One of the things we have been watching in markets is inflation. This is related to the potential for significant fiscal stimulus expected in the U.S. which would be added to a monetary and fiscal expansion around the world, especially in China.
This weeks numbers do not show inflation in the last week. With the fed talking about creating an inflation target without respect to employment numbers, these deflationary numbers give latitude in policy responses.
With the S&P500 now eyeing off its all time highs, a risk emerges in markets where at the same time, traders and investors all asks how this happened at the same time and want to hit the exit together.
Although there is conceivably room in the S&P500 to do something wilder –
The Nasdaq has traded though its important level in a false-break.
When gold sold-off Friday the S&P500 priced in gold bounced from its level a second time. Until trading through the lower bound of the trend channel, this chart shows either a gold sell-off or equity strength.
The U.S. congress is currently negotiating its second stimulus package with a number ranging from $1 to $3.5 trillion. Nancy Pelosi helpfully suggested to the Republican side ‘We’ll go down one trillion, you go up one trillion’. To invoke Senator Everett Dirksen, ‘with a trillion here and a trillion there, pretty soon you’re talking about real money’.
Digital assets have continued to be bid very strongly, and we are starting to suspect that the promised institutional funds are finding their ways to specific projects in the ecosystem. It is interesting that this has largely happened without Bitcoin.
With fund managers who have concentrated on technology being among the best performing for the last 5 years, but with the Nasdaq at such extreme high levels it makes sense for well-resourced tech-focused fund managers to be actively looking for other similar investments and we may find this to be the case moving forward. This would bring a fundamentally new dynamic into the digital asset ecosystem.
Bitcoin has been especially muted over the last week. Looking at the chart below, we remain bullish on the asset and are surprised it is not trading higher where we might re-consider being bullish. Given that it hasn’t done this, an interesting possibility for Bitcoin is a reversion to the trend-line, which could see it trade as low as $10k again.
Having said that, we remain long and expect a move in the asset this week.
Volume in Bitcoin is encouraging for the asset. This is a weekly chart over the last 2 years and shows strong volume.
Bitcoin volatility has tripled in the last 2 weeks and remains high at present, despite ranging over most of that time.
The sentiment reading in Bitcoin is as far as ‘extreme greed at the moment’.
BTC Dominance has been an interesting chart recently. After Paul Tudor Jones validated Bitcoin for use as digital gold in portfolio’s during this period of monetary expansion, we expected Bitcoin to outperform other assets, especially after selling off.
Not only has that not happened, but this chart still looks bearish.
One possibility is that the market structure of Bitcoin sub $10k is still embedded in the asset, and that there are incentives to sell volatility and trade against break-out and momentum traders. Now that the asset is more mature, perhaps it does things in its own time.
In money this week, we saw the U.S. dollar look like a very weak asset, bouncing from its low in one of the only attempts at reversing its weakness, only to turn around and go straight back to the low.
At this point, U.S. dollar has made a double-bottom and could conceivably rally, but if the asset takes another run at the low it is hard to imagine it being held.
During the week, Morgan Stanley had taken profits on a weak U.S. dollar trade while Goldman Sachs was reported to still be interesting in pushing further. There is no reason why it can’t consolidate for the month of August.
Gold has had an impressive run, higher on the week but has retraced slightly from highs on friday.
With the big Comex contract expiring August 27th, we should consider the potential for a short-squeeze in the asset. It has been strong, but has also been sensible, without any significant events besides grinding higher.
This week we are open minded to the U.S. dollar consolidating a little, perhaps trading to the down-trend or even breaking it before rolling over again in September/October and trading between 94 and 95.
If the asset has made a low we would expect it to trade to the blue square in the short/medium term. This retracement would reject further downside but also show a cautiousness from simply turning around and deciding on a strong U.S. dollar.
Our expectation for the rest of the year is a soft USD.
Written By: Thomas Kuhn, CFA
Thomas is a 12-year veteran of financial markets working to bring digital assets into the fold of traditional financial markets. With an interest in fundamental analysis with a technical overlay, Thomas actively takes positions in the markets he covers.
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