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Wild rollercoaster ride in markets and bitcoin

We recently highlighted the importance of the US inflation data on market direction for cryptos. This report was another key medium-term plank for the US Federal Reserve in determining how high interest rates would need to go and how long they might need to stay there. This would therefore have an impact on liquidity and bitcoin, and the numbers certainly didn’t disappoint for market volatility.

Hoped for signals of inflation topping out again didn’t materialise as headline inflation hardly eased (0.4% M/M and 8.2% Y/Y, from 8.3%) while US core inflation (6.6% Y/Y) jumped to the highest level since 1982 as the monthly pace (0.6%) remained uncomfortably elevated as it surpassed the level seen at which the Fed began hiking interest rates in March. This was a worrying signal which confirms that financial conditions are not tight enough to significantly lower inflationary pressures, so the data was a clear signal that the Fed has more to do.

Probably most amazing was market price action, with a first instinctive reaction being a sharp jump in US Treasury yields with the two-year north of 4.5% while the 10-year yield tried to take out the 4% barrier. Money markets embraced the idea of two additional 75 bps Fed rate hikes in November and December. Meanwhile the S&P 500 opened about 2.5% lower but technical factors came into play with the benchmark index touching the 50% retracement of the post-corona rally triggering a squeeze on recent bearish positioning. In an impressive comeback, US indices closed up to 2.6% (S&P) and 2.8% (Dow) higher. All-in-all the S&P 500 saw its 5th-largest intraday reversal from a low in the history of the index.

S&P 500 D1

Cryptos suffer and then rebound

Bitcoin sold off sharply down to a low of $18,131, a level last in mid-June. But the pain was very short lived with the world’s most popular cryptocurrency ultimately running higher than its pre-CPI level. Traders were calling it “the biggest bear trap in history” and some crypto analysts noted that liquidations in a single hour on the day were the highest on those timeframes in over a month.

While the most traded crypto has failed to reclaim the treasured $20,000 level, extreme bearishness has subsided as risky assets are trying to bounce back. The rejection of the lows is a good sign for the bulls with the chance of a broad base and temporary relief rally in play. Bullish divergence is another reason some are hoping that bottom rejection foresees sunnier days. Some crypto watchers are proclaiming that the last two major impulses were both preceded by around 120 days of relatively low volatility consolidation before they began. That said, consolidation and range trading near the lows often can mean the breakout in line with the dominant trend. For the time being, the positive risk mood this week is helping underpin support risky assets and cryptos.



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