US Stocks Lower as Hawkish Fed Comments Offset Mixed Economic Data

U.S. equity futures are trading at their low of the pre-market session after St. Louis Federal Reserve President James Bullard sounded the hawkish alarm. His comments also fueled a surge in U.S. Treasury yields, which gave the U.S. Dollar a boost, while putting pressure on dollar-denominated commodities like gold and crude oil.

Meanwhile, U.S. economic data came in surprisingly mixed. A key Fed report on East Coast manufacturing plunged, but housing market data was better-than-expected and weekly unemployment claims mysteriously fell.

Fed’s Bullard:  Even “Dovish” Policy Assumptions Require Further Rate Increases

Even under a “generous” analysis of monetary policy the Federal Reserve needs to continue raising interest rates probably by at least another full percentage point, St. Louis Federal Reserve President James Bullard said, arguing that rate hikes so far “have had only limited effects on observed inflation.”

Bullard said that despite aggressive actions by the Fed this year the current target policy rate of between 3.75% and 4% remains below the “sufficiently restrictive” level the Fed feels is needed to lower inflation to its 2% target, Reuters reported.

“While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive, according to this analysis, even with the generous assumptions,” Bullard said. “To attain a sufficiently restrictive level, the policy rate will need to be increased further.”

Economic Data Offers Mixed Signals

In economic news, the Philadelphia Fed Manufacturing Index plunged to -19.4, much lower than the -6.0 forecast and the -8.7 previous reading.

However, U.S. Weekly Unemployment Claims surprising fell to 222K, down from 226K last week. Traders were looking for a reading of 228K.

In another surprise, Building Permits rose 1.53 million units, better than the 1.51 million estimate, but lower than the previously reported 1.56 million last month.

Housing Starts produced similar results, coming in at 1.43 million units. This was lower that the previously reported 1.44 million units, but better than the 1.41 million forecast.

For a look at all of today’s economic events, check out our economic calendar.

Investors Looking to Boost US Stock Market after Mid-Term Election Uncertainty is Lifted

The Democrats will have continued control of the Senate, according to projections from several major news services including Fox News and CNN.

Both are reporting that the Democrats will maintain power in the Senate thanks to Democratic Senator Catherine Cortez Mastro being declared the winner in Nevada on Saturday night in her race against Republican challenger Adam Laxalt.

Democrats now hold 50 seats compared to the 49 seats held by Republicans with one seat yet to be decided in Georgia where a runoff election will be held between Republican Hershel Walker and Democratic Senator Raphael Warnock on December 6, Fox News reported.

Even if Walker were to win in Georgia, Democrats would still have control with Vice President Kamala Harris’s tie-breaking vote, Fox News wrote.

House of Representatives Still Up for Grabs

Republicans are still hoping to take back control of the House of Representatives and appear on track to do so needing to win 7 races out of the two dozen congressional races across the country are still outstanding.

The latest reports show that the Republicans have secured 211 seats of the House’s 435 members – just shy of a 218-member majority.

Early Stock Market Impact

The price action early last week was a clear demonstration of the kind of effect the mid-term elections could have on the stock market should investors choose to use them as a short-term indicator. However, as a short-term indicator, it would be quickly replaced by other fundamental events that have an even greater impact on stocks in the short-run.

That being said, it’s best to avoid relying on mid-term elections for your short-term decisions, and instead consider them for your long-term strategies.

The volatility in the stock markets early in the week confirmed investors don’t like uncertainty. When there is uncertainty, investors tend to sell. We saw that the day after last week’s mid-term elections, with so many races in both the Senate and the House undecided the first day.

The blue chip Dow Jones Industrial Average and the heavily-tech weighted NASDAQ Composite fell sharply, while the benchmark S&P 500 Index dropped 1.2 percent.

Short-Term Bears Burned by Bullish Consumer Inflation Data

Short-term investors who panicked and trimmed positions when the results were still uncertain last Wednesday, were burned on Thursday, following the release of the bullish U.S. consumer price index (CPI) report. U.S. stocks rose sharply on the news forcing those who reacted negatively to the mid-term election uncertainty to chase prices higher.

It’s only one event, but it serves enough purpose to demonstrate that investors are more keen to react to short-term indicators like consumer inflation that have a greater impact on monetary policy and essentially the health of the economy than mid-term elections that tend to have a greater impact over the long-term.

It may also indicate that the effects of a midterm or Presidential election tend to smooth out over the long-run so their impacts aren’t felt that much as volatility gets capped.

Democrats Victory Won’t Hurt

Despite the Democrats victory and their propensity to be anti-business and pro-regulation, their victory isn’t likely to hurt the market on Monday. Firstly, the news from over the week-end lifted the uncertainty, allowing investors to move on. Secondly, investors are laser-focused on Federal Reserve policy and future rate hikes.

For a look at all of today’s economic events, check out our economic calendar.

Strong Showing from Republicans in Midterm Elections Could Spark Stock Market Rally

U.S. voters go to the polls in midterm elections on Tuesday with the House of Representatives and the Senate at stake. Republicans are gaining momentum ahead of the vote. However, there are still three outcomes at stake that could influence the financial markets over the short-run and perhaps the next two years remaining years of President Joe Biden’s term.

The three outcomes include:  A Democratic victory with the party maintaining control of the House and Senate. A Republican sweep with the party taking control of both the House and Senate. The third outcome is a split vote with either party controlling the House or the Senate.

Some Investors Would Prefer Gridlock

Let’s take a look at the third outcome first. Investors are leaning toward a big Republican wave in the mid-term elections. If Republicans take at least one chamber of Congress – the House or the Senate, that would likely result in gridlock. According to data from Edelman Financial Engines, this would be the situation the market would love.

Historical data shows that the S&P 500 had an annualized return of 16.9% since 1948 during the nine years when a Democrat was in the White House and Republicans had a majority in both chambers of Congress. That compares to 15.1% during periods of full Democratic control in years when there was a unified GOP government, according to Edelman Financial Engines.

“Investors are more happy when politicians bicker but don’t actually enact any new laws that may hurt corporate profits,” CNN wrote.

But Gridlock Isn’t Always Good

Although the historical studies point to favorable returns if there is gridlock, each case has to be looked at individually because of various situations and circumstances. For example, a low interest rate environment that may have had nothing to do with the government, and everything to do with Federal Reserve policy may have driven those returns.

Gridlock this time may be bad of stocks this time if it means a longer recovery from a recession. Then there is the debt ceiling issue that could lead to a lower credit rating for the United States.

Political headlines are often just noise for the stock market. Historically speaking we could see a short-term reaction to the news, but stocks could just go up over the long-run because of economic conditions, no matter which party control the White House and Congress.

Generally Speaking…

The common assumption is that Republicans represent business and the Democrats represent the people. Whether that’s a valid conclusion is debatable.

If Republicans take control for the next two years, business conditions could improve especially in the oil industry. Republicans tend to lead toward lower corporate taxes and few regulations that tend to help companies and the economy grow.

Democrats tend to favor social programs funded by fiscal spending. And in order to pay for them they raise taxes and increase regulations that tend to stifle growth.

All things being equal, meaning no inflation, no rate hikes, and no recession, a Republican sweep of the House and Senate would be favorable for business and the stock market.

For a look at all of today’s economic events, check out our economic calendar.

Oil May Soon Get A Boost As Russia Failed To Find Enough Tankers

Key Insights

  • Russia struggles to find vessels to transport its oil. 
  • The price cap on Russian oil will be imposed by December 5, and Russia does not have enough time to find more vessels. 
  • Russian oil production will likely decline in the upcoming months, which will be bullish for oil markets. 

Russia Struggles To Find Oil Tankers

Oil traders continue to prepare for December 5, when G7 countries will impose a price cap on Russian oil. The price cap remains unknown, but recent reports indicate that it may be somewhere in the $60 – $65 range. Russia has previously stated that it would not supply oil to countries that impose a price cap.

As the price cap mechanism cuts Russia from West-controlled ships and insurance, Russia will have to rely on its own fleet to transport its oil.

The Russian Institute for Energy and Finance Foundation has recently made an attempt to count how many oil tankers are needed to support Russian maritime exports of 3.5 million bpd). The research was based on the data from Braemar. According to the IEF, Russia needs 157 Aframax vessels, 65 Suezmax vessels and 18 VLCC vessels.

The Russian-owned fleet consists of 50 Aframax vessels and 10 Suezmax vessels. This year, 70 vessels (aged 15 years or more) have been sold to unknown firms, and IEF assumes that they would be used to transport Russian oil.

Even if all these vessels are used by Russia, the potential deficit is up to 110 vessels, assuming that Russia completely loses the access to the services of Western shipping companies. It should be noted that S&P Global has recently arrived to the same conclusions.

Russia’s Oil Exports Will Likely Fall After December 5

Brent oil is already trading near the psychologically important $100 level as traders prepare for a potential deficit in the European markets. U.S. markets get support from local oil producers, so WTI oil is trading at a significant discount to Brent oil.

Back in September, IEA forecasted that Russian oil production would decline by 1.9 million bpd in February 2023 from the levels seen in February 2022. This forecast looks realistic assuming that Russia faces serious problems with transportation of its oil.

It looks that oil markets have started to price in the potential problems with the Russian oil exports. Both Russia and G7 will likely try to show that they are “tough”, so G7 countries would cut Russia from shipping services in December, while Russia would not agree to the price cap scheme.

There are too many ships to substitute, and Russia would not be able to get 100+ vessels in just a month. In this light, Russian exports will start declining at the end of the year, which will be bullish for oil prices.

For a look at all of today’s economic events, check out our economic calendar.

Weakening Dollar Boosting Crude Exports, Central Bank Demand for Gold

While it may be too early to call an end to the broad-based U.S. Dollar rally as the U.S. Federal Reserve is likely to continue hiking interest rates until it corrals nearly runaway inflation, the greenback is in the early stages of topping out, which could bode well for dollar-denominated commodities such as crude oil, gold and wheat.

US Dollar Showing Signs of Topping

There are numerous reasons why the dollar is beginning to show signs of weakness. Firstly, the European Central Bank (ECB) is expected to raise interest rates more aggressively as it plays ‘catch-up’ with the rest of the major central banks in an effort to curb rapidly rising inflation. This is underpinning the Euro.

Secondly, the British Pound appears to be in the early stages of recovery after the U.K. cancelled a highly controversial program to stimulate its economy and appointed a new prime minister. Furthermore, the Bank of England (BOE) is also to supersize its next rate hike on Thursday.

Thirdly, the Japanese Yen is holding steady after a massive intervention by the Bank of Japan (BOJ) last month. Although a divergence in policy between the U.S. Federal Reserve and the BOJ is weighing heavily on the Yen, the divergence and the threat of additional interventions could keep a lid on the U.S. Dollar.

Finally, on Wednesday, the Fed is widely expected to hike its benchmark interest rate by a super-sized 75-basis points. However, policymakers could announce that the central bank will begin slowing the pace of its aggressive rate hikes. This could dampen the appeal of the U.S. Dollar as an investment.

Dollar-denominated commodities should benefit from a weaker dollar.

Crude Oil Exports Soar

With the charts showing the U.S. Dollar may have topped against a basket of major currencies in late September, the crude oil market is already benefitting from the move.

U.S. benchmark WTI crude oil is being underpinned by last week’s Energy Information Administration (EIA) inventories report that showed record U.S. crude exports.

Crude exports rose to 5.1 million barrels a day, the most ever, dropping net U.S. crude imports to their lowest in history.

Analysts took notice of the jump in prices saying, “Across the board this is a dollar-denominated move, and if you try to read outside this, it’s foolish,” said Eli Tesfaye, senior market strategist at RJO futures.

Central Banks Buying Gold at Record Levels

A weakening greenback may have also led to a surge in demand for dollar-denominated bullion last quarter.

Central banks bought a record 399 tonnes of gold worth around $20 billion in the third quarter of 2022, helping to lift global demand for the metal, the World Gold Council (WGC) said on Tuesday.

Demand for gold was also strong from jewelers and buyers of gold bars and coins, the WGC said in its latest quarterly report, but exchange traded funds (ETFs) storing bullion for investors shrank.

Buying by central banks in the third quarter far exceeded the previous quarterly record in data stretching back to 2000 and took their purchases for the year to September to 673 tonnes, more than the total purchases in any full year since 1967, according to the WGC.

For a look at all of today’s economic events, check out our economic calendar.

Here’s What To Expect From FOMC Minutes

Key Insights

  • FOMC Minutes will show whether the Fed has any worries about the impact of higher interest rates on the economy. 
  • The market expects that the Fed will raise the rate to 425 – 450 bps by the end of this year. 
  • Any material changes in the interest rate expectations will lead to big moves in the forex market.

FOMC Minutes May Have A Significant Impact On Markets

Today, traders will focus on the release of FOMC Minutes, which usually have a material impact on market dynamics.

FOMC Minutes provide an in-depth summary of the Fed discussion at the latest Fed meeting. Traders pay close attention to the details of the Fed discussion to find clues about future policy.

This time, traders will try to evaluate whether the Fed leaves any room for a more dovish scenario. “Dovish indicators” may include concerns about putting too much pressure on the economy.

While the Fed has previously stated that the job market was too tight and the rise in the Unemployment Rate was desirable, some Fed members may be concerned that the central bank would push the economy into a severe recession. Judging by the recent dynamics of the S&P 500, the market is seriously concerned about such a scenario.

“Hawkish indicators” will include a strong focus on fighting inflation at all costs. Perhaps, some analysts would even count the number of times the word “inflation” appears in FOMC Minutes.

Potential Scenarios

The FedWatch Tool indicates that there is a 83.3% probability of a 75 bps rate hike at the next Fed meeting on November 2. Traders also expect that the Fed will follow up with a 50 bps hike on December 14, pushing the target rate to 425 – 450 bps. These hawkish expectations provided significant support to the U.S. Dollar Index, which has settled near multi-decade highs.

If FOMC Minutes show that the Fed is not concerned about the potential recession, the U.S. dollar would get more support. This scenario would be bearish for EUR/USD and GBP/USD. USD/JPY, which is already testing multi-decade highs, may move towards the 150 level if the Fed is hawkish enough.

If the market sees FOMC Minutes as dovish, the probability of a 75 bpd rate hike will decline, which will be bearish for the U.S. dollar and bullish for stocks. The U.S. dollar gained a lot of ground against a broad basket of currencies this year, so dovish remarks in the FOMC Minutes may lead to a sell-off.

For a look at all of today’s economic events, check out our economic calendar.

Here’s What To Expect After Thursday’s U.S. CPI Report

Key Insights

  • Traders wait for the release of U.S. inflation reports, which will have a material impact on market dynamics. 
  • If inflation exceeds expectations, the U.S. dollar will move towards yearly highs, while stocks will likely test new lows. 
  • In case Inflation Rate declines below the 8.0% level, riskier assets will get significant support. 

U.S. Inflation Rate Is Expected To Decline To 8.1%

At this point, traders remain focused on Fed’s actions. The Fed is determined to fight inflation, and its actions may push the world economy into a recession. Not surprisingly, inflation data from the U.S. has a significant impact on various asset classes.

Tomorrow, traders will have a chance to take a look at the CPI reports from the U.S. Inflation Rate is expected to decline from 8.3% in August to 8.1% in September, while Core Inflation Rate is projected to grow from 6.3% to 6.5%.

Today’s PPI reports were not optimistic. The reports indicated that Producer Prices increased by 0.4% month-over-month in September, compared to analyst consensus of 0.2%.

Inflation remains a serious problem, and it remains to be seen whether it will settle below the 8.0% level in the upcoming months. Importantly, Core Inflation Rate is expected to grow to 6.5%, which is a bullish catalyst for the U.S. dollar.

U.S. Dollar May Test New Highs If Inflation Exceeds Expectations

The forex market will remain extremely sensitive to inflation reports. In case Inflation Rate and Core Inflation Rate exceed analyst expectations, the U.S. Dollar Index may gain significant upside momentum and move towards yearly highs at 114.78.

In this scenario, S&P 500 will likely test new lows as traders will bet on aggressive rate hikes from the Fed. Commodities like gold and silver will also find themselves under serious pressure if the U.S. dollar tests new highs.

If the reports indicate that Inflation Rate declined below the 8.0% level, riskier assets will get a serious boost. Stocks will rally as S&P 500 is trading near yearly lows on fears that aggressive Fed will push the economy into a recession.

Traders should note that there will be no CPI reports between October 12 and the Fed meeting on November 2, so the upcoming reports will have a major impact on Fed’s policy. In this light, traders should be prepared for strong moves if inflation reports do not meet analyst expectations.

For a look at all of today’s economic events, check out our economic calendar.

What Does Yet Another Fed Policy Mistake Mean For Commodity Prices?

Fed Mistakes In Detail

Had the Fed learned from the painful inflationary experience of the 1970s, it would not have allowed, as it did over the past two years, for the money supply to balloon out of control and interest rates to become as negative as they still are in inflation-adjusted terms today.

Had the Fed learned from the painful 2008 experience with the bursting of the housing and credit bubble, it would not have allowed even greater bubbles to form in the global equity, housing and credit markets. But instead, it engaged in one of the biggest and most unprecedented money printing programs that the world has ever seen.

Had the Fed learned from both of these painful experiences, it would not have spent the whole of last year playing down the biggest year-on-year rise in inflation seen in more than 40-years – characterizing the record spike as “transitory” and nothing to be concerned about.

Historically, the Federal Reserve has never been right on monetary policy and has a proven track record of setting the economy up for an even bigger crisis further ahead.

It’s becoming more evident, day by day, that the Federal Reserve is fighting a losing battle against rapidly surging inflation and now find themselves spinning the wheels and not even getting close to bending the curve on inflation.

The hard fact is that as long as we have interest rates below the inflation rate, even if they’re higher, they’re still negative – and negative interest rates put upward pressure on inflation. Ultimately, you can’t fight inflation with negative interest rates. That’s like trying to put out a fire with gasoline!

The toxic combination of stubbornly entrenched inflation and slowing global economic growth has left officials facing a situation common to chess players down on their luck – stuck with nothing but bad moves to play.

Inflation Impact on Commodity Markets and the Currency War

The Fed’s inflation struggles this year have undeniably bolstered the dollar, exacerbating inflation elsewhere by raising the cost of Commodities which are, more often than not, priced in the greenback.

This is unleashing, a crisis on top of a crisis – with a “reverse currency war”, now in full flow. Central banks across the world are being left with no other choice but to frantically compete with the Fed in order to have the strongest currency – shifting inflation pressures to every corner of the globe.

Getting back to my chess analogy. Trading is just like chess and if you know how to connect the dots, you will realize there is a massive opportunity brewing ahead. Right now, these markets are a traders dream – packed with unlimited money-making opportunities to capitalize on the macro-driven volatility!

Commodity Price Forecast Video for September 23, 2022

Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions:

Three Signs That May Point to a New Crypto Bull Run

Key Insights:

  • Unlike many bear markets, the crypto bear market came unannounced.
  • In recent weeks, however, signs are emerging of a possible trend reversal and the beginnings of a crypto bull run.
  • Three headwinds plaguing the crypto market since late 2021 appear to be dissipating.

Unlike most bear markets, the crypto bear market came largely unannounced. On November 10, 2021, bitcoin (BTC) struck an all-time high of $68,979, coinciding with the total market cap all-time high of $3,009 billion.

BTCUSD bear run out of gas.
BTCUSD 110822 Daily Chart

Sentiment across the crypto market was bullish, as was the case across the global equity markets. The NASDAQ 100 struck highs of $16,764.85 on November 22, 2021, shortly after the beginnings of the crypto winter.

From the November 10 ATH high of $68,979, BTC tumbled 74.5% to a June 18 and 2022 low of $17,601. The total crypto market cap fell to a June 18 and 2022 low of $762.83 billion.

Crypto Winter
Total Crypto Market Cap 110822 Daily Chart

However, since June 18, bitcoin and the broader market found a comfort zone, despite the crypto market facing numerous headwinds. Headwinds included the fears of a US economic recession, Fed monetary policy, and a likely shift in the crypto regulatory landscape.

In recent weeks, several signs are pointing to a possible bottoming out and the beginnings of a crypto bull run.

Signs of a New Crypto Bull Run Are Flashing Green

The several signs pointing to a possible bottoming out and the beginnings of a crypto bull run include macroeconomic data, monetary policy, and technical indicators.

Macroeconomics

When considering the macroeconomic component, the crypto market has closely tracked the NASDAQ 100 throughout 2022.

NASDAQ Correlation 2022
NASDAQ-Crypto 110822 Daily Chart

Fears of a US economic recession contributed to the bearish trends seen across the crypto market and the NASDAQ 100. In July, the Fed appeared mindful of the economic headwinds, delivering a ‘dovish’ 75-basis point rate hike. While the US economy contracted in the second quarter, recent economic indicators suggest a possible return to growth.

Two key indicators that have delivered hope included US non-farm payrolls and ISM Non-Manufacturing PMI numbers. However, the better-than-expected numbers raised the prospects of a more aggressive Fed interest rate path to bring inflation back to target.

The Federal Reserve Holds the Cards for Crypto Investors

For riskier assets, the missing piece of the jigsaw, from a macroeconomic perspective, was clear evidence of inflation topping out. On Wednesday, US inflationary pressures softened from 9.1% to 8.5%. While still well above the Fed target, the softer numbers mean that the Fed is under less pressure to deliver another 75-basis point hike that could cripple the economy and sink riskier assets.

With the recent downward trend in crude oil prices, the markets are betting on inflation to soften further in the near term. A sense of calm over the US economic outlook and easing market jitters over another 75-basis point rate hike have been behind the shift in investor sentiment.

The SEC, Cryptos, and the SEC v Ripple Case

There is even hope for investors grappling with the possibility of the digital asset space falling under the authority of the SEC. The third and final piece of the jigsaw is chatter on Capitol Hill that favors the Commodity, Futures, and Trading Commission (CFTC) to oversee the digital asset space.

Taking all three components, which contributed to the broader crypto market collapse, the storm clouds appear to be parting. Wednesday was pivotal and may be the catalyst to a crypto bull run. However, investors need to be mindful of what lies ahead.

The Bull Run Curve Balls

From a monetary policy perspective, the Fed has another round of economic indicators to digest before the September FOMC meeting. Weak data and a spike in inflation could unravel the bullish sentiment. Worse yet, upbeat data and a spike in inflation could force the Fed to deliver a percentage point hike.

From a regulatory perspective, the SEC is in a prolonged battle with Ripple. An SEC victory, however unlikely, could give the SEC the authoritative powers to regulate the crypto space. Investors will hope that lawmakers tackle the SEC’s approach to the digital asset space that strangles innovation.

Technical Indicators Are Turning Bullish, Hinting at the Start of a Bull Run

For the technically minded, the BTC 4-hourly chart and EMAs are sending bullish signals.

In response to the US CPI numbers, BTC broke through the 200-day, 100-day, and 50-day EMAs within a single session and currently holds well above the 50-day EMA ($23,442).

Chart, histogram Description automatically generated

While we have previously seen failed breakouts, the US economic indicators support an extended run.

If the storm clouds are parting and the crypto winter is thawing, BTC will need to break out from $25,000 and target $30,000 to convince investors still wary after the crypto crash of 2022 that took numerous exchanges down and others to the brink of bankruptcy.

Chart, line chart Description automatically generated

 

Ethereum Goerli Merge: Everything You Need to Know

Key Points 

  • Ethereum developers run the “Merge” to PoS from PoW on the Goerli testnet on Thursday.  
  • This is the final trial run ahead of the mainnet merge scheduled for 19 September.  
  • Success will give the Mainnet merge the green light and could support an ETH rally.  

What is the Goerli Merge? 

In less than 24 hours, the Ethereum network is set to move one step closer to its most important upgrade ever. The second-largest cryptocurrency by market capitalization has for years been preparing to shift its blockchain consensus mechanism from Proof-of-Work (PoW) to the much less energy intensive and, according to some, more decentralized Proof-of-Stake (PoS).  

The so-called “Merge” to “Ethereum 2.0” is slated to take place on 19 September, senior Ethereum developers hinted last month. But before implementing the “Merge” on Ethereum’s mainnet, developers have one more hurdle to get past.  

Having successfully implemented the transition from PoW to PoS on two of Ethereum’s main testnets in June and July (Ropsten and Sepolia), developers want to implement the merge on one final testnet.  

On Thursday 11 August, Ethereum developers will run the merge on Ethereum’s Goerli testnet. All going well, the mainnet merge will get the go-ahead for 19 September. If there are problems with the Goerli merge, this would likely delay the mainnet merge.  

Ethereum After the Merge 

Ethereum’s merge to PoS is expected to reduce the network’s energy consumption by 99.95%. Whilst Ethereum mining will eventually become a thing of the past as the development team set of the so-called “difficulty bomb” that will eventually make profitable Ethereum mining impossible, Ethereum owners will be able to stake their ETH tokens for a steady return, as happens on other PoS networks.  

Cryptocurrency mining energy consumption is a source of concern for climate-aware investors and regulators across the globe. For example, Bitcoin mining often finds itself in the firing line from US lawmakers who are worried about the network’s large carbon footprint.  

Ethereum’s transition to PoS ought to shield it from this line of attack. Indeed, as crypto attracts further institutional investment in the coming years, Ethereum’s low carbon footprint could be a key differentiator to Bitcoin as the popularity of ESG investing continues to grow. 

Meanwhile, some investors have argued that once Ethereum has transitioned to PoS, it will experience a supply shock as owners lock up their tokens in staking for extended periods of time. For all of the above reasons, Ethereum’s merge has been generally viewed as a bullish development for ETH.  

A successful “Merge” also sets the stage for the next series of major network upgrades, called “Surge”, “Verge”, “Purge” and “Splurge”. At the recent Ethereum Community Conference (EthCC) in Paris, Ethereum co-founder Vitalik Buterin spoke about the upgrade roadmap, which will make Ethereum “a much more scalable system”.  

“By the end, Ethereum will be able to process 100,000 transactions per second,” he said. Ethereum has been criticized in the past for its scalability problems that have resulted in high network (gas) fees and congestion.  

How Might ETH React to the Goerli Merge? 

Ethereum has rallied more than 80% from its mid-July lows near the $1,000 and was last changing hands in the mid-$1,800s. Whilst much of this has been in tandem with a broader cryptocurrency market rally amid an improvement in macro sentiment (Bitcoin is up over 25% since its mid-July lows), analysts have said that anticipation ahead of the merge has been an important tailwind driving ETH higher.  

ETH/USD
ETH/USD rallies 80% from mid-July lows. Source: FX Empire

On 8 June, when Ethereum developers successfully implemented the Ropsten merge, Ethereum barely budged and ended up closing the day around 1% lower. Prices proceeded to decline by nearly 45% that month. Meanwhile, the successful merge of the Sepolia testnet on 7 July only saw ETH prices rally about 4% intra-day, though prices did then end that month over 55% higher.  

ETH/USD
Ethereum Ropsten and Sepolia merges didnt have much impact. Source: FX Empire

So what lessons can be drawn from ETH’s reaction to the last two testnet merges? Probably not that much. At the time of both of the last two testnet merges, macro developments were the main driver of price action in the cryptocurrency space, not Ethereum development fundamentals.  

ETH only really seemed to take notice of the upcoming Merge when senior developer Tim Beiko tentatively put forth an official date for the Mainnet merge to take place this September. Anything that pushes that date back may weigh on ETH in the short-term, such as any hiccups during the Goerli merge on Thursday.

A successful Goerli merge would likely be bullish for ETH. Combined with softer than expected US inflation figures for July that were just released, ETH prices could be in with a shot of hitting $2,000 before the week is out. 

ETH/USD
ETH/USD bulls eye move to $2,000. Source: FX Empire

Ethereum PoW Hard Fork a Threat to Ethereum 2.0? 

Tron founder and owner of crypto exchange Poloniex Exchange Justin Sun has thrown his backing behind a potential hard fork of Ethereum’s Mainnet that would create a new Ethereum blockchain that continues to run on PoW. A hard fork to preserve an Ethereum PoW blockchain is getting a lot of sympathy from the Ethereum mining industry, which generated $620 million in July alone.  

Sun pledged to donate some of the 1 million ETH tokens to the community and developers of any future Ethereum Proof-of-Work hard fork blockchain.  

Poloniex Exchange has already listed two potential forked ETH tokens, ETHS and ETHW. Several other exchanges have also listed the tokens. ETHW was last trading around $80. 

Ethereum co-founder Buterin has played down the impact of any potential PoW hard forks, saying at this week’s Korea Blockchain Week that he doesn’t “expect Ethereum to really be significantly harmed by another fork”. Moreover, Buterin said that he thinks “Ethereum Classic already has a superior community and a superior product for people kind of with those pro-proof-of-work values and preferences”.  

Ethereum Classic is actually the original Ethereum blockchain that never rectified a major hack back in 2016. Ethereum Classic will not be transitioning to PoS in September. ETC Cooperative, the non-profit that supports the development of the Ethereum Classic ecosystem, sent an open letter to well-known Chinese Bitcoin proponent Chandler Guo urging him not to press ahead with plans to create a new PoW fork of the Ethereum blockchain, which he has been campaigning for.  

In a big blow to any future new Ethereum PoW blockchain, the likes of Tether and Circle have thrown their backing behind the Ethereum merge to PoS.  

Any USDT and USDC tokens on a future PoW Ethereum blockchain would be irredeemable for dollars.  

A Price Cap On Russian Oil May Lead To A Massive Rally

Key Insights

  • G7 countries try to establish a mechanism that will reduce the price of Russia’s oil exports. 
  • Meanwhile, Russia is suffering from a strong ruble as imports decline, which means the country does not need too many dollars or euros.
  • Attempts to impose a price cap on Russian oil may lead to a cut in supplies and push oil prices towards yearly highs. 

G7 countries have recently announced their plans to impose a price-capping mechanism on Russian oil to reduce Russia’s revenues. G7 plans to have a working tool by December 5. As a reminder, that’s when the EU plans to stop most imports of Russian oil.

When asked about the potential price cap, the head of the Russian Central Bank Elvira Nabiullina said that Russia would not sell oil to the countries that had imposed the price cap.

Oil markets ignore the issue and the potential supply problems that can arise from implementing the price cap. WTI oil failed to settle above the $120 level in June and has recently declined towards the $90 level.

However, the topic of the price cap on Russian oil will ultimately have more impact on oil price dynamics.

What Is The Idea Behind The Price Cap?

G7 countries plan to use their financial dominance to ban insurance, transportation and financing of Russian oil exports for countries that buy Russian oil above a specified price.

Some publications discussed a $40-60 price range that will keep Russia interested in producing oil.

To implement the price cap, G7 must create a “cartel of buyers”. If G7 countries are successful and the biggest consumers participate, Russia will face a tough choice. The country will have to either supply oil at a specified price or lose oil revenues, which are vital for its budget.

Russian Oil Exports

In June, Russia’s oil exports totaled 7.4 million bpd, compared to the average of 7.75 million bpd in January – June. Sanctions have made Russian oil “toxic”, and Russia’s Urals is sold at a material discount to Brent oil.

According to Neste, the current spread between Urals and Brent exceeds $30. As Brent is trading near the $95 level, Russia sells its oil for about $65 per barrel.

In this situation, a price cap set at the $60 level does not look like a big problem for Russia as it is already selling its oil close to this level.

Russian Ruble And Sanctions

USD/RUB touched highs near the 120 level in March when foreign investors rushed out of the country while Russian citizens bought foreign currency in fear of a total financial collapse.

In response, the Russian Central Bank imposed currency controls. Meanwhile, Russia’s imports dropped due to sanctions. A combination of currency controls and declining imports strengthened the ruble. USD/RUB touched lows at the 50 level in late June before rebounding to 60. The strong ruble is a headache for Russian exporters, while importers cannot benefit from the situation as many potential suppliers cannot sell goods to them due to sanctions.

Russia’s current problem is the excessive flow of foreign currency. Even worse, the “virtual” money, dollars or euros, can turn to nothing at any time if the sanction war escalates. The Western countries have already frozen the assets of the Russian Central Bank, which is now working hard to minimize the use of dollars and euros inside Russia.

Put simply, Russia does not want too much foreign currency that can be frozen at any time, and that cannot be used to buy goods and services. This is important to understand when we consider the potential reaction to the oil price cap mechanism.

Politics Trumps Economics

The year 2022 is full of examples when countries implemented actions and measures that would hurt them economically if they believed that it was politically important to do so.

There is little reason to think that Russia would look at the oil price cap mechanism as an economic exercise. Most likely, the decision will be purely political.

As we have discussed above, Russia does not need foreign currency that cannot be used to buy goods. As a result, Russia may want to cut exports to countries that participate in the price cap mechanism and sell oil to willing buyers.

In 2021, Russia exported 2.4 million barrels to the EU. Assuming that Russian exports decline by about 4 million barrels in 2023 (extreme scenario), the price of oil may easily settle in the $100 – $150 range or even higher.

Interestingly, the revenue (in rubles, which is important for the Russian budget) that Russia will get by selling 7.4 million bpd at $60 per barrel with USD/RUB at 60 is almost equal to the revenue that Russia will receive by selling 3.4 million bpd at $100 per barrel with USD/RUB at 80. Before February, USD/RUB fluctuated near the 75 level, and the country could afford USD/RUB in the 70 – 90 range without triggering severe inflation.

All in all, it remains to be seen whether the price cap on Russian oil will be successful. To have a real chance for success, G7 will need China to join the deal. Politically, this scenario looks increasingly unlikely after Pelosi’s visit to Taiwan. China will still get Russian oil at a discount and get a competitive advantage over U.S. and EU if oil rallies towards the $150 level.

From a trading point of view, the attempt to implement the price cap mechanism may lead to a total cut of supplies to participating countries and lead to a massive rally in the oil market. However, traders will have to wait until October – November before markets will start to price in such scenarios.

For a look at all of today’s economic events, check out our economic calendar.

What Next for Crypto After Friday’s Strong US NFP Data?

Key Points

  • Cryptocurrencies were choppy on Friday as traders digested stronger-than-expected US jobs data.
  • Crypto is holding up well despite the build-up of Fed tightening bets, perhaps an improved US economic outlook.
  • Focus now turns to US CPI data next week, which is expected to show a moderation in headline price pressures.

Strong US Jobs Data Boosts Optimism US Economy Not in Recession

Friday was a choppy day for cryptocurrency markets, with prices initially slipping in wake of a much stronger than expected US labor market report, though recovering most of their earlier lost ground by the end of the day. Bitcoin was last changing hands around $23,200, having earlier dipped to $22,800.

BTC/USD
BTC/USD was choppy after an initial negative reaction to the US NFP data. Source: FX Empire

The US economy added 528,000 jobs in July, far more than the 250,000 expected by economists, while June’s non-farm payroll gain was revised higher to 398,000 from 372,000. July’s gain saw the headline non-farm payroll employment finally recover back to its pre-Covid-19 pandemic level, 30 months on, and marked a 19th successive month of job gains. The unemployment rate also fell to 3.5% from 3.6%, a new post-pandemic low, though this was in part due to a drop in the participation rate.

The latest jobs data, as well as US ISM Services PMI data earlier this week that unexpectedly jumped in July, paints a picture of a US economy expanding at a healthy pace at the start of Q3 2022. So much for that recession, the US economy is allegedly in.

Markets Rebuild Fed Tightening Bets, But Sentiment Holds Up

Meanwhile, the pace of Average Hourly Earnings growth accelerated to 0.5% MoM and 5.2% YoY from 0.4% and 5.1% in June. This pick-up in wage growth was particularly concerning for those hoping to see a moderation in wage-price pressures, which could help to bring headline consumer price pressures back towards the Fed’s 2.0% goal.

All said, analysts interpreted the data as strongly supportive of a continued fast pace of monetary tightening from the US Federal Reserve in the months ahead. Money markets quickly adjusting to imply a more than 70% chance of a 75 bps rate hike at the central bank’s next meeting in September, which mark a third consecutive move of this magnitude from around 34% a day earlier.

This repricing of Fed tightening bets towards a more hawkish outlook was likely what initially weighed on crypto, as was also initially the case for stock prices. However, US equities had recovered the bulk of their earlier losses by the close of trade, helping lift crypto.

Why is Crypto Holding Up So Well?

The Fed’s hawkish shift from viewing inflation as transitory and not worthy of a monetary tightening response as recently as Q4 2021 to its current stance of wanting to tighten policy significantly is one of the key factors behind the ongoing crypto bear market that began last year. So why has the latest build-up in hawkish Fed bets in wake of the latest US jobs data not hurt crypto prices?

Well, it’s still early days and crypto investors may yet take a more cautious view on things over the weekend/next week, meaning a further pullback from recent highs is very possible, but the continued optimism is likely due to the fact that recent data has pointed to two recent positive developments in the US economy.

Firstly, as mentioned above, US economic data (jobs and ISM services PMI) this week has pointed to an economy that is by no means in recession. If anything, the US economy appears to be heating up. Of course, that could be a bad thing for crypto if it means higher inflation and a more hawkish Fed, which Friday’s jobs data did trigger some fears of.

But both of this week’s ISM reports (manufacturing and services) alluded to a substantial decline in price pressures faced by businesses, with both showing a large drop in the prices paid subindex. Recent price action in US energy markets, in particular with WTI falling to fresh lows since prior to Russia’s February invasion of Ukraine under $90 per barrel, will further boost optimism of lower inflation ahead.

In other words, the argument for US inflation having peaked in June looks pretty strong. And if it has peaked and falls a reasonable amount in the coming months, this will ease fears about the Fed taking interest rates to, say, beyond 4.0% in 2023. You only need to think back to around six weeks ago to a time when US inflation appeared to be accelerating whilst growth appeared to be slowing to see how the economic backdrop has improved, arguably warranted higher cryptocurrency valuations.

What Next for Crypto?

Inflation remains at the front of investor focus next week with the release of US Consumer Price Index data for July on Wednesday. Headline CPI is seen rising at a rate of 0.2% MoM and 8.7% YoY in July, down from 1.1% and 9.1% respectively in June. Meanwhile, Core CPI is seen rising 0.5% MoM and 6.1% YoY versus June’s 0.7% and 5.9% respective readings.

The drop in headline price pressures would be a welcome validation of peak inflation hopes and this has the potential to boost sentiment in cryptocurrency markets. Focus will then turn to the release of the University of Michigan’s Consumer Sentiment survey for August next Friday, which contains a widely followed measure of one- and five-year consumer inflation expectations.

Any further moderation in these could further boost hopes about a more benign inflation outlook in the quarters ahead and reduce fears about the Fed needing to go super restrictive in 2023. Major cryptocurrencies like Bitcoin and Ethereum both look to still be in uptrends and the bulls will be hoping that a combination of positive technicals and an improving macro backdrop back further boost prices in the weeks ahead.

BTC/USD
BTC/USD looks to be in an uptrend still. Source: FX Empire
ETH/USD
ETH/USD is also in an uptrend. Source: FX Empire

The Essential Checks to Make When Choosing a Crypto Exchange

Key Insights:

  • Users should take time to thoroughly research the exchange they’re considering.
  • Exchanges should not be in the business of adding any and all new coins as this presents costly risks to users, says the CEO of deVere Group.
  • Users ought to opt for exchanges with higher trading volumes as liquidity is crucial.

According to the CEO of deVere Group, Nigel Green “crypto is inevitably the future of money. But you need to get it right from the get-go”. This certainly rings true, especially as many investors are still reeling from losses during May’s crypto market crash.

There are currently over 20,000 tokens in existence, with global crypto adoption rising by over 880% last year. In fact, TripleA estimates that there are now over 320 million crypto users worldwide. In light of such exponential growth, it is more imperative than ever for investors to evaluate where and how to transact in cryptocurrencies. That means choosing the right crypto exchange, as well as deciding how you will use the platform.

Due Diligence

Green, who runs one of the world’s largest independent financial advisory, asset management and fintech organisations, states:

“The issues facing some of the biggest crypto exchanges right now highlight why you should spend some time on choosing the right one. Don’t necessarily just jump on the ones with the flashiest TV ads and celebrity ambassadors. Security, liquidity, fees, history and user experience are essential checks you should make”.

The CEO is referring to the recent string of freezes enacted by several cryptocurrency exchanges that stemmed from Terra’s collapse and the loss of nearly $40 billion in investors’ capital. More specifically, the crypto market crashed in May when the algorithmic stablecoin UST lost its peg to the U.S. dollar and the price of LUNA dropped 98%. The result was a market capitalisation that fell below $1 trillion for the first time since January 2021.

In response, crypto exchanges like CoinFLEX, Zipmex and Vauld halted withdrawals and deposits. However, CoinFLEX later allowed users to withdraw up to 10% of their funds and Zipmex has resumed withdrawals for some altcoins, while Bitcoin (BTC) and Ethereum (ETH) remain frozen.

Green added: “You should see which company owns the exchange. Is it well-established? Is it a global company that can handle complicated issues across multiple jurisdictions? Is it experienced in both fintech and traditional financial services? Is there a proper client service department to deal with any issues quickly and effectively? Are there news and educational resources on offer?”.

Coin Offering List

Considering that there are tens of thousands of cryptocurrencies in existence, it’s important to recognise that not all exchanges offer every digital asset. Users ought to think about what coins they are most interested in and whether the exchange has a suitable menu.

For instance, a well-known exchange like Coinbase offers more than 526 crypto-to-crypto trading pairs, while Kraken lets you trade more than 160 coins. When examining a platform’s coin offering list, Green said:

“Most exchanges add to their coin offering list on a regular basis as each one has a different set of characteristics. But the exchange should not be in the business of adding any and all new cryptos as clearly this presents obvious, avoidable and potentially costly risks to users”.

As such, he encourages platforms to conduct due diligence before any new coin is listed, adding that users “should ensure this is part of the exchange’s policy”. Notably, there are exchanges, often based overseas, that allow users to trade less mainstream coins that struggle to get listed. However, not all exchanges are subject to same level of regulation.

Security-first Mentality

When it comes to cryptocurrency exchanges, reputation counts and users ought to take time to thoroughly research the platform they’re considering. What do other users say about the exchange? Have there been any security concerns in the past? If so, how did the exchange address such issues?.

“Most crypto exchanges offer basic protections like two-factor authentication, others will need official identification such as a passport or driver’s licence to open a new account. Some also have authentication codes required when you buy or sell, or if you make major account changes” explains the deVere CEO.

In December 2021, hackers stole around $196 million worth of tokens from BitMart during a large-scale security breach. Instances like this signal the importance of choosing a crypto exchange with strong measures in place against such cyberattacks, or a user can be on the lookout for additional features such as Crypto.com’s exchange mobile app which supports biometric login and uses facial and fingerprint identification to verify identity.

Nonetheless, major exchanges like Kraken and Gemini typically require users to provide government-issued identification when opening a new account in order to further enhance security and ward off illicit actors.

The Bigger Picture

Another equally vital practice is to compare fees as you may have combed through the leading exchange offerings and reams of data to determine the top service only to forgo how the exchange will impact your investing daily.

An exchange can have an excellent reputation and no history of hacks or scams, but you’ll find that it charges high fees for depositing fiat currency and low transaction fees between coins. Thus its imperative to compare different fee structures that are all targeted to a particular type of investor.

For example, if you are a day trader who doesn’t want to incur high individual transaction fees or if you just want to buy a small amount of crypto, fees will be less relevant than other features aimed at frequent traders. Fee tiers are usually based on your total trading volume over a 30-day period and the percentage you pay generally lowers as the size of your trades increase.

Consider how the fees would impact your investing based on your style; do you plan to be highly active, executing transactions every day? If so, it may be best to opt for an exchange with lower transaction fees. Green concluded: “Liquidity is important. You’ll want to know that you can exchange your traditional currencies into crypto and vice versa with no hassle. A good way to look at this is by trading volumes – the higher the better”.

Overall, in the words of the deVere CEO, the process of choosing the right crypto exchange may be rigorous and it “might take time, but your future self will thank you for it”.

How a US Recession Can Boost Crypto

Key Points

  • Data this week showed that the US economy was in recession in the first half of 2022.
  • Meanwhile, other recent data has shown a further worsening of economic conditions in early Q3, but crypto has been resilient.
  • A worsening economy could result in easier financial conditions as Fed tightening bets are pared, which is crypto bullish.

Crypto Resilient Despite Growing US Economic Pessimism

US GDP growth data released this Thursday revealed that the US economy shrunk at an annualized pace of 0.9% in the second quarter, a big miss on median economist forecasts for a modest expansion. That marked a second successive quarter of negative GDP growth in the US after the economy shrunk at an annualized pace of 1.6% in the first quarter.

Two consecutive quarters of negative GDP growth is often cited as the main definition of an economy in recession. US Treasury Secretary Janet Yellen on Thursday argued that the US economy wasn’t actually in recession in the first half of 2022, given that the labor market remained strong. Typically, the labor market worsens in a recession.

But the labor market has shown some signs of moderating in recent weeks, with weekly initial jobless claims rising. Moreover, while consumer confidence has been in the dumps and inflation-adjusted consumer spending stagnant for a while amid the bite of high inflation, other indicators are also blinking of weakness elsewhere in the economy.

PMI data released last Friday showed that the dominant US service sector likely contracted in July. So while, Yellen can argue that the US actually wasn’t in a recession in the first half of the year, things are not looking good for the second half of the year.

Despite growing pessimism about the US economy in the last few weeks, cryptocurrency prices have risen. At current levels around $23,800, Bitcoin is trading over 35% higher versus its June lows in the $17,500 area. Meanwhile, at current levels above $1,700, Ethereum is nearly up 100% from its June lows around $880 per token.

If things in the economy are so bad, then why have cryptocurrency prices been able to recover?

Easing Financial Conditions Boost Speculative Risk Assets

The reason why crypto, as well as other highly speculative risk assets like certain US tech/growth stocks, has been able to perform so well in the last few weeks is because US financial conditions have loosened significantly.

Amid growing evidence that the US is entering/already in a recession, optimism is growing that sky-high inflation may have peaked. As optimism about a more benign inflation outlook grows, so do bets that the US Federal Reserve won’t have to be so aggressive with its rate hikes in the coming quarters, which the bank is implementing in order to attempt to get inflation back to its 2.0% long-run target.

Indeed, at this week’s Fed meeting, where the bank lifted interest rates by 75 bps for a second successive meeting and back to roughly in line with the so-called neutral rate of 2.25-2.50% that neither stimulates nor slows the economy, Fed Chair Jerome Powell sounded a little more dovish. He noted the recent slowdown in the economy and evidence that US prices pressures might have already peaked and refused to back further outsized rate hikes at the Fed’s upcoming meetings.

Money markets, which can be viewed as the market’s view on where the Fed will take interest rates, have subsequently moderated bets on tightening for the rest of 2022 and in 2023. The market’s base case now seems to be for a 50 bps rate hike in September, followed by a series of 25 bps rate hikes in the rest of 2022/early 2023 that will take interest rates to close to 3.5%.

Money markets then see the Fed cutting rates back to around 3.0% for the remainder of 2023. In response to the recent moderation of Fed tightening bets, US inflation-expectation adjust bond yields have fallen sharply. The 5-year TIP yield ended the week around -0.09%, down nearly 70 bps versus earlier monthly highs. 10-year TIPS yields were last around 0.11%, down around 60 bps from earlier monthly highs.

Analysts interpret real yields in positive territory, as they were earlier this month, as being restrictive to the economy, while real yields close to zero have a neutral impact. In other words, financial conditions have arguably moved back from being slightly restrictive to around neutral.

Easier financial conditions have historically boosted speculative risk assets like US tech stocks and cryptocurrencies. This is because easier financial conditions reduce the appeal of holding now lower-yielding bonds, which forces investors into riskier asset classes.

Given the above, a further worsening of economic conditions in the US, if it helps bring inflation under control and results in a further reduction of Fed tightening bets, has the potential to boost crypto prices. As inflation starts to fall, traders may continue to boost Fed rate cut bets for the second half of 2023 and beyond.

If the Fed starts to give credence to such bets by coming across as more dovish at its last few meetings in 2022, that could result in a further easing of financial conditions, which could act as a major tailwind for crypto.

Will the Crypto Winter Thaw in the Second Half of 2022?

Key Insights:

  • The collapse of Terra, 3AC, and insolvency crisis across crypto institutions has created severe bear conditions in Q2.
  • Experts predict prolonged crypto winter in the second half of 2022.
  • Bitcoin saw a quarter-to-quarter loss of over 57%, and ether lost over 67%.

The cryptocurrency market has had a roller coaster ride this year, with signs of liquidity crunch and even insolvency. After raising phenomenally in 2021, bitcoin (BTC), ether (ETH), and other significant cryptos started to plummet.

The $2 trillion crypto market crash wiped out investor gains and obliterated once staple cryptocurrencies. For instance, Terra’s (LUNA) collapse is one of the primary drivers of the crypto market dive. The algorithmic stablecoin lost all of its value following TerraUSD (UST) collapse in May.

Another major driver is the centralized-finance lender Celsius, which offered users yields of more than 18% for depositing their cryptos. The firm paused withdrawals for customers in June.

Market participants are calling the current turmoil a “crypto winter.” To start with, crypto winter is the term used when there is a rapid and prolonged decrease in crypto values. Prices can remain depressed for many months, falling as much as 50-90%. It has been a difficult phase for crypto investors, who are anxious to know how long this uncomfortable period can last and how to survive the frosty crypto markets.

“If Winter Comes, Can Spring Be Far Behind?”

The current phase could be challenging for holders; nonetheless, this is not the first time the market is witnessing such high volatility. Between 2018 and 2020, bitcoin lost nearly half its market value but came back stronger in November 2021, reaching its all-time high.

The latest monetary policy decision from the Fed on Wednesday has had little impact on the bitcoin price. As the Federal Reserve continues to curb stubborn inflation, the central bank raised interest rates by 0.75%, the fourth consecutive increase this year alone.

Soon after the announcement, experts largely predicted that investors should expect new volatility this week. At the start, sentiment in the crypto market appeared slightly bearish, though prices showed signs of going uphill.

Bitcoin was trading above $23,000, and ethereum was trading above $1,700 as of Thursday, both up by over 10%.

Edward Moya, a senior market analyst at Oanda, told the Time publication,

“The FOMC decision provided optimism that the end of tightening is in sight, and that triggered a nice rally for risky assets that helped elevate cryptos.”

Q3 & Q4, 2022: A Ray of Hope for Crypto Investors?

According to Moya, crypto investors are keeping a close eye on the price of bitcoin, ethereum, and other cryptos to see if there is any “possible retest of the June lows.”

However, despite the positive momentum last week, it is no where close to the highs it reached last year. Looking into the crypto’s history of volatility, it is not clear when the market turbulence will settle.

Few market experts predict that there could be more pain in the second half of this year as crypto companies struggle to pay their debts and process customer withdrawals.

For instance, Tom Loverro, a former Coinbase Board member, has shared his predictions on crypto winter in his series of Twitter threads. According to him, the present phase could fall even lower in 2022.

He noted that the pandemic largely drove the 2020 bear market, and the current crypto winter isn’t similar to the 2020 fall. He further said,

“So, these investors will suffer until rates stabilize.”

Loverro advises investors to have enough cash to get through the next 30–36 months. He said, “crypto will come back bigger than ever.”

In an interview with FX Empire, Dora Yue, founder of crypto firm OKEx, said that after this “aggressive round of forced selling and deleveraging,” there are many reasons for investors to remain optimistic, such as:

  • The market has deleveraged, and stablecoin debt utilization has returned to a relatively reasonable level.
  • Asset prices have started to rebound from their lows, especially for Defi.
  • Valuations in the primary market are slowly returning to sanity.
  • Business models and startups will mature more as they go through the market cycle again.

As Q3 of 2022 begins, it wouldn’t be pleasant for bitcoin, given the baby steps that cryptos take to recover. As reported by FXEmpire, bitcoin saw a quarter-to-quarter loss of over 57%, while ether dropped by more than 67% over the same time.

Per Nomura, a Japanese financial services behemoth, major economies could see a recession “‘in the next 12 months amid tightening government policies and higher costs.” The words sent a chill down investors’ spines, expecting hard times in the near future.

Fundamental Vs. Technical Analysis – What’s Your Style?

They are not the same by any stretch, so it’s not a debate over one “apple” vs. another.  It’s a comparison of two completely different approaches, and the comparison is more of the “apples vs. oranges” variety.

Trading vs. Investing

Before we get into the fundamental vs technical analysis, there are important distinctions to be made between investors and traders.  Investors are more long-term growth-oriented, while traders focus on immediate income or aggressive account growth.  Market participants tend to be focused on one approach or the other.  But many are a mix of both.

Investing and trading are different worlds, and it can be challenging to master either domain, much less both.  The key is to know what style is best for your timeframe, to what extent, and why.

Technicals vs. Fundamentals

The Technical Approach

Technicians are students of price patterns.  Technical analysis looks at the price movement of a security and uses these data to predict future price movements.  In general, the more liquid the product, the more reliable the price patterns on the chart.   A high-volume index product like the SPY ETF will more reliably chart investor and trader sentiment than a thinly traded penny stock.

Technicians focus on chart price action, often supplemented by choosing among literally thousands of “indicators” and combinations thereof.   I can’t tell you how often I’ve heard from hardcore nerd technicians something like, “This indicator (or set of indicators) works in all markets and all timeframes.”

Uh, no.  I haven’t seen that yet in over 30 years of trading. Beware of too much chasing of a holy grail set of indicators.  That “forest” is vast, and you may never find your way out.  A relatively small group of indicators and patterns can serve technicians well.  The key is to know under which conditions to apply them and how.

The Fundamental Approach

The fundamental approach looks at economic and financial factors that influence a business over the longer term.  Fundamentalists study financial statements, analysts’ reports and ratings, earnings reports, and forecasts.

If a company has earnings “X” that are expected to grow at “Y%”, it is still up to market participants to decide what value to place on their assessment.  And they can be a moody bunch.

Why I Lean Toward The Technicals

My opinion of a “correct” valuation is essentially meaningless.  But as a technician, I care about what the big money thinks and how they move their capital.  The price action from the chart is a reflection of what the big money thinks.  That’s our edge as technicians.  We’re following the money rather than our opinions on valuation.

Technicians are all about picking high-probability entries and exits.   As a technical trader, do I even care about fundamentals? Perhaps not. The charts can tell me what I need to know about what the big money is doing.

Can technicians safely ignore fundamental analysis?  There’s a case to be made based on the assumption that everything currently known about fundamentals is baked-in into price.  Efficient market theory, as it were.  Technicians can be quite successful by focusing just on price action.  But chart patterns and indicators can and do unexpectedly fail.   So good risk management is always a requirement.

A hybrid approach for Buy-and-Hold?

A herd mentality often drives markets.  One of the classic texts about market behavior is “Extraordinary Popular Delusions and the Madness of Crowds,” written by Charles Mackay and initially published in 1841.  It’s been commented on and analyzed ever since, and it seems not much has changed about human behavior.  History rarely repeats precisely, but it does tend to rhyme.

If you’re a long-term investor of the “buy and hold” variety, you could dismiss technical analysis.  But you’d be doing yourself a disservice.  Why?  Because the economy and markets are cyclical and there are times when it is best to move to the sidelines to avoid large drawdowns.  Fundamentals can be far out of sync with price action when fear and greed take over.  “The Market can be irrational for longer than you can be solvent.”

Staying fully invested through major economic and price corrections can be costly to long-term results.  At other times, technical analysis can help buy-and-hold investors to see when a security is oversold, bottomed out, and may have a high-probability re-entry.   Again, good risk management is essential to protect our capital.

Fundamental vs. Technical analysis – summary

Which is better for you?  It depends not just on your time horizon but also on what suits your personality better.   I doubt I can do fundamental analysis on a public company and gain some insight that few others see.  That would make me a first-order participant with no edge vs. an army of institutional professionals.  As a technician, I’m a second-order participant.  My goal is simply to assess the price action as accurately as I can and make decisions accordingly.

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The Voyager Rebuff Highlights the Urgent Need for Regulatory Oversight

Key Insights:

  • On Monday, beleaguered crypto firm Voyager rejected an FTX buy-out proposal, calling it “a low-ball bid.”
  • In 2008, bank mergers in the wake of the Lehman collapse prevented a contagion of far greater magnitude.
  • The crypto winter is wreaking havoc across the crypto market. How firms on the brink of bankruptcy can reject buy-out offers is not in the interest of investors.

On July 1, Voyager Digital announced the suspension of trading, deposits, withdrawals, and loyalty rewards. The company cited market turmoil as the reason, attributing the blame to the 3AC default.

The news followed a late June market response to reports of a possible 3AC loan default. TSX listed Voyager Digital (VOYG) tumbled by 52.5%. The June sell-off left VOYG down 97% for the current year.

Despite the VOYG share price slump and news of Voyager Digital suspending trading, deposits, withdrawals, and loyalty rewards, there was little evidence of regulatory intervention.

For investors and the crypto market, the lack of coordination among regulators to tackle the crisis should be alarming.

The lack of coordination also raises the question of where the resources of the SEC lie. Some may consider targeting crypto firms for allegedly selling securities illegally as secondary to tackling the fallout from the crypto winter.

A Lack of a Crypto Regulatory Framework Leaves Investors Exposed

With the crypto winter now set to extend into August, the need for a regulatory framework becomes more pressing.

The number of crypto platforms freezing withdrawals continues to rise, with crypto investors powerless and at the mercy of firms to resolve liquidity issues likely entwined with other exchanges.

Financial institutions don’t have it so easy and provide reporting and face regulatory scrutiny to ensure that such events do not reoccur after the 2008 global financial crisis.

Crypto firms do not need to meet criteria to remain a going concern. There is a lack of oversight to protect investor assets.

The regulatory spotlight seems more targeted toward classifying assets as commodities, securities, or “other.”

If the CFTC and the SEC are to regulate the digital asset space in partnership, the basics should form part of the debate. Otherwise, one should have authoritative control to embed the necessary processes to formulate the appropriate structure.

Some lawmakers are more progressive than others. It may contribute to the slow progress toward an appropriate regulatory landscape that doesn’t stifle innovation and protects investors.

Lawmakers See the Lummis & Gillibrand Bill Sidelined until 2023

In June, FX Empire reported on the Lummis and Gillibrand Bill, which aims to give regulatory powers to the CFTC.

As the  SEC v Ripple case drags on, with no end in sight, the collapse of TerraUSD (USDT) and TerraLuna (LUNA) caught regulators off-guard.

Since then, the G7, the White House, the US Treasury, and others have attempted to progress towards a global regulatory framework.

However, the progress is slow,  highlighted by the lack of lawmaker enthusiasm to debate the Lummis and Gillibrand Bill.

On July 19, in a joint pre-recorded interview with Gillibrand, Senator Cynthia Lummis told Bloomberg,

“It’s a big topic, it’s comprehensive, and it’s still new to many US senators.”

Lummis added,

“The wide-ranging scope of the legislation may make it difficult for lawmakers to digest quickly.”

The bipartisan bill that has found the support of the crypto industry could deliver the ideal mix of innovation and consumer protection.

While well-versed lawmakers recognize the need for innovation and regulation, crypto market sentiment towards the SEC and the CFTC is in favor of the CFTC.

The SEC and the CFTC Need Lawmakers to Decide

In June, FX Empire considered the likely battle between the CFTC and the SEC to win control of the digital asset space.

While the Lummis and Gillibrand Bill aims to pass the baton to the CFTC, the SEC remains in the hunt. The ongoing SEC v Ripple case is a focal point for investors and lawmakers.

The pushback of the Lummis & Gillibrand Bill to 2023 could even coincide with the outcome of the SEC case against Ripple.

However, lawmakers have highlighted one problem, the SEC’s targeting of crypto firms. The SEC has dished out some punitive fines that may have led crypto shops to other jurisdictions. Earlier this year, lawmakers approached Gensler, questioning the SEC tactics to which the SEC Chair may have responded.

SEC Chair Gensler softened his position, calling on the CFTC for collaboration to regulate the digital asset space. Following the call for a partnership, Gensler even talked of easing SEC regulations on crypto firms.

A shift in stance may prove positive for the crypto space. It will ultimately boil down to the answer to the puzzle. What is and isn’t a security?

In 2018, the former SEC Director of the Division of Corporation Finance said that Bitcoin (BTC) and Ethereum (ETH) are not securities.

Regulatory Uncertainty Doesn’t Breed Crypto Innovation

Uncertainty is bad for any asset class and no different for the crypto space. Since late December 2021, the talk of increased regulatory oversight adversely affected investor sentiment.

Since calls for a global regulatory framework, the landscape has changed. However, the need for a regulatory framework remains. Once market conditions improve, crypto-related firms and investors will look for legislation that supports innovation and protects consumers.

Finding the balance is crucial to cryptos and the global financial markets.

How Ethereum Could Surpass Bitcoin After The Merge

Key Insights:

  • Ethereum issuance changes could remove any natural selling pressure after the Merge.
  • The network will use 99% less energy which is good for policymakers and ESG-focused corporations.
  • ETH prices are down 2.4% as a tumultuous week in macroeconomics begins.

Crypto markets are in retreat again during this Monday morning’s Asian trading session, but they have been rallying for the past fortnight, primarily driven by Ethereum.

The network will enter its final testing phase for the Merge on August 11, and the date for the mainnet launch is September 19.

The Merge will dock the current Ethereum proof-of-work chain with the new proof-of-stake chain, which will become the primary blockchain. The consensus mechanism for the network will transition to staking instead of mining.

There has been a lot of analysis and discussion recently on why this is such a bullish event for Ethereum. Some even believe it could eventually surpass or “flip” Bitcoin, becoming the industry’s largest digital asset.

Why The Merge is Such a Big Deal

On July 24, Ethereum analyst and researcher Vivek Raman tweeted why he thought ETH would flip BTC.

The first argument was based on supply as there are 900 BTC mined daily. This means that there is always some selling pressure on Bitcoin from miners taking profits. Without any new buying pressure, its price would fall, he added.

If the selling pressure disappears, prices should naturally drift higher, which will be the case for Ethereum after the Merge.

Ethereum is currently mined with 14,250 ETH issued per day; however after the Merge, issuance is likely to become deflationary due to the fee-burning mechanism introduced in August 2021. Over the past week, 13,249 ETH has been destroyed via this mechanism.

“This means that there could be *net daily buy pressure* on ETH (without a dollar of external capital entering),” he added.

“ETH will transform into an economically (and environmentally and game theoretically) sustainable asset – arguably more so than BTC.”

Another bullish factor he didn’t mention was that Ethereum’s energy consumption would be reduced by more than 99% after the Merge. This will make the network more acceptable to environmentalists, regulators, and policymakers, and more attractive to investors and corporations. Bitcoin will always be proof-of-work and will always demand more energy as adoption grows, and mining competition increases.

ETH Price Outlook

Ethereum prices have rallied 30% over the past fortnight, with the asset reaching a six-week high of $1,639 on Friday. It appears to have formed a range-bound channel over the past week; however, failing to break through resistance.

ETH is currently trading at $1,518, having lost 2.4% over the past 24 hours. The asset is still down 69% from its November 2021 all-time high, so the recent rally may have been short-lived.

This week’s market direction is likely to be driven by macroeconomic news from the United States as the Federal Reserve raises rates again and the GDP figures for the second quarter are announced.

Crypto Hazard: The Elon Musk Effect Has Come to an End

Key Insights:

  • Elon Musk, advocate or market manipulator, sliced Tesla’s BTC holdings in Q2.
  • Dogecoin didn’t suffer a similar fate but could do so should DOGE fall below Musk’s January 29, 2021, purchase price.
  • Crypto investors spurred by Musk’s tweets may need to tread with care. Musk’s support could become a vapor trail at any time.

Elon Musk, the CEO of Tesla Inc. (TSLA) and SpaceX, has been a long-time advocate of Bitcoin (BTC) and meme coins, Dogecoin (DOGE) and Shiba Inu Coin (SHIB).

Crypto references have frequently appeared on the Musk Twitter account, with both Tesla and SpaceX pawns in the price movements of BTC, DOGE, and SHIB, in particular.

Ultimately, supportive tweets, Tesla and SpaceX company announcements, and interviews have raised eyebrows and questioned whether the Musk commentary is akin to market manipulation.

More significantly, the most recent company news suggests a shift in sentiment towards cryptos or perhaps, a show of force over the crypto market.

Tesla Inc. Dumps Bitcoin Holdings without Warning

On Wednesday, news hit the wires of Tesla offloading 75% of its crypto holdings. According to Reuters,

“Elon Musk cited concerns about his company’s overall liquidity as the reason for the sale.”

In total, Tesla sold $936 million equivalent of BTC in Q2, one year after purchasing $1.5 billion at close to the top of the market.

Elaborating on the concerns over liquidity, Elon Musk stated,

“It was important for us to maximize our cash position. We are certainly open to increasing our bitcoin holdings in the future, so this should not be taken as some verdict on bitcoin. It’s just that we are concerned about overall liquidity for the company.”

However, musk did confirm that the company did not offload its Dogecoin (DOGE) holdings.

On February 8, 2021, news hit the wires of Tesla’s $1.5 billion bitcoin purchase. However, unlike other long-term BTC hodlers, also known as Bitcoin Whales, Tesla flooded the market with a sizeable portion of the 2021 investment, contributing to the BTC and broader crypto market pullback.

Tesla and BTC
BTCUSD 230722 Daily Chart

While Musk highlighted that DOGE did not suffer the same fate, DOGE and SHIB now face similar prospects. Neither DOGE nor SHIB have demonstrated price stability to justify special treatment.

The Musk Effect was evident, with the crypto market reacting to the news.

Bitcoin slid by 5.45% from a day high of $24,276 before finding support to end the day with a 0.76% loss. By contrast, DOGE responded favorably, rising by 1.59% to buck the broader market trend on the day.

The references to holding DOGE could be considered price manipulation. In June 2022, Musk spoke to Bloomberg TV, citing his support for DOGE. Musk delivered support in response to DOGE investor calls for Musk to reiterate his support for the meme coins.

During the interview, Musk also said that BTC amounts held were insignificant relative to the cash assets, in reference to Tesla and SpaceX.

More significantly, Musk delivered his support despite an investor filing a $258 billion lawsuit against Musk, SpaceX, and Tesla Inc. for claiming that “Dogecoin is a legitimate investment when it has no value at all.”

Elon Musk and the Big Flops that Preceded Tesla and SpaceX

After an uncertain beginning, Tesla Inc. has established itself as a profitable car manufacturer, with sales revenues of more than $18 billion. While SpaceX is on a firmer footing, Musk has had a chequered past. A string of failings takes the shine off the cv.

Some well-known Musk moments to forget include an unsuccessful job application at Netscape, the removal as CEO of Zip2, removal from PayPal, and a string of failed rocket launches.

For investors looking to ride on the Musk coattails, the decision to offload 75% of Tesla’s BTC holdings is a warning to DOGE and SHIB holders.

In June, Elon Musk said that the BTC holdings were negligible relative to cash assets. Dogecoin could suffer a similar fate should Musk offload the DOGE holdings. Musk could even suspend DOGE payments for merchandise at SpaceX and Tesla.

Dogecoin had its big moment on January 29, 2021, when DOGE rallied by 166% on news of Elon Musk purchasing DOGE. Musk provided no details on his DOGE purchase. Despite this, DOGE surged to an August 5, 2021, all-time high of 0.7398 before tumbling to a June 18, 2022, current year low of $0.0491.

Musk - DOGE
DOGEUSD 230722 Daily Chart

Buyers jumping in at around August 2021 levels will be disgruntled, despite Musk’s efforts to deliver DOGE rebounds on several occasions. Viewing the DOGE daily price chart, Musk’s price spikes are evident. However, these have not reversed the downward trend since August 2021.

Elon Musk made one comment in his June interview with Bloomberg TV that should resonate among crypto investors.

“I have never said that people should invest in crypto.”

Web3 Gaming and Investments During the Bear Market: How the Crisis can Bring GameFi to a New Level

While some conservatively-minded critics celebrate the collapse of an oversaturated market, there is a largely overlooked bright side — the reassessment of the sector and the cleansing of inefficient startups create an opportunity for sustainable projects to rise.

Can GameFi become the future of the traditional entertainment industry, and is the current crisis a perfect opportunity to enter the emerging market? The answer is yes — but only if several quality standards are met.

Popular GameFi recipes. Does quantity go to quality?

GameFi, like many aspects of the contemporary crypto-universe, is not an entirely new word. The idea is simple: take the steadily growing demand for digital entertainment, combine it with a blockchain-based reward system to attract new players, and you get a silver bullet, destined to succeed. Fueled by the hype train of venture capital, the number of Web3 gaming projects increased exponentially.

The supply of cheap money was so immense that questions of quality and sustainable tokenomics were not taken into consideration. The market was flooded with underdeveloped low-quality projects that failed to retain their gaming base, stabilize the price of their native assets, and, ultimately, survive.

How to understand that the project is really worthy of attention?

What are the key evaluating points for a GameFi project?

  • Know Your Founder. What is the background of the team behind the idea? Do they have ample experience in management, Deep Tech, and raising capital? In the current market, investors seek confidence, and the personality of the founder is crucial to convince them that a project is viable and long-standing.
  • Novelty. In the early days of GameFi, Play-to-Earn games were a breakthrough. Today, however, there must be something additional to the project’s competitive advantage. Is there anything novel a startup introduces? Do they deal with AR and VR or have a standalone research department? A good GameFi startup stands on the border between entertainment and tech — and if there are no potential technological advancements, there is not much to invest in.
  • Tokenomics. It is extremely important to analyze the unit economics of the startup. What is the algorithm behind the native asset emission? It is safe from hyperinflation — as a simple check, are tokens burned? Does the project really use blockchain’s capabilities or is it just an attraction buzzword? A good example is the backlash Ubisoft faced when it recently attempted to sell Ghost Reckon NFTs which had no value other than collectability.

However, it would be a whole different story if those NFTs were used in smart contracts for staking, entering in-game events, or even renting digital property to other players. Ideally, the rewards for playing should not rely on native tokens exclusively — for instance, creating a self-replenishing Bitcoin pool would persuade the gamers that the prizes will remain worthwhile and help to retain a stable audience.

  • Graphics and gameplay. While high-polygonal graphics, complex gameplay mechanics, and a carefully developed player interaction system have long become a standard for Web2 games, there is much space for GameFi to catch up. Monetary incentives help to attract new players, but they alone are not enough to create a mature ecosystem with stable revenue flows.

One of the most popular P2E games — Axie Infinity — is a Flash Player-ish 2D game. No matter how conceptually progressive it is, it’s no match to AAA Web2 titles. A successful GameFi startup shouldn’t necessarily use the state of art game engines like Unreal Engine 5, but it can’t be allowed to sacrifice playability.

The crisis is just a milestone in the GameFi’s development.

GameFi, just as crypto and tech in general, is hit by a crisis. But this is not a fatal blow — there is much merit to the perspective that it will become the logical evolution of Web2 gaming. The traditional gaming industry is stagnating, the market is in recession, we haven’t seen that since 2015.

On the other hand, there is explosive growth in GameFi: the GameFi market saw a 194.19% increase in Q1 funding compared with the data last year. More and more people from developing countries gain internet access and try to escape poverty by earning online; advancements in AR and VR bring Metaverse closer to reality — everything of these is a signal that GameFi is poised for long-term growth.

After inefficient projects are cleansed from the market, the industry must adopt new quality standards, thus overcoming the existing skepticism from the side of the Web2 gaming community. The new technical level, evaluated by the audience of projects, clear risk assessment criteria and, as a result, greater transparency make GameFi market truly promising for investments.

Ilman Shazhaev, founder of the Bitcoin mining-powered Farcana game