There are weeks that matter and then there are weeks that MATTER. This week will be pivotal for the future direction of markets. The start of a new Fed rate hike cycle is not a common occurrence, but its impact will be felt far and wide.
As famed investor Warren Buffet once said, “Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe." Crypto is no exception.
With the war in Europe previously dominating market chatter, unless a major escalation materializes, the market will be anxiously awaiting the Fed meeting. It's likely the market will have no major moves until then.
Going forward, here is a detailed overview of risks and opportunities to watch out for in the week ahead.
Macro
The actual “FOMC announcement on fed funds rate” is scheduled for Wednesday March 16th at 2pm ET. Then at 2:30pm ET, Fed Chair Powell will give a press conference.
As of this writing, CME Fed Futures estimate a 98% probability of a 25bp hike with a 2% probability of a shock 50bp hike. The 25bp hike is essentially priced in so the market will be focusing on the guidance for future hikes as well as any news on the start of QT (quantitative tightening). If Powell indicates that the Fed may do a 50bp hike in May and/or June, the market might not react too kindly. Any language that implies front-loading the rate hikes will be key. Remember, the market is currently pricing in 5+ 25bp hikes.
If there are no surprises, there’s a good chance the market will rally post Fed news, assuming that Russia doesn’t intensify its attacks in Ukraine.
China is another factor to pay attention to, as Covid-19 cases have been on the rise while their economy and stock market have been deteriorating. Already, the cities of Shenzen (China’s Silicon Valley) and Shanghai have been partially locked down. This only makes the supply chain problem and resulting inflation worse.
Lastly, the contagion factor is again still present as many Western firms have investments in Russian assets. Spillover effects are still possible. Remember, the Russian stock market is still closed this week.
Geopolitics
Another week and another round of talks between Russia and Ukraine while Russia slowly advances and Ukraine works on getting more weapons and support from the West.
Russia has been reeling economically, especially with the self-sanctioning from normal buyers of Russian commodities and energy. To make up for the lack of Russian oil, the U.S. now seems to want more Iranian or Venezuelan oil on the market.
However, Iran’s military launched missiles near a US consulate in Kurdistan, Iraq over the weekend so no Iran oil deal is likely. On the Venezuelan front, there is chatter of a deal nearing, but it could easily fall apart as a good portion of the Venezuelan oil is likely already owned by Russia or China and it wouldn’t make sense to buy Russian-controlled oil when you’re sanctioning Russia. Still the appearance of an impending deal would lower oil prices in the short term and likely benefit risk-on assets.
Investors should also be aware that Ukraine’s Zelensky will be giving a virtual address to the US Congress on Wednesday at 9am ET. How this will affect markets remains to be seen, but he will likely ask for more Western support.
The US Deputy Treasury Secretary recently stated that the US can still punish Russia via “ full trade embargo; blocking access to international waterways; prohibitions on nickel, uranium, titanium, and Russian entities’ crypto assets.” Any escalation will likely be matched in some fashion by Russia. Russia even announced that they “may halt wheat, corn, rye, and barley exports on March 15th.” If these actions do take place, markets will not benefit.
Over the weekend, a Ukrainian military base fifteen miles from NATO member Poland was also bombed by Russia. Any accidental attack on NATO territory is also a major risk to take into account. Putin is not afraid to escalate and we should also not forget that tactical nukes have already been deployed by the Russian side.
Crypto
The crypto market has been relatively calm while moving sideways since the weekend with Bitcoin (BTC) hovering around $39K. Many altcoins have been underperforming relative to BTC, suggesting a weak risk appetite as the Fed announcement nears.
Sentiment in the crypto space is still in extreme fear territory according to the Crypto Fear & Greed Index, not unexpected given the current environment.
One crypto that could be interesting this week is Ripple’s XRP. It received a boost on Friday when it was granted the ability to use the “fair notion defense” in its case with the SEC - a very positive development. The Crowdsense Sentiment Chart for XRP seen below is also intriguing as it appears to be showing a pattern of higher highs - definitely something to monitor in the coming days.
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