12 Jun Bitfinex Alpha 58 | Economic signals mixed ahead of FOMC but Bitcoin undervalued
The US economy is facing a multi-faceted challenge with a widening trade deficit, a slight improvement in wholesale inventories, and a slowdown in the services sector. While factory order data out last week looked positive, the overall economic outlook reflects the precarious balance the economy is in. So far the market is still positioned for a pause in rate increases at this week’s FOMC meeting.
April saw the US trade deficit widen to its largest gap in eight years, leaping by $14.0 billion to hit $74.6 billion. This increase – the biggest since April 2015 – is ringing alarm bells for economists who fear it could chip away up to 2.5 percentage points from Q2 GDP, should the trend persist. Resurgent imports of goods coupled with dwindling energy exports is being held responsible for this surge.
The silver lining comes in the form of an improved performance in wholesale inventories. The latest data suggests a less pronounced decline in April than anticipated, potentially indicating wholesalers are restocking in anticipation of increased future sales.
However, this positive note is tempered by the US services sector’s sluggish growth in May. Although the non-manufacturing PMI reported a reading of 50.3, indicating slight growth, the pace has been significantly slower than earlier in the year. While still above the contraction zone, dwindling services PMI, coupled with an ongoing contraction in the manufacturing sector, heralds caution.
The market is undoubtedly keen to see how these divergent economic indicators will play out in the wider economic landscape. Will the modest improvement in wholesale inventories be able to offset the troubling trade deficit and provide a boost to GDP? Or will the slowdown in the services sector and the weak manufacturing output throw a spanner in the works? The answers to these questions will significantly shape the policy responses from the US government and the Federal Reserve in the months to come. As they grapple with these complex economic dynamics, monitoring the evolving landscape remains crucial.
In crypto markets, Bitcoin is looking increasingly undervalued when stacked against the S&P 500 index, according to a revealing Ordinary Least Squares regression analysis conducted over the past 200 days. Despite the AI-fuelled rally in US equity markets, Bitcoin is trading at around $25-26,000, stubbornly below its estimated fair value of $27,550, suggesting an unseemly discount of over eight percent.
However, even though Bitcoin’s correlation with the S&P 500 has cooled, historical trends demonstrate this should not last long. In historical terms, it has only been this low a handful of times, and is taking place as the BTC correlation with gold has been increasing. Historically, a move higher in the BTC-Gold correlation precedes a similar move in the BTC-S&P500 correlation, heralding hope for a reconciliation between Bitcoin and S&P 500, and potentially triggering a ‘catch-up’ rally in the coming months.
That said, the sharp downward moves in BTC last week, following the legal action by the SEC against Binance and Coinbase, triggered the largest long liquidations in USD terms, so far this year, totalling $348 million. The news flow clearly disrupted the market, but taking the behaviour of options traders, it has not had a long lasting impact. Analysing the movement of historical volatility in relation to implied volatility indicates there has not been a significant move in the positions taken by options traders, who do not expect much movement in the price for short dated options.
The news flow in the last week of course has been riveting, as law enforcement and regulatory agencies in the US take action against several centralised exchanges.
Aside from the SEC’s attack against Binance and Coinbase, in which we go into considerable detail, we also saw the US Department of JustIce oppose the request by the now bankrupt exchange Bittrex to let its customers withdraw their locked funds, citing concerns over the need to prioritise some creditors over others. The Bittrex hearing on its bankruptcy plan is due this week, which will be a crucial signal for how customer assets should be treated in the case of a bankruptcy.
More positively though, in El Salvador Volcano Energy announced it was raising $1 billion to invest in energy production from solar and wind sources, to add to the national grid and provide power for Bitcoin mining. Attracting such a large amount of investment and harnessing renewable energy to grow the country’s energy sector is immensely promising. The initiative provides a pathway for more sustainable Bitcoin mining, and bats away any environmental concerns over the industry, It also demonstrates the huge benefit that El Salvador’s decision to adopt Bitcoin as legal tender is having on the country.