Stealth Moves, Market Grooves

In a world where the pulse of global finance never rests, a seismic shift ripples from the heart of the U.S. monetary system. 2022 witnessed the Federal Reserve’s audacious move to slim its colossal $9 trillion balance sheet, heralding the dawn of Quantitative Tightening (QT). But contrary to expectations, the effects of QT on asset prices were subtler than anticipated. Now, stepping out from the sidelines, the U.S. Treasury takes centre stage, spearheading a period of even more stringent Quantitative Tightening. 

Within the intricate corridors of financial engineering, monetary authorities discreetly boosted liquidity, a move aimed at staving off a looming Banking crisis – a strategy aptly named “Stealth Quantitative Easing”. While QT’s primary goal was to diminish liquidity, strategic actions by the U.S. Treasury, such as reducing its general account and primarily issuing short-term government bonds, intriguingly counterbalanced the impact of QT. This unexpected resilience of the U.S. economy left many economists scratching their heads. But as 2023 unfolds, a shift is palpable. U.S. Treasury Secretary, Janet Yellen, has been subtly amplifying the force of QT by releasing an increased number of Treasury notes and bonds, introducing new complexities into the market. When participants purchase these bonds, they may use cash, take on debt, or sell other assets. Since Treasury bills have a low duration risk, market participants are more inclined to use cash or take on debt. However, the greater interest rate exposure of Treasury notes and bonds makes market players reconsider their risk, often leading them to sell assets to balance out the added risk which results in further tightening. 

This shift raises a pressing question: Who truly directs the course of QT? Is it the Federal Reserve or the U.S. Treasury? As the Treasury releases riskier bonds, market stakeholders find themselves hastily adjusting strategies to mitigate these new uncertainties. 

Here’s the twist: despite the monumental shifts and covert operations, it might not be enough to derail the sustained rally in stocks witnessed this year as a storm might be brewing on the horizon. As we move forward, investors should brace for an era of unpredictability, where market trends defy conventional wisdom, and monetary actions continually challenge long-held beliefs. The financial dance between easing and tightening continues.

This sentiment is further accentuated as investors analyse the minutes from the recent July FOMC meeting. The notes reveal heightened concerns among officials about impending inflationary threats, suggesting a call for more assertive monetary intervention. Currently, the investor consensus sees only a 13% likelihood of the Fed increasing rates in the upcoming September assembly.

As the crypto market has repeatedly hinted at breaking its summer stagnation, the consolidation that has lasted over two months seems to still dominate. From a technical standpoint, the wedge pattern that Bitcoin has been trading in since the November low has just hit a crucial juncture as it has broken down through its trendline support. Historical data from the chart left many bulls hoping for a rally towards the $34,000 resistance as in the previous three instances that Bitcoin grazed its trendline support, it surged by 46%, 47%, and 26% respectively. This interaction with the support presented an ideal window for a long position on Bitcoin however, the bulls lost this fight to the bears. The next key level looks to lie around $25,000 which the bulls will look to hold before a move back towards $30,000.

Check out the chart on TradingView here.