inflation rates will continue, so the market would be surprised by the resilience of the inflationary trend. However, we admit that this will take more time, so we do not expect terrible consequences or a serious fall in the near future, while we expect a volatile decline and a moderate downtrend. After a prolonged decline in February, there may be some pause in the bond market, as well as in the stock and cryptocurrency markets, but it is worth taking into account the lag of the crypto market from the classical markets. To sum up, we expect the risk off trend to continue and are looking for favorable moments to hedge with short positions in BTC.

Calendar of events

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Required Disclosures

This material is a product of the Gotbit Trading Department. This material is provided solely for informational purposes, is intended for your use only and does not constitute an offer or commitment, a solicitation of an offer or comment, or any advice or recommendation, to enter into or conclude any transaction, or to provide investment services in any state or country.

Sources:

• TradingView
• Bloomberg
• Glassnode
• investing.com
• MarketTwits