August 21 REX Wire Market Outlook
A dawning realization that "higher for longer" is more than a mantra led to a steep correction for both TradFi and crypto markets.
It has been a turbulent week for both the traditional and crypto financial markets, with prices crashing across the board. We're here with another REX Wire Market Outlook to help you understand what's going on.
Higher For Longer. Really.
For months now, Fed officials have been drumming home the message that not only might there be more rate rises, but that rates could need to stay elevated for a long period of time.
Traders have not believed Jay and his cronies, and have been betting on the fabled "pivot" before the end of the year. Now, it seems like they're reassessing their assumptions. The market has not only accepted the fact that rates are likely to stay at 525-550 bps into 2024, but that there's a significant (30%) chance that they might increase to 550-575 bps by December.
All of this puts pressure on other assets, as money is pulled out of stocks and bonds to earn those juicy, risk-free returns. As bond prices fall, the yield rises. The yield on US 10-year treasuries is 4.29%, a level not seen since 2007. The picture is similar in Europe and the UK.
What has brought about this change of heart?
The US appears to have avoided a "hard landing", aka recession, and is posting stronger-than expected economic data. But that means there's still the risk of resurgent inflation, as greater demand puts upward pressure on prices. That's one thing the Fed is desperate to avoid, and recent FOMC minutes suggest there's a real possibility of further rate rises to do that.
Rate rises, or the expectation of them, strengthen the US dollar, since global investors like the look of the returns they can get for holding USD. The DXY has shown unexpected strength, and is close to a 3-month high. And, as we know, a strong dollar has implications for risk assets, including crypto.
Having consolidated for weeks in the $29-30k region, bitcoin finally made its move on Wednesday—crashing through support and putting in a low of $25,600 on Friday. It's currently trading around the $26,000 mark.
We have now seen two major retests of the $30k resistance zone in recent months, which proved such strong support for BTC in the last cycle, and which we always knew would be a key level to overcome in the new bull market.
For now, bitcoin has stayed above the June low, rather than putting in a lower low. The RSI is in heavily oversold territory on both the daily and the 4h chart. Should that low around $25k be broken, however, $20k comes back into play. Alts, meanwhile, are likely to be stuck in the wilderness for a few more months.
Big moves to the upside are often kicked off with a shakeout. But then, so are big moves to the downside. It remains to be seen—both for bitcoin and the TradFi markets—whether this is just a correction and a bounce is due, or the start of a new medium-term trend.
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