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Wall Street wobbled on Bitcoin bubbles and Fed’s taper tantrum concern, but rebounds

calendar 20/05/2021 - 21:02 UTC

Dow Future wobbled Wednesday and early Thursday on Bitcoin bubbles and Fed’s taper tantrum concern. But Dow Future also rebounded by almost +450 points to close in moderate green as USDBTC recovered and FOMC minutes fine print shows Fed may not go for any QE tapering in 2021. Also, mixed U.S. jobless claims boosted stimulus-addicted Wall Street as it will help Fed to stay on the sideline in 2021.

Dow Future was already under stress on the concern of broader risk-off sentiment amid Bitcoin (BTC) plunge amid Tesla CEO Musk’s ‘U’ turn on crypto. Tesla suspended acceptance of Bitcoin due to growing energy/environmental concerns. And BTCUSD plunged almost 30% to a 4-months low around 30000.00 after three Chinese banking and payment industry bodies issued a statement (through PBOC), warning financial institutions not to conduct virtual/cryptocurrency-related business, including trading or exchanging fiat currency for cryptocurrency/Bitcoin.

As per SCMP: https://www.scmp.com/tech/policy/article/3133967/beijing-sends-another-warning-cryptocurrency-risks-amid-recent-elon

China has effectively banned financial institutions and payment companies from providing services related to cryptocurrency transactionsa and warned investors against speculative crypto trading. But so far but has not barred individuals from holding cryptocurrencies. Chinese policymakers have recently ruled out cryptocurrencies as mediums of exchange (virtual currency) but tacitly supported them as investment vehicles (as an asset) – as long as they serve the real economy and are not purely speculative.

China is keen on using evolving Blockchain tech that underpins cryptocurrencies to help build its digital economy and quicken adoption of its sovereign digital currency while avoiding the risks that decentralized virtual networks pose to the financial system. China prohibits cryptocurrency fundraising and trading platforms out of fear of stoking financial instability. Three Chinese state-backed financial associations have jointly issued a warning about the risks stemming from volatile cryptocurrencies, in the latest step by Chinese authorities to tamp down on speculative trading and draw a clear distinction with the central bank’s digital currency.

The National Internet Finance Association of China, a state-backed association of Chinese internet firms providing financial services, the China Banking Association on behalf of the country’s banks, as well as the Payment and Clearing Association of China, on Tuesday warned their members to stay clear of any financing activities related to popular cryptocurrencies.

They stated that any activity related to the exchange of fiat money for cryptocurrencies, providing intermediary services to facilitate trading, or conducting token-based derivatives trading, could be charged as a criminal offense in China. The warning, which was republished by the People’s Bank of China (PBOC), the country’s central bank, underlines Beijing’s caution when it comes to the financial risks and money laundering concerns raised by cryptocurrencies: “Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order”.

On mid-Wednesday, BTCUSD recovered from around 30K to almost 40K after Tesla CEO Musk tweeted through a combination of text and emoji’s, that Tesla had ‘diamond hands’, implying that the company maker would not be selling its $1.5B stakes in Bitcoin:

As BTCUSD recovered, Wall Street also followed and was well-off the session/panic lows; Dow Future recovered almost +500 points. As a pointer, Wednesday’s 30% plunge in BTCUSD resulted in a huge margin call almost in 775K retail accounts, resulting in around $8.6B loss (notional). Such abnormal volatility in an asset like USDBTC/cryptos is bound to have a serious spillover effect on the overall financial market due to a possible margin call. Also, various crypto/BTC savvy corporates like Tesla having large Treasury investments (in BTC) are susceptible to a huge fall.

But the question is whether Fed or Biden admin will go for an outright ban on crypto transactions, paving the way for disorderly fall of the same and doomsday for the Wall Street? The answer is most probably ‘no’; Biden admin will take the calculated middle path for currency as well as financial market stability.

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On Wednesday, Dow again slips briefly after FOMC minutes (April meeting) shows ‘taper’ word. But only some FOMC participants (policymakers) said it might be appropriate at some point in the upcoming meetings to consider QE tapering discussions if the economy continues its present rapid progress.

And most of the FOMC policymakers remained largely unconcerned about inflationary pressures, which they see as transitory. The FOMC minutes didn't signal any immediate policy change, however, some policymakers hinted a shift could be ahead; i.e. Fed may think/discuss the eventual QE tapering in upcoming meetings to prepare the market well in advance. Eventually, Dow recovered as FOMC minutes largely reflected recent stance by Powell, Clarida and almost all other FOMC policy makers’ public statement.

On Thursday, Dow Future recovered and jumped into positive territory after a mixed jobless claims report, which will ensure less hawkish Fed in the coming days; i.e. no QE tapering in 2021:

The number of Americans filing initial claims for unemployment benefits dropped by 34K to 444K in the week ending 15th May, the lowest since mid-March 2020 and below market expectations of 450K. The labor market continued to show signs of recovery, helped by the country's re-opening efforts, the ongoing government support, and one of the world's most successful vaccination programs. Applications are likely to decrease further in the coming weeks as more than 20 states have recently announced plans to withdraw from federal unemployment benefit programs (PUA), with businesses saying they make it more difficult to hire as the unemployment benefits pay more than most minimum wage jobs.  

The 4-week moving average of US initial jobless claims, a better indicator as it removes week-to-week volatility, dropped to a 14-month low of 504.75K in the week ending 15th May, from a revised 535.25K in the previous period.

The U.S. continuing jobless claims, which measure unemployed people who have been receiving unemployment benefits for a while (more than 1-week), rose by 111K to a seven-week high of 3751K in the week ending 8th May, above market expectations of 3640K.

The number of Americans applying initially for financial help from the Pandemic Unemployment Assistance (PUA) scheme, which covers uninsured workers that do not qualify for initial jobless claims, fell to 95.086K in the week ending 15th May, from the previous week's revised level of 103.678K.

Overall, at a glance, jobless claims were mixed amid an uptick in continuing claims. The U.S. unemployment rate in May should be around 5.75% as per average continuing jobless and PUA claims, adjusted for seasonal/double claim factors. For any substantial further progress of Fed’s maximum employment goal, the primary condition that unemployment rate should fall meaningfully lower than Dec’20 levels of 6.7%. The Fed may want to see the headline unemployment rate at 5.0% as the primary condition for its substantial further progress of maximum employment from Dec’20 levels. At present trend rate and considering U.S. COVID vaccinations for all trajectories, PUA benefit till Sep’21, the unemployment rate may sustainably stay around 5% only after Dec’21. And Thus Fed may not go for any QE tapering in 2021 and may only think about that by late 2022. Thus, Dow again got a boost and closed in moderate green (+201 points) from earlier red (-245 points).

Technical view: SPX-500, DJ-30, and NQ-100 Futures: Updated

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