Cosmic Tides, Economic Strides

As the 4th of July recess draws to a close, we set sail into the traditional second half of the fiscal trading year. This year’s Independence Day came with an added highlight – the “Super” Full Buck Moon. For the more superstitious traders, this marked the first Supermoon of the year and the beginning of a series of four that will be visible until the end of September. Maybe there are more superstitious traders out there than we thought, as market trends seem to change during this celestial event.

In the past three years, changes have been consistently observed during the weeks when the Supermoon appears and fades. In 2020, the period from March 9 through May 7 witnessed an astronomical 161% rally within the Bear market, akin to a phoenix rising from ashes. In contrast, the 2021 interval from April 27 to June 24 was marked by a 51% capitulation in a Bull Market, reminiscent of Icarus’s fall. More recently, from June 14 to August 12, 2022, the markets experienced a buoyant 43% leap in the midst of a Bear market.

With celestial events and market reversals fresh in our minds, let us now zero in on the current landscape. So far, as the above chart displays, this week’s markets have been marked by risk-off sentiment, with both stocks and cryptocurrencies slightly rising between 0-2% while interest rates mainly remained static. Saudi Arabia and Russia have enacted deeper cuts to their oil production as oil prices continue to be subdued and volatile due to weak demand. These volatile prices present ideal market conditions for scalpers to exploit. Inflation, meanwhile, is anticipated by many market observers to stabilise around 3-4% through the year-end, influenced by the phasing out of the positive base effects following the drop in oil prices this quarter. As such, traders may contemplate constructing a hedge against inflation by allocating capital to assets that have a track record of flourishing in inflationary climates, such as precious metals like gold, real estate holdings, or equities of firms possessing robust pricing leverage. The big question for crypto traders will be whether BTC will finally be seen as another ‘inflation hedge’ asset.

On the macro side, as the curtains fall on the trading week, the Federal Reserve’s stance emerges with clarity and is intriguingly paralleled by a surge in US long-term yields. Following the release of the FOMC meeting minutes on Wednesday, the Fed Terminal Rate held steady at 5.4%, in sync with the recent policy narrative. As anticipated, the Fed continues to maintain a hawkish stance. The minutes reiterate what Powell has been communicating over the past few weeks: a consensus between Fed members that additional rate hikes will be necessary this year, implying that the Fed is on a firm path towards another rate increase this month. This trajectory has been largely anticipated, as markets are already pricing in around 33 basis points of further increases. Additionally, US long-term yields have hit their highest level since March behind stronger-than-expected first-quarter GDP growth. This economic upswing furnishes the Fed with the leeway to nudge the federal funds rate upwards without tipping the economy into a recession. This gives traders an opportunity in the form of Treasury Inverse ETFs. These ETFs are designed to move in the opposite direction of Treasury bond prices. When the Federal Reserve hikes rates, bond prices generally decline, leading to an increase in bond yields. Consequently, Treasury Inverse ETFs can be expected to gain, providing traders with a potential avenue for profit.

In conclusion, the alignment of potent economic data, market anticipation, and the Federal Reserve’s decisive posture paints a critical backdrop for the financial landscape as we navigate the second half of the fiscal year. The convergence of U.S. long-term yields scaling new heights, buoyed by an unexpectedly sturdy GDP growth, and the Federal Reserve’s tactful approach in calibrating the federal funds rate, underscores the intricate interplay of economic forces at work. For traders and policymakers alike, the current market scenario calls for close observation and strategic decision-making.