Bitcoin slumps below $67,000 during Friday's Asian trading hours

How will this imminent correction impact BTC’s long-term outlook?

Market Movements

Global Macro Market Observations

?? US Consumer prices rose 0.4% in February and 3.2% from a year ago

? Country Garden misses yuan bond payment for first time

?? UK probably left recession as economy grows 0.2% in January

?? US annual PPI inflation rises to 1.6% in February vs. 1.1% expected, adding signs of persisting inflation

The reaction to a stronger than expected US CPI print (3.2% vs 3.1% expected; Core 3.8% YoY vs. 3.7% expected) was… surprisingly bullish for risk assets. The initial print likely did not scare a market that had already adjusted its expectations to the Fed’s expectations for only 3 rate cuts for the year. The SPX 500 proceeded to close the day near its ATH at 5175.28, though this was in spite of a rise in treasury yields on the day (10Y up 5bps to 4.15%).

However, the subsequent US PPI release surprised greatly to the upside, while US Retail Sales was a huge miss (0.6% Month-on-Month vs 0.8% expected). This spooked the market a bit more, owing to the magnitude of the PPI surprise and what looked like a weaker than expected consumer sector. The 10Y yield started to rise more rapidly, closing the week at 4.31%. Naturally, stocks started a bit of a slide and the dollar remained strong.

In the middle of the week, a news leak that the BOJ would be taking Japan out of its negative interest rate policy made the rounds. USDJPY saw a swing lower over the headline, about 40 pips to a low of 147.43, before questions about the credibility of the leak (via Jiji Press vs. a more official newswire) and stronger 10y yields undid all of the move. USDJPY ended the week just below 149.

Malaysia Market Observations

?? Malaysia's January IPI up 4.3% y-o-y, fastest pace since May 2023

?? Malaysia emerges as winner in semiconductor industry amid US-China trade war

???? Ringgit opens lower against US dollar, higher versus other major currencies

Malaysia’s January Industrial Production Index could be a green shoot for the Malaysian economy (Source: The Star)

Higher than expected US inflation spurred US Dollar strength (which is a major factor for the USDMYR pair rising this week) and pushed UST yields higher (from 4.08 to 4.31 on the 10-year).

This, coupled with the release of Malaysia’s Jan-24 Industrial Production rising at the fastest pace since May-23, saw local government bond yields rising across the curve; this means government bond prices went down as indicated in the right-most column:

Corporate bond yields tend to be higher on account of the additional credit risk inherent in those instruments, which helps the segment maintain a positive return this week:

The drivers for corporate bonds are similar to those that led to the Halogen Shariah Ringgit Income Fund (HSRIF) delivering another week of steady returns, despite overall market volatility.

In equities, the KLCI shrugged off downbeat sentiment on regional markets to end the week marginally higher at 1,552.83 or +0.59% for the week.

Crypto Market Observations

?? Bitcoin shoots above $73k, tumbles to $67k during Friday’s Asian trading hours

? Bloomberg analysts substantially lower likelihood of spot Ethereum ETF approval in May to 30%

?? Dencun upgrade goes live on Ethereum mainnet

?? Elon Musk Says 'We Should Enable' Dogecoin Payments For Tesla

In crypto, strong inflows from Bitcoin ETFs and speculative furor continued to push Bitcoin higher. The digital gold analogue rose to a high of $73,777 on Binance on Wednesday. The entire crypto ecosystem remained hot, with multiple altcoins in the Layer 1 category attempting to make new YTD highs. Solana in particular saw strong performance over the week, marking a new YTD high just below $189 and frankly not too far away from its all time high near $250.

In true crypto bull market fashion, this week saw another attempt by speculators to push prices higher, which was met with another liquidation flush lower as the market got ahead of itself. Funding rates in Bitcoin perpetual swaps actually spiked to 12 bps/8 hours on Binance, which was higher than that during the first attempt to push past the 70k level last week. After stalling at $73,700, Bitcoin reversed course and punched back through the 70k level, hitting a low of $65,600 before dip buyers came back in. Bitcoin closed the NY session near $69,500.

During the flush, certain sectors did stand out with pockets of strength. Solana has seen strong price support, outperforming Bitcoin and Ether in this period. Memecoin majors $DOGE and $PEPE were also seen to show some resilience, with both getting some support from Elon Musk over the week. Interestingly, Tesla’s founder once again went on record to say that Tesla would accept Dogecoin as payment for their vehicles ‘at some point’, which saw DOGE leap some 15% over that event.

The EIP-4844 upgrade (more commonly referred to as the Ethereum Dencun upgrade) went live on the 13th of March 2024. While technically an important step to reducing network fees throughout the ecosystem, this upgrade primarily impacts fees on Layer 2 rollups (which help scale transactions on Ethereum). As a whole, the upgrade had little impact on Ether’s price. In fact, large L2 protocols such as Arbitrum saw their token’s price decline following the upgrade (in typical buy the rumour, sell the fact action).

What we are monitoring for the week ahead

Looking Ahead: Our Insights

The market reaction to the US CPI print was rather surprising, and quite frankly didn’t make sense. Even if the market seemed to look past it, the divergence was a warning sign to some savvier market watchers. It’s more likely that the Fed would pay close attention to the print than not, even if implied rate probabilities were already more in line with Fed communications.

Thursday’s PPI and retail sales data proved that point, and it paints a different picture for Q1 24 in the US. Based on the Atlanta Fed GDPNow reading and the latest CPI and PPI forecasts, the Q1 regime is more likely to be one of slowing growth but accelerating inflation, on a Year-on-Year basis. Depending on how narrow the Quarter-on-Quarter delta is for that, the market might be taking further losses on fixed income portfolios as the Fed stays higher for longer (but not necessarily on equities, given the strength of the mega tech sector in the US).

This coming week features rate decisions from four G7 central banks, with the Fed of course being the most important. Given the rumours surrounding the Bank of Japan’s potential exit from NIRP, we note that the USDJPY price divergence makes playing that possibility an attractive one for a convex type of move lower. For now, the market takes it lightly (probably for good reason).

One data point does not make a trend, but if we keep seeing outperforming numbers like Malaysia’s January Industrial Production economic growth could surprise on the upside for the first time in a long time. It points to a resilient baseline when it comes to domestic demand, aided by a recovery in the global electronics industry. This could mean support for manufacturing counters and the ringgit, but could spell pain for long dated bonds. At current juncture we still expect an unchanged Overnight Policy Rate (OPR), which means short dated bonds (e.g. the target segment of the Halogen Shariah Ringgit Income Fund) offer the best value for fixed income investors based in ringgit.

Over the week, the prospect of a crypto liquidation flush continued to increase as prices rose. Among the signs that we saw were:

1. Bearish volume divergences in the crypto majors (higher prices at cycle highs occurring on lower trading volumes)
2. Funding rates were also increasingly positive, despite an attempt last week to flush out speculative longs already. This was particularly true in the AI and Memecoin sectors. A standout was $FLOKI (named after Elon Musk’s dog), which at one point had a funding rate of 75 bps/day (or 274% p.a.).
3. The Crypto Fear/Greed Index pushed even further into Extreme Greed territory, jumping 7 points to hit 88 points. The last time a similar jump happened was, coincidentally, March 5, where Bitcoin attempted to breach the $70,000 level but was rejected firmly.

While liquidations help remove the froth in a trend, seeing a 2nd flush in as many weeks is likely a harrowing experience for new investors to the space. It’s why we advocate for a deliberate asset allocation and risk management first mindset. Support for Bitcoin was seen in the $65,000 to $67,000 region. There’s a good chance a second leg lower plays out though, after which Bitcoin then consolidates in the $64,000 to $69,000 region.

Similarly, Ether should find support in the $3,400 to $3,600 region. We update our decision making framework to include the newest updates from the Bloomberg ETF analysts regarding their assessment of an ETH ETF approval. 30% odds is also in line with betting market odds right now. Frankly, anything below 25% is probably good odds to take the bet, as there are still points in favour for an approval to consider (ETH futures imply tacit agreement that it correlates with spot price, and potential of litigation being pursued on denial among those).

The cyclical view for a continued uptrend remains intact, but needs time to play out as speculative froth gets removed from the system. Liquidations were fast and furious in the crypto native exchanges, but open interest in CME Bitcoin futures remains extreme, perhaps owing to the stricter margin requirements imposed on CME Bitcoin contracts. We’d like to see this pull back slightly to indicate that there’s room for an uptrend to continue.

For the week, we’re also paying close attention to Nvidia’s GTC 2024 AI conference, starting on Monday. The decentralised AI sector in crypto has been a very strong one over the past couple of months. In particular, we saw the start of a strong run up in major projects like Fetch.AI (FET) and Singularity.NET (AGIX), ostensibly on the hype of the conference. In the past, we’ve seen ‘buy the rumour, sell the fact’ on such hyped events. The Bitcoin ETFs aside, smaller events like ETH Denver, the Dencun upgrade, and Solana’s Breakpoint conference also experienced such price action. We’ll be looking to see if a similar pullback in the AI sector occurs, which might allow for investment opportunities there.

Thank you for reading and we’ll see you next week!

Team Halogen

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