Recurring market commentary on what’s happening in the crypto markets, summarized by the Crypto Broker team at Crypto Finance AG.
Market commentary
Good Morning!
Last week, the price action was choppy with most eyes on the FX markets, which are under a great deal of stress. For nwo the market has already gained some height again after the short low. At the time of writing the price of Bitcoin (BTC) is around 20.2k USD (-3.2% in 7 days) and Ethereum (ETH) at 1.38k USD (-0.3% in 7 days).
FOMC meeting went by
The FOMC went for 75 bps, which is what most market participants were expecting. The decision had no impacts on risky assets. Nevertheless, the Fed was pretty clear, and we should expect neither pivots nor rate cuts any time soon. Dot plot shows the terminal rate going from 3.8% to 4.6% by 2023, and 2/3 of committee members see rates peaking above 4.5% next year. With 67.5% probability, the target rate for the Fed meeting on December 14th will be 425-450 bps; the current target is 300-325 bps, which means that an additional 1.25% hike is in the cards until year-end.
Meanwhile, the US Yield Curve is inverted, starting from the 3-year yield (currently 4.35%). The 10y Yield is now 3.85%. I expect the Fed to act and convince the market in order to slowly flatten the curve and allow the backend to pick up. In terms of the sentiment in the market, the current rate forecast is already being used to discount risky assets, so I would expect a rather calm price movement if expectations remain the same.
Europe's market situation still shaky
In Europe, the situation is rather critical. Firstly the GB Pound was pounded and fell as low as 1.0373 USD after Treasury Chief Kwasi Kwarteng pledged a sweeping package of tax cuts, fueling concerns about the government’s economic policy as the UK is probably already in a recession. At the time of writing GBP/USD is trading at 1.0805 (-20.14% YTD). Secondly the Italian elections saw the coalition of right-wing parties win. I now expect Ms.Meloni to start doing what they have been saying they will do: challenge the European Union. I further expect expansive monetary policies that include tax cuts.
However, the situation in Italy is much different than in the UK. Italy does not have its own currency, but shares the euro with 19 other countries: from Germany to Slovakia. Market participants could target BTPs, but the EU TPI programme should avoid rates skyrocketing. Nevertheless, the eligibility criteria to participate in this programme include:
- Compliance with the EU fiscal framework: not being subject to an excessive deficit procedure (EDP)
- Absence of severe macroeconomic imbalances
Should the EU stop supporting countries such as Italy, the entire union would then be challenged. I continue to consider the euro as the easiest target. This is another example of the weakness of the EU banking system. Each country has its own economic, fiscal, and structural issues, but none have their own currency. Countries with the euro are pegged to a currency that they cannot manage.
This is similar to when smaller countries in the Americas peg to the US Dollar, which is very much a two-edged sword. I see a few reasons as to why the incoming Italian government should not take this path. The current pension scheme is already broken; the Italian debt to GDP ratio is 134.8% (German Debt/GDP is 59.8%), and the average tax rate for both workers and companies is already way above the OECD average. In 2012, under Merkel and Sarcozy, the EU pushed the BTP-BUND spread to 5.31% to bring down the government driven by Silvio Berlusconi. Will the story repeat itself?
- IT10Y: 4.614% (+97 bps MoM)
- DE10Y: 2.146% (+69.3 bps MoM)
- CH10Y: 1.429% (+55.4 bps MoM)
- US10Y: 3.858% (+83.3 bps MoM)
Huge pressure on the market through strong USD
Happy Trading!
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