Avantis Macro Series #7: Cautious start to 2024, as the cross-asset everything rally takes a breather
In this week’s extensive macro series, we explore the halt of the cross-asset rally, incoming BTC ETFs, and the macro-drivers and data you should look out for to understand crypto price action in 2024.
The blistering cross asset rally over the last 2 months took a pause as the new year dawned with risk assets giving back some gains (lower equities, higher bond and credit yields,VIX up and a stronger dollar). A key feature of the Nov-Dec meltup was fund managers FOMOing and chasing indices against which they are benchmarked to avoid notching a significant underperformance with hardly any time left in the year but a fresh start in 2024 allows them leeway to reposition their books and be more discretionary.
The key macro drivers that will determine outcomes in 2024 are the trajectory of inflation (while hopefully avoiding a deep economic recession) and the resultant global liquidity impulse that supports risk assets. The reason for the everything rally was an expectation of easier monetary policy and loosening global liquidity conditions in 2024, and risk assets need incoming macro data to remain favorable over the next few months for continued confidence in the narrative. An easier global liquidity picture acts as a tailwind for risk assets.
Macro Data
FOMC minutes were hawkish compared to market expectations. Markets have been pricing in 150 bps of rate cuts in 2024 (against Fed projections of 75 bps), and the Fed minutes pushed back against the narrative with an emphasis on keeping rates higher for longer and being data dependent for any cuts.
Jobs data (JOLTS, ADP and NFP) all pointed to a robust job market and a strong economy. It also seems like the US economy will avert a wage price spiral which is great news on the inflation front while avoiding a deep recession and lends more support to the soft landing narrative. However it does push forward the timing of the 1st rate cut to later in the year from March and is bearish risk compared to market expectations.
Upside Inflation Risks due to Supply Chain Disruptions
There are ongoing problems with shipping on both the Suez (attack on merchant ships by Houthis from Yemen) and Panama canals (extreme drought has reduced the capacity of the canal to about 24 ships/day against normal capacity of 38/day). This has caused a lot of ships to divert around South America and Africa causing supply chain delays and increased costs. If these problems remain persistent over the next few months, they could lead to some uptick in inflation inputs, although the effect isn’t currently expected to be a major driver of inflation.
China Liquidity Impulse
The Chinese economy had a rough 2023 with the slowdown in the economy and various government crackdowns leading to capital flight and a bad year for risk assets (CSI 300 is down ~20% when global equities are all up). Thus PBoC injected CNY 350 Bio of liquidity in December to support the real estate sector and expectations of further easing from PBoC in 2024 lends further credence to the increasing global liquidity narrative and is positive for risk assets.
Oil
2023 was a mixed bag for oil markets. While demand grew by 2.3 mio barrels per day (surpassing the previous highest annual consumption set in 2019 before covid), supply more than matched it (US shale growth, Iran production surge due to deliberate sanction non enforcement and more than expected Russian exports through its shadow tanker fleet). This forced the OPEC+ led by Saudis to extend their production cuts and helped place a floor on the oil price. 2024 for Saudis is more of a wait and watch situation as oil demand will grow (although growth is expected to slow down), but non OPEC supply growth is also expected to match this growth in demand. OPEC+ is expected to extend its production cuts through the 1st half of the year but any slowdown in demand or more than expected increase in supply (from US shale and other non OPEC states) will send the market in surplus. This could lead to a right tail scenario where Saudi Arabia reverses course, declares a price war on shale and floods the market with cheaper oil thus crashing the price (they did this before in 2016 after continuously losing market share from 2010–2015). A growing minority of market participants have started pricing in that scenario.
Crypto
Crypto has continued its fantastic run with all eyes on BTC ETF approval currently expected around Jan 8–10th. With 11 players in the mix, the marketing war for these ETFs has heated up in a bid to start strong and accrue assets and volumes in the early days.
https://twitter.com/hashdex/status/1743287176337482184
https://twitter.com/hashdex/status/1740354018982219819
https://twitter.com/BitwiseInvest/status/1736755061127020794
https://twitter.com/vaneck_us/status/1743300722928619779
Meanwhile BTC has remained rangebound and is pushing up against the monthly 44–48k resistance band, with market participants waiting for further developments on the ETF front while BTC betas like STX and ORDI have done well.
Demand for leverage remains high with record high OI as well as basis rates on CME futures, while funding rates across the board reached very high levels before a liquidation cascade and leverage reset on 3rd Jan.
CME Futures Data
ETH has continued to lag BTC but the market expectations for a rotation to ETH ETF narrative (post BTC ETF approvals) and upcoming EIP 4844 proposal should give both ETH and its L2 betas (ARB,OP) some momentum going forward.
Alts have been on a phenomenal rally for the last 3 months with multiple sector rotations to different L1 ecosystems and narratives. (alts such as SOL, AVAX, TIA, SEI,cosmos ecosystem, AI, DePin narratives etc). The market also became quite frothy with breathtaking memecoin rallies on most ecosystems whose L1s did well.
Sentiment for market reaction in the immediate aftermath of ETF approvals next week is still mixed,with many participants calling for caution and a short term pullback while others remain bullish. However any negative news on the ETF front will undoubtedly see a strong bearish reaction and a market dump across the board.
Read more from the author (and our macro researcher), Fractalmonk: https://medium.com/@fractalmonk999
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