• Bitcoin continues to trade within a defined support and resistance band
• Rates markets awash with speculation as yield curve flattens
• U.S. equities fall from record highs

ELON MUSK’S SOCIAL MEDIA SHENANIGANS DIRECTING BITCOIN (BTC)

Bitcoin pushed above the $40000 mark this week after tweets from Tesla CEO, Elon Musk helped boost the cryptocurrency. In his tweet, Mr. Musk alluded to the fact that Tesla may restore the use of Bitcoin as a payment method should energy sources used in BTC mining come from renewable basis’.

In other news, the FBI managed to track down the physical identity of cyber criminals who received $2.3 million worth of Bitcoin. This could significantly dent the anonymity associated with the digital currency going forward.

BITCOIN (BTC) TECHNICAL ANALYSIS

Bitcoin daily chart:

Chart prepared by Warren Venketas, IG

Bitcoin price action has been comparatively subdued recently with the daily chart exhibiting a rectangle pattern (yellow). This pattern gives market participants hopes of a potential breakout either above or below the rectangle. While many analysts believe in further upside, traders should look for a confirmation breakout before favoring any directional bias.

Bulls will be looking for the recent swing high as initial resistance at $41303.6 while Saturday's low at $34659.6 will hold as support.

HAWKISH SHOCK DISRUPTS MARKETS

The Federal Reserve met this week announcing somewhat of a disruption to prior expectations whereby the March dot plot was reviewed quite significantly. The 2023 forecast projected two rate hikes during the period which caused notable changes across financial markets.

This change in sentiment could be fleeting as these are long-term adjustments that have been reacted to; while the current environment remains extremely accommodative. In late august this year, the Jackson Hole symposium could provide the next bout of important transformation but until then it is likely we may see minimal change to current forecasts.

One of the main reactions to the news was reflected in the yield curve (see below) which flattened – longer dated bond yields fell. The narrowing of yield spreads between short and longer dated bonds has affected the reflation topic as evident by the slump in reflation-linked commodity prices.

U.S. GOVERNMENT BENCHMARK YIELD CURVE

Chart prepared by Warren Venketas, Refinitiv

SPX COMES OFF RECORD HIGHS WHILE FINANCIALS ADD TO DECLINE

The S&P 500 index slipped after the FOMC announcement which basically brought investors back to reality after being overwhelmed with liquidity. This could be the “hangover” correction that many analysts have been expecting.

REFINITIV U.S. FINANCIALS INDEX

Chart prepared by Warren Venketas, Refinitiv

Initially, U.S. financials reacted positively post-Fed which was one of the few sectors to benefit from the Fed’s hawkish announcement. Shortly after - as evident from the Refinitiv US Financials Index below, financial stocks tanked in response to the flattening yield curve above, even though the U.S. dollar continued to surge. The logic behind this is that rate sensitive sectors like banks respond badly to a decrease in yield spread. One of banks’ primary tools to making money is to borrow at short-term rates and lend out at longer term rates therefore, when spreads decrease profit margins tend to decrease.

S&P 500 (SPX) TECHNICAL ANALYSIS

SPX 4-hour chart:

Chart prepared by Warren Venketas, IG

The 4-hour SPX chart above shows a potential rising wedge pattern (yellow) unfolding which has since broken below wedge support. Although typically, a rising wedge is preceded by a downtrend it should not be ruled out. Bears will be looking at the June swing low at 4167.33 as initial support since

the 4200.00 psychological level has been pierced.