Risk appetite is back as SPX records its best November in a century! | Posted by Fractal_Monk | Coins | December 2023

Risk appetite is back in the markets as the intense cross-asset rally continues and economic data remains favorable towards the end of the hiking cycle. The SPX comeback in November was one of the biggest meltups in the last 100 years! Bond yields fell, corporate bonds (both high-rated and high-yield) rose, and even small-cap stocks had a good month.

The dollar decline was another tailwind for risk assets, with the DXY falling more than 3% in November, its biggest monthly decline in a year. As risk aversion faded from the market, the VIX also returned to pre-pandemic levels. Falling crude oil prices are another big positive in the fight against inflation, even though it does not bode well for global growth prospects.

Governor Chris Waller, a member of the FOMC, commented Tuesday that current policies are well-positioned to return inflation to 2%, further strengthening the market’s assumption that the rate hikes are over. Moreover, he hinted at an ‘insurance cut’ in 2024 to prevent the Fed from passively tightening real interest rates too much. (Real interest rate = nominal interest rate – inflation. When inflation falls, real interest rates rise for the same nominal interest rate) Market is now setting a price. A cut of 120 bps is expected in 2024. Chairman Powell also spoke on Friday and was expected to curb market strength. He maintained two-way policy risk by saying the Fed’s action would depend on data, but the lack of an apparent stronger pushback than expected was taken as a positive sign by markets.

Data released this week was also favorable from a risk asset perspective. The U.S. economy remains strong, with third-quarter GDP growth revised upwards to 5.2%. This supports the soft landing narrative that the Fed can control inflation without causing a severe recession. Meanwhile, core PCE inflation (0.2% MoM, 2.5% YoY) meets expectations and continues to decline.

Inflation in the Eurozone was also the nicest reading since July 2021, with headline inflation of 2.4%. Monetary policy has performed very well during this hiking cycle in Europe, and there are growing signs of the ECB winning this inflation battle, even though policymakers remain cautious and wary of possible surges in wage growth and energy markets. This supports the case for a more favorable global interest rate environment for risk assets in 2024, with the market pricing in the first rate cut in the first half of the year, along with four 25 basis point cuts throughout the year.

crude

This week was an eventful one for crude oil prices, with the OPEC+ meeting on Thursday. The meeting was particularly important as producers sought to finalize their 2024 production targets amid concerns that the market would face a potential surplus due to higher production in the United States (700 to 800,000 bpd more than expected). Iranian output also recovered as the United States eased sanctions and Russian exports defied expectations and OPEC+ commitments. Meanwhile, as the global economic outlook darkens, demand growth is expected to slow.

There was much friction at the meeting over potential cuts to production quotas from African member states (mainly Nigeria and Angola), which led to the meeting being postponed from 25 to 30 November. However, back-channel diplomacy prevailed and the producers agreed on production amounts. Saudi Arabia has voluntarily reduced production by 1 million barrels per day since July, and Russia has agreed to reduce production by 500,000 barrels per day, bringing the reduction to close to 2 million barrels per day. Brent crude oil had been on the rise for the past few days in anticipation of the cut and surged further following the announcement, but the market was expecting more and was disappointed, sending the price back to $81.

cryptocurrency

The bid for risky assets has also been very evident in the ongoing cryptocurrency rally (cryptocurrencies remain a risky asset class). Although ETF approval has its own explanation, changes in macro perception have played a large role. Bitcoin rally between 28,000-38,000.

There was significant interest from Tradfi Capital, which resulted in OI for CME futures outperforming Binance. Asset managers have increased their long BTC futures positions by approximately 1 bio since early November.

Microstrategy continued to add to its positions, with total purchases of 16,130 BTC (~600 million Mio) in November. This brings your total holdings to about $6.5 bio. Meanwhile, the GBTC discount has become a ‘live betting line’ for ETF approval, narrowing to 8% as the market expects approval for conversion to ETFs by January 2024.

Not much happened in the cryptocurrency majors this week through Thursday. Bitcoin continued to push the 38,000 level while the market waited for ETF news. However, a monthly close above 37,000 is certainly optimistic. BTC was strong on Friday after the monthly close, trading around the 39,000 handle before moving towards 40,000 on the hold.

ETHUSD price action was fairly stable around the 2100 level while ETHBTC continued in a tight range around 0.054. Sol also took a breather after a hot rally last month and solidified at the $60 level. Meanwhile, Celestia, another major player in the monolithic vs. modular blockchain scaling Babel narrative (SOL and TIA), continues to perform well and is pushing towards 7 bio FDV.