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Macro update 11.7.22

Bulls on parade

Friday’s market reaction to strong labour-market data was interesting for a few reasons:

  • Digital assets followed a similar pattern
  • Commodities rose
  • Bond yields rose

This pricing action implies “rates will rise as the economy remains strong, but demand will be able to handle this due to the strong labour market”. Right or wrong, the reaction may be indicative of seller fatigue.

Indeed, this week’s datapoints are key for the summer narrative. Wednesday’s June US CPI is projected to rise by 8.8% yoy from 8.6% in May, while Friday’s release of June retail sales are expected to expand by 0.8% mom after a 0.3% fall in May. Below consensus data would, in our view, support a ‘bad news is good news’ rally though upside surprises could be a risk off signal. A key risk remains Q2 earnings and guidance, with the charts below showing that USD strength implies more earnings downside than currently estimated.

Nevertheless, as we outlined here, historical data supports the case for a risk-asset rally in the net 1–2 months. Moreover, if the optimistic scenario of a soft landing emerges then the chart below suggests equity markets have priced this in.

Source: TS Lombard, The Market Ear

Bankruptcies shrugged

Numerous metrics have suggested value in the digital assets space for a while now, but uncertainty around leverage, exposure, contagion, etc. has weighed heavily on sentiment. We believe market action has been favourable over the past week as the market shrugged off numerous negative news items (e.g. here, here, here and here), while some positive news is starting to emerge. This suggests that a significant negative surprise may be needed to cause further significant falls. Given an attractive entry point for BTC (chart below), we believe digital assets can rally along with TradFi risk assets if data continue to suggest a more optimistic, soft landing scenario for the US economy.

Kind regards

Lyndon Barreto, CFA

Chief Economist and Project Specialist

Disclaimer: The content above does not constitute investment or financial advice. All statements are opinion and not statements of fact.



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