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This Week’s Setup
In last week’s Lookout, we said that the coming week of major tech firm earnings would be “a true test in terms of the crypto-tech stock correlation.”
It now appears that the correlation held strong as equities and crypto finished the month of April heavily in the red with the tech-heavy Nasdaq taking the brunt of the pain.
And the pain didn’t stop on Friday, as the crypto market continued to fall over the weekend.
That being said, it should still be highlighted that Bitcoin and Ethereum have held up relatively well with the riskier altcoins experiencing most of the damage.
What’s even more interesting is that while U.S. real yields have gone up significantly over the past month with risk-on assets performing as expected in such an environment - Bitcoin and gold have largely shrugged off the development.
We’ll have to wait and see if this has any deeper meaning such as a change in Bitcoin’s correlation to risk-on assets.
Moving forward, all eyes will be on the Federal Reserve’s FOMC meeting this Wednesday, but before we delve into the Fed, let’s highlight a few cryptos to watch this week.
Bitcoin this week will largely be driven by macro factors such as guidance on U.S. monetary policy as well as changes in the lockdown status of China, but support has held steady at $37K while $40K has turned into resistance.
Sentiment has gotten more bearish though as many commentators are calling for a fall to $30K or even a drop all the way to $26K. Assuming there’s no major guidance surprise by the Fed’s Powell, it’s quite possible that BTC will continue to trade range bound.
Little brother Ethereum will likely follow in Bitcoin's footsteps, but it should be noted that whales have begun to accumulate ETH in mass.
Tron (TRX) is an interesting one as well. It will be launching its own stablecoin, USDD, on May 5th and current expectations are that it will be very similar to Terra's UST stablecoin mechanism which would then require the burning of TRX tokens to create new USDDs.
That being said, investors should be aware that TRX does not have a history of making major price moves and that copying Terra won't necessarily bring about the same results.
Additionally, traders should keep an eye on Ethereum Classic (ETC). It has experienced a sizable jump in positive social chatter in the past few days. As of this post, ETC’s Crowdsense’s Social Sentiment Score stands at 7.9 out of 10 - a major jump from the neutral 5 level where it had been moving as seen below. Will the price follow the sentiment in the coming days?
This week will largely be driven by macro developments - specifically the Federal Reserve.
The Fed's FOMC will meet on May 4th and the current consensus is they will hike rates by 50 basis points. This is already baked into the cake as CME Fed futures are assigning this outcome a 99% probability.
What everyone will be listening to is how much they plan to hike at the June meeting as well as any news on the start of QT - quantitative tightening. Many commentators expect the Fed to formally announce the QT policy this week.
Fed Chair Powell will be giving his press conference Wednesday at 2:30pm ET. This is when a lot of market volatility could occur.
Traders should specifically pay attention to any deviation from the current consensus of another 50 basis point hike in June. If Powell is vague about new hikes going forward, this likely indicates that the recent market carnage has had an effect and the market will presumably respond in a bullish fashion.
On the other hand, if Powell's inner inflation-fighting Volker comes out and he continues to emphasize front-loading the interest rate hikes or even says a 75 basis point hike is on the table - expect markets to react poorly.
Furthermore, if Powell does announce the QT policy, the current expectation is for $95B a month in balance sheet shrinkage, but with the mortgage market implosion, it's possible that the Fed won't sell their MBS position so quickly. Therefore, the given number could be smaller than $95B a month.
Lastly, on Friday May 6th, NY Fed President Williams will be speaking at 9:15am ET and St. Louis Fed President Bullard will be speaking at 7:15pm ET.
Both Williams and Bullard are voting members of the FOMC meaning their opinions matter when it comes to deciding on actual Fed policy. Bullard is known as the "super hawk" who wants 75 basis point rate hikes. Traders should prepare accordingly.
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Nothing contained in this post should be construed as investment advice. All investment strategies and investments involve risk of loss. Any reference to past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.