Macro Market Review July 24th 2023
Fed interest rate decision, VIX, Equities, NASDAQ, DXY, Crypto & more.
Markets have been rallying in the last 6 months. However, this bullish trend seems to be dying out, so what happens next?
First things first, we have an interesting week ahead in terms of data:
- Monday July 24th: Flash PMIs (manufacturing and services data of multiple countries: France, Germany and US)
- Wednesday July 26th: is a big day! Fed interest rate decision and FOMC press conference.
- Thursday July 27: ECB press conference
- Friday July 28: The Bank of Japan outlook report and a press conference.
PMI:
- France’s Manufacturing PMI went down from 46 to 44.5 and Services PMI went down from 48 to 47.4.
- Germany’s Manufacturing PMI went down from 40.6 to 38.8 and Services PMI went down as well from 54.1 to 52.
- US Manufacturing PMI went up to 49 after being at 46 and Services PMI went down from to 54 to 52.
If the index reading is higher than 50, then it indicates an economic expansion. This means that the closer the reading is to 100, the higher the degree of positive economic growth. A reading below 50 indicates an economic contraction, with readings closer to 0 indicating a higher degree of contraction. So far, manufacturing and services worldwide have struggled to remain above 50, indicating that the economy is going through a contraction.
Volatility & Fed interest rates:
I would expect volatility in the markets this week, especially during and after the FOMC press conference. The direction of the market still remains unclear to me so we have to wait and see what happens. The world economy in an inflationary environment, even though inflation has seemed to come down a bit. The question is what is going to happen in terms of rates? Will the Fed hike rates aggressively again?
It is expected that the Fed will hike 25 bps. The majority of the consensus believes that the Fed will hike rates to 5.5%- 5.75% by December 2023. The current EFFR (Effective Federal Funds Rate) is 5.08%. The market is anticipating 1–2 further rate hikes before a Fed pause. I think anything between 5.5% and 5.75% is possible before they start cutting rates.
EFFR is at 5.08%, if there is a 25 bps hike on Wednesday, the new rate will be 5.25%. In addition, the US02Y/10Y has been heavily inverted for 382 days as well as the US03M/10Y. I am looking for the curve to come out of inversion and maybe at that point we will see some cracks in the economy. An inverted yield curve has historically preceded every US recession for the past half century.
However, the real metric to asses the economic situation after rates and inflation is going to be the unemployment data. At the moment the job market has been very resilient but at what point do we start seeing the cracks and tight credit affecting the labour market, then Fed will decide to start cutting rates?
Other things to look at:
VIX: Volatility index for the equities market.
The VIX is at the 13.90 level, which is very low. When the VIX trades at a lower range, this indicates that it is a good time to for profit-taking and a potential trend reversal in the markets. When the VIX trades lower, volatility usually remains low and this leads to more confidence and certainty in the markets.
It is a dangerous zone to be chasing the rally in equities when the VIX is so low. Equities tends to experience a sell off due to profit taking therefore, I would be more reluctant to take a long and start to look for short entries from a trading prespective.
Equities: S&P 500
I think the S&P 500 is getting close to a local top. Price is trading at a major resistance level at 4600–4500. The question remains wether price will try to push higher or range at the top or could it trade back down to the 4300 level. This key price points leave us with a very clear trading range, where the range high is at 4570, the mid range at 4440 and the low range at 4300. This could be a good shorting opportunity for the S&P. From a risk reward (1:3) perspective it is a good set up to short from the high range to the mid range.
NASDAQ:
NASDAQ bounced back down after hitting a major resistance level. Usually the S&P and NASDAQ are correlated, however the question remains if the S&P will follow.
DXY: US Dollar
The US Dollar bounced back up after hitting major support level at 99.5. I think the US Dollar market low is in and will start trading higher in the upcoming months. Mind you, this doesn’t mean that the Dollar is going to take off immediately. It is probably going to have some range bound price action and consolidation before recovering. As long as the low range holds, there is a good chance dollar will keep trading up.
CRYPTO
If we take a look at the crypto total market cap, the structure is still very bearish. From a trading perspective, there is a good chance to short the crypto market since there has been rejection at the 1.2T level. However, if you are not an active trader, rather than shorting, the play for you is to do research on fundamentals of crypto projects and prepare for the bull run.
There will be good buying opportunities, especially if there is a recession. There will be a recessionary risk on alts and BTC and price will decrease. The question you need to be asking yourself is at what levels, at what price points and at what market cap do you want to buy into these projects. You should be looking for that 5x, 10x, 15x profits and good risk reward ratio.
You do not have to be a genius trader to do that; just some good common sense, a bit of proactiveness, proper research and positioning yourself with a strategy can get you far. As a spot buyer as an investor you have to be looking to buy the end tail of accumulation. The key to trading alt coins successfully is to understand at what point to get out of the market and take profit. In a bull market you don’t have to trade much just buy and sell at the right time. I think there will be lots of buying opportunities in the next months, due to the risk of recession and the BTC halving in 2024.
I hope this information was useful!
Love & light,
Mariana
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