Stagflationary signals coming from major US retailers (Walmart and Home Depot also reported earnings this week) have negated this week’s stronger than anticipated US Retail Sales report for April and come against the backdrop of a Fed (and other major global central banks) that remains intent on continuing to tighten monetary policy aggressively.
Traders will recall remarks from Fed Chair Jerome Powell on Tuesday where he emphasized that the Fed’s top priority is inflation-fighting, even if that means slower growth, and, as a result, the Fed “will not hesitate” to take rates above the so-called “neutral” level (of around 2.5%) if required. Other Fed policymakers speaking that week have largely signaled the same message.
Expectations for slower growth (meaning weaker earnings) coupled with expectations for higher interest rates (meaning a higher discount rate) squeeze equity valuations from both directions. Many analysts are unsurprised that the bounce in US stocks earlier in the week proved to be short-lived.
In Thursday pre-market trade, US equity index futures are extending on Wednesday’s losses and look likely to break out to fresh annual lows before the week is out. Crypto is holding up a little better for now, with the total market cap for now consolidating around the $1.225 trillion mark and slightly in the green on the day.
Tier two US data in the form of the May Philadelphia Manufacturing survey, the weekly initial jobless claims report, and April Existing Home Sales probably won’t move markets much, with focus set to remain on the overarching themes of slowing growth, inflation, and central bank tightening.
Expect cryptocurrencies to continue taking their cue from stocks and, if that is the case, be prepared for further downside. A break below support at $1.20 trillion could see the crypto market cap drop back towards annual lows under $1.1 trillion.
Crypto Price Action
Bitcoin fell nearly 6.0% on Wednesday in tandem with the downside in equities, dropping from the upper $30,000s to the mid-$28,000s. However, despite continued US equity downside in pre-market trade, bitcoin has stabilized in the $29,000 area and remains a good 14% above last week’s sub-$26,000 lows (unlike S&P 500 futures, which are only a whisker above last week’s lows).
If bitcoin can continue to consolidate around the $30,000 level as has been the case over the past six or so sessions despite a breakout to fresh annual lows in US equities, that would be impressive. But the aforementioned negative themes of growth and central bank tightening fears suggest that it remains too soon to bet on a substantial bitcoin rebound.
At current levels, bitcoin has a market cap of around $550 billion, giving it a market dominance of around 45% (up from under 44.5% on Wednesday). In times of market turmoil, bitcoin’s market dominance tends to expand given its status as the largest/most durable cryptocurrency (many think).
Ethereum, meanwhile, dropped closer to 9.0% on Wednesday from around $2,100 per token to around $1,900. At present, the second-largest cryptocurrency by market cap is trading a tad higher on the day in the low $1900s but also remains vulnerable to further US equity market downside.
At current levels, ethereum has a market cap of around $230 billion, giving it a crypto market dominance of around 19% (down from 19.4% on Wednesday).
Non-stablecoin altcoins unsurprisingly underperformed versus bitcoin on Wednesday.
The total value locked (TVL) of the entire Decentralised Finance space dropped by about $4.0 billion on Wednesday to around $98 billion, which is unsurprising really given the resoundingly risk-off broader market conditions.
Even though various DeFi protocols offer attractive yields on various stablecoins which are supposed to be immune to broader market conditions, investing in DeFi is still seen as highly speculative. This is even more so the case in wake of last week’s UST (and LUNA) crash.
At the start of 2022, the TVL of the total DeFi space was well above $200 billion. Amid the broader risk-off conditions in crypto and financial markets, it is difficult to imagine flows returning anytime soon.
In other notable DeFi news, early voting indicates majority support within the Terra community/validators for founder Do Kwon’s proposed fork. The fork, which could happen as soon as 27 May, would see the creation of a new Terra blockchain alongside the original one.
The new blockchain will scrap the UST stablecoin. The old Terra blockchain will be called Terra Classic and governed by the native token LUNA classic. LUNA’s market cap has fallen back under $1.0 billion as voting proceeds. UST/USD, meanwhile, continues to trade below the $0.10 level.
Exchange wallets saw net inflows of about $223 million worth of bitcoin on Wednesday, data from Glassnode showed, in fitting with the bearish market conditions. Crypto investors tend to move their investments back to exchange wallets where they can then be sold during difficult market conditions. During the same time period, ethereum exchange wallets saw a net inflow of just $7.1 million.
Elsewhere, there has been some hype across the crypto media landscape about the recent accumulation of more bitcoin by the richest non-exchange bitcoin wallet. The wallet has seemingly been using the recent downturn as an opportunity to buy the dip, having bought about 3,015 bitcoins over the last three weeks on net. That means the wallet now holds 127,067 bitcoins, worth about $3.685 billion based on Thursday prices.
US Securities and Exchange Commission (SEC) Chair Gary Gensler said in a Congressional hearing on Wednesday that a majority of initial coin offerings come under the SEC’s securities law, and that these tokens will be brought into the regulatory framework with the deployment of the SEC’s existing securities laws. A very small number of tokens, including bitcoin, are considered commodity tokens, he added, and would therefore fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC).
Russian Industry and Trade Minister Denis Manturov said on Thursday that, “sooner or later”, Russia will legalize cryptocurrencies as a means of payment. Speaking at a forum, Manturov was questioned on the matter of crypto legalization as a means of payment. “The question is, when this occurs, how it will be regulated, given that the central bank and government are actively working on it,” he stated. “The general consensus is that… sooner or later, this will be implemented in some form,” he said.