Smart Money is a weekly overview of everything finance. We provide the best actionable information and insights on Forex, Stocks, and Crypto Currencies. Smart Money is intended for Investment Awareness and Education and should not be considered Financial Advice.
Welcome to Smart Money’s third edition! In the investment realm, Smart Money refers to the capital under the control of institutional investors, central banks, and other financial titans. Simply put, it’s the money wielded by the experts in the financial world.
“Smart money knows that sometimes the best investment is patience.” – Charlie Munger
In this edition of Smart Money, we will go through
- Overview of Macro-Finance
- Status of Forex Market
- Status of Stock Market
- Status of Crypto Market
- Bitcoin, Ethereum, and Opportunities
Overview of Macro-Finance by Smart Money
Table of Contents
The world’s in a tight spot right now. Russia’s move into Ukraine has stirred things up, causing political rifts and economic headaches in Europe and the West due to sanctions. Meanwhile, the Israel-Hamas tussle is brewing, adding more tension to an already edgy global scene, especially in the oil-rich Middle East.
Yet, the most potential for a future Cold War seems to stem from the shaky relationship between the U.S. and China.
- Despite making up about 43% of the global GDP, their economic ties soured after the 2018 trade war initiated by former President Donald Trump.
- Besides, recent saber-rattling over Taiwan, a territory China claims as its own, raises the specter of an impending new Cold War.
Major powers’ adoption of isolationist policies threatens to undo the progress made since the early 1990s, potentially wiping trillions from the global GDP.
US
The Federal Reserve kept interest rates steady on Wednesday, hinting that the era of tightening monetary policy is over. The central bank anticipates a shift towards lower borrowing costs in 2024.
- Inflation is dropping faster than expected, and though the economy is cooling, it’s still growing.
- In simpler terms, a smooth landing is on the horizon.
The Fed’s surprising move on Wednesday hints at a shift. If borrowing costs dip in 2024, yields may also decrease. It might lead some investors to jump into stocks and riskier ventures while others rush to secure yields in long-term bonds.
Europe
The US Federal Reserve stands alone as many of Europe’s central banks stay committed to tight policies well into the next year.
- Any hope that the Fed’s shift toward rate cuts signaled a global trend is dashed.
- Europe’s central banks, including the European Central Bank and the Bank of England, remain hawkish.
In the two-day meeting, the ECB didn’t even discuss easing policy.
- The Bank of England stated high rates will persist for an “extended period,” and Norway’s central bank raised rates.
- On the other hand, the Swiss National Bank, while less hawkish, hinted at possible rate cuts next year due to declining inflation without explicitly confirming it.
Analysts anticipate the ECB to follow the Fed’s lead and move towards cuts in 2024.
Russia
Vladimir Putin’s Ukraine invasion, approaching the two-year mark, has taken a toll on Russia’s economic growth.
- As per US Treasury estimates cited by the Financial Times, the war has cost Russia a potential 5% increase in GDP.
- Moscow’s response and sanctions have strained the economy, leading to surging expenditures, a weaker ruble, rising inflation, and a tight labor market due to workforce losses.
Since the invasion, Russia has faced extensive sanctions from the US and the European Union, making it the most sanctioned country globally.
- Despite economic challenges, Russia allocates a significant portion of its GDP, about 6% for 2024, to defense—compared to 3.9% in 2023.
- It surpasses military spending by the UK (2.2% in 2022) and the US (3.5%).
Additional concerns include inflation nearly doubling the central bank’s 4% target and a record-high emigration rate. Moreover, Russia lags behind other energy exporters, including the US.
Status of Forex Market
DXY
The dollar is on track for its most significant weekly decline against major currencies since July, influenced by increasing expectations of US rate cuts in the coming year.
- The US dollar index (DXY) has fallen over 2% this week, currently below $102, marking its lowest point since mid-August.
- Despite Thursday’s release of US economic data surpassing expectations, it only offered limited support for the US Dollar.
Euro
On the other hand, the Euro and Pound gained support as European central banks adhered to their hawkish strategies.
- The EUR/USD surged, nearing the 1.10 mark and testing highs from November and December around 1.1010.
- The EUR/USD might continue forming higher highs and lows, ahead of the US Personal Consumption Expenditure (PCE) Price Index update.
- Nevertheless, a core PCE reading exceeding expectations might hinder the recent EUR/USD advance by extending the duration of higher US interest rates.
Argentine Peso
Meanwhile, Argentina will devalue the peso by over 50%. This drastic move is part of emergency measures to assist the nation’s struggling economy.
- In recent years, Argentina’s central bank increased peso printing to aid the government in avoiding default on its debt.
- Unfortunately, this led to soaring prices over time.
Interest Rates
As the last Smart Money edition highlighted, interest rates have shown remarkable stability since June 2023. This trend mirrors the consistency observed during the bullish years of 2020-2022, reminiscent of the dot-com bubble era.
- The Federal Reserve, in its final meeting of 2023, opted to maintain the key interest rate within the range of 5.25% to 5.5% for the third consecutive meeting.
- Moreover, alongside this decision, committee members indicated the likelihood of at least three rate cuts in 2024.
Notably, the current rate has exceeded the 2007 highs at 5.25%, sparking concerns about a potential stock market collapse similar to the events of 2008.
In the meantime, the benchmark US ten-year bond yield plummeted by ten basis points to 3.917%, reaching a four-month low. The 10-year rate, a pivotal gauge of bond market sentiment and safe-haven demand, had surged above 5% back in October.
Status of the Stock Market
Since October, stocks have been on a widespread upward trajectory, fueled by optimism that inflation has subsided enough for the Federal Reserve to halt its market-disrupting interest rate hikes and even contemplate reductions. These expectations strengthened on Wednesday when the Fed kept its main interest rate steady and indicated that the federal funds rate is likely at or near its peak.
While prices may not revert to pre-pandemic levels universally, Wall Street seems indifferent to that concern. It broke out the champagne, reveling as if it were the 1980s.
- Essentially, the Dow Jones Industrial Average notched a 0.43% increase, reaching another record high after surpassing the 37,000 level for the first time on Wednesday.
- Furthermore, the S&P 500 also saw a gain of 0.26%, and the Nasdaq Composite experienced a 0.19% rise.
Meanwhile, Moderna shares surged over 11% following positive trial results for an experimental mRNA-based treatment for skin cancer, revealed by the company and its partner Merck.
However, the market’s momentum eased as Big Tech, with a substantial impact on the indexes, faced losses. Microsoft dropped 2.25%, Amazon declined by 0.95%, and Meta saw a 0.47% dip.
- While most of the market is on an upward trend, the pause in Tech megacaps is, in fact, a positive development, especially considering their substantial gains in 2023.
- Investors holding these stocks may have a reason to profit by selling.
The ongoing stock market rally seems to be in the early stages of another upswing.
- While there have been new buying opportunities recently, many leading stocks appear stretched.
- We would avoid chasing extended stocks, especially considering the overall market’s extended status and prevailing bullish sentiment.
- Besides, with market breadth showing significant improvement, stocks and sectors that were previously off the radar for months are now gaining traction.
Oil
The COP28 climate summit in Dubai reached a substantial agreement, urging nations to “transition away from fossil fuels.” Despite the ambitious goal, the oil industry remains unconcerned, as the agreement’s language is notably vague, allowing many countries to take minimal action.
- Rather than demanding specific actions, the agreement “calls on countries to contribute” to global efforts to reduce carbon pollution.
- This ambiguity raises doubts about the effectiveness of the commitments made.
Meanwhile, oil prices increased on Friday, poised for their first weekly rise in two months.
- This surge follows a bullish forecast from the International Energy Agency (IEA) regarding oil demand for the next year, coupled with a weaker dollar.
The International Energy Agency’s monthly report projects a rise in world oil consumption by 1.1 million barrels per day (bpd) in 2024, up 130,000 bpd from its previous forecast. This adjustment is due to an improved outlook for U.S. demand and lower oil prices.
Source: MRCI
The chart above uses 30 years of data, employing the March crude oil future, to identify the most probable times for annual highs and lows.
- Notably, the oil seasonality tends to turn bullish in the second or third week of December.
Crypto Currencies
Bitcoin
Recently, Bitcoin dropped from $44K to under $41K within 24 hours, marking a 5.75% decline—the third-largest sell-off this year.
- Contrastingly, in previous months, a similar drop might have led to further declines.
- The resilience of Bitcoin’s price, holding strong and even recovering slightly, indicates a healthier market.
- The minor correction in the broader market aligns with the rational profit-taking process, especially as BTC has rallied over 70% since October.
Currently, the BTC landscape appears relatively calm. Our attention is on weekly levels in the BTC chart.
- If Bitcoin maintains a key support, the target becomes the next resistance.
- Conversely, if it loses support, the target shifts to the next support level down.
The current approach is to keep things straightforward, especially with the anticipation of an ETF on the horizon.
Markets thrive on certainty, a crucial lesson gleaned from recent years of investing. A compelling illustration comes from web3, specifically in the aftermath of major events involving CEX CEOs.
The chart showcases the price of bitcoin, with each yellow vertical line denoting the removal of a prominent crypto exchange CEO—namely, Arthur Hayes of BitMEX, SBF of FTX, and CZ of Binance.
- Notably, following the departure of each CEO, markets experienced robust rallies.
The chart stresses substantial capital was on the sidelines, waiting for market clarity. Once clarity emerged, investors promptly deployed capital, propelling the price of Bitcoin upward.
Ethereum
ETH’s current supply has reached its lowest point in 456 days, dating back to the time of the Merge. Two key factors contribute to this decline:
Source: Ultrasound.money
Combining these factors—reduced annual ETH emission and a burn mechanism—results in Ethereum behaving as a deflationary asset. Consequently:
- ETH’s annual supply change stands at -0.21%, indicating that more ETH is being burned than issued.
- The total supply of ETH has decreased by 317,000, equivalent to approximately $720 million less ETH in circulation.
Despite recent subdued price action for ETH, attributed to lower demand than other tokens, it’s essential to recognize that Ethereum’s supply dynamics are more robust than in the previous cycle. This strength in supply mechanics could pave the way for a significant rally once demand returns to the Ethereum network.
Meanwhile, Solana’s “culture-coin,” $BONK, experienced a significant surge during its debut on Coinbase, reaching new all-time highs and approaching a $1.9 billion market cap.
- The trending coin of the moment has seen a remarkable 137.5% increase week-over-week.
- In tandem, the native token of its parent network has also risen by over 8%.
This positive momentum contrasts with the 7-day decline observed in ETH and BTC following the weekend’s slump. Are we witnessing the resurgence of the meme-coin season?
That’s all for this week’s Smart Money. See you again next week!
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