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Volatility Makes a Comeback
ETFS Multi-Asset Weekly Volatility Makes a Comeback
Highlights
- Oil drops another 10% as the IEA revises 2015 outlook down.
- European stocks oscillate in response to mixed news.
- FOMC in focus as US dollar rally continues unabated.
With the political situation in Greece remaining precarious and falling oil prices changing the world order, perception of risk is rising. The Chinese domestic equity market ended the week up close to 2%, despite a 5% fall on Tuesday in a particularly unstable week. Position-squaring and reduced liquidity going into year-end is likely to contribute to market volatility, but also likely to leave investors flush with funds to invest at the start of 2015. Gold and silver, traditionally seen as defensive, hedge assets rose last week amidst the instability. The Federal Open Market Committee’s last meeting for 2014 will be closely watched for cues on policy tightening to come in 2015.
Commodities
Oil drops another 10% as the IEA revises 2015 outlook down. WTI fell below US$60/bbl last week while Brent is following close behind, after the International Energy Agency (IEA) announced it expects prices to remain low on weak demand and large supplies. Although price weakness is likely to continue through the first half of 2015, continued economic growth in the US and China, combined with a reduction in oil supply, will eventually bring the oil market back to balance in with prices returning to trade above the US$70/bbl level. We believe the reduced demand forecasts from OPEC are a precursor to supply cuts. At these prices, close to 20% of crude oil and condensates production from the United States are unprofitable according to the EIA. Meanwhile, silver rose 3.4% on tighter supply prospects in 2015. While silver stocks remain elevated, they have fallen by 4% since the beginning of October. We expect industrial demand to rise and buttress price action over the next few months as the recovery in the US and China gains momentum.
Equities
European stocks oscillate in response to mixed news. The EURO STOXX 50® Investable Volatility Index ended the week up 13% after a turbulent week. A report outlining strong German factory orders prompted a rally in European stocks. These gains were quickly erased following an announcement made by Antonis Samaras, the Greek prime minister which stated that voting for a new president would commence this week, casting doubt over the political future of the nation. Energy related stocks have suffered as oil marches lower as illustrated by the -10.7% fall in the Solactive US Energy Infrastructure MLP Index. The FTSE 100 was dragged lower last week by the poor performance of mining stocks, falling -3.3% as China revealed the biggest fall in imports in eight months. The report confirmed growing fears that the domestic demand is weak in the world’s largest consumer of industrial metals.
Currencies
FOMC in focus as US dollar rally continues unabated. We expect the US Dollar to remain on an upward trajectory during 2015, as the economic recovery prompts the Federal Reserve to begin to tighten policy in Q2. We expect that a large balance sheet for the Fed does not preclude rate hikes and that small and measured rate increases can be a signalling mechanism to allow the central bank to warn the market that stimulus will be gradually removed as the recovery continues to absorb spare capacity. Meanwhile, the surprise rate cut by the Norwegian central bank, coupled with the continued weakness in oil prices has been detrimental for the Norwegian Krone. We expect that the deflationary impact of lower oil prices will begin to fade and that the negative impact of weaker oil prices on the Norwegian external balance should also start to diminish as crude recovers.
Important Information
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).
Crypto assets have been approached with caution by some investors given their volatility during periods of market stress and this year has reflected this perspective, as crypto has struggled amid macroeconomic uncertainty.
However, as we highlighted in previous editions of the Hash Insider, maintaining exposure is critical across most asset classes — for example, missing only the 10 best days in the S&P 500 over a 20-year period would significantly reduce your overall returns. In crypto, this effect is even more pronounced: missing the 10 best days can actually turn a positive performance into a negative one.
Once again, following a new wave of crypto-related tailwinds, such as the recent withdrawal of the crypto guidance for banks by the Federal Reserve, crypto has demonstrated resilience, recovering from the shock of Trump’s “Liberation Day” much faster than other asset classes.
We have seen this pattern before, and it reinforces the idea that stress events could present valuable investment opportunities in the crypto space.
Market Highlights
Federal Reserve withdraws crypto guidance
The Federal Reserve has withdrawn previous guidance that discouraged banks from engaging in crypto activities such as custody and trading.
This move, part of a broader regulatory shift under the Trump administration, is poised to foster innovation in the crypto space by reassessing regulatory frameworks and easing restrictions.
SEC advocates for clear crypto regulations
SEC Chair Paul Atkins has emphasized the need for a robust regulatory framework for digital assets after taking office last week.
This highlights Atkins effort to provide clarity and stability in the marketplace, signaling a significant shift in the SEC’s approach to the growing digital asset sector, the effects of which should be beneficial to the whole asset class throughout the current administration.
US BTC ETFs record $3.1B in weekly inflows
Spot BTC ETFs in the US have recorded a new weekly inflow record of $3.1 billion, driven by investor enthusiasm amid BTC’s recent price surge.
This marks the seventh consecutive week of positive flows, underscoring the growing institutional interest in BTC as it once again nears $100,000.
Market Metrics
The NCITM constituents had a strong week, with most constituents posting gains close to or above 10%. This week’s highlight was ETH (+14.0%), which, after several weeks of underperformance, outpaced both BTC (+11.6%) and SOL (+9.5%), contributing significantly to the NCITM’s 11.6% return. This shift could signal a broader turnaround in crypto performance, supported by even stronger fundamentals following the withdrawal of crypto guidance by the Fed, and the endgame of the tariff war by Trump.
This week, the NCITM (+11.6%) delivered strong performance, nearly doubling the gains of traditional indices like the Nasdaq 100 (+6.4%) and the S&P 500 (+4.6%). This surge allowed the NCITM to close the gap and finally surpass the Nasdaq 100 on a year-to-date basis. As we’ve discussed in previous editions, crypto fundamentals remain strong and strengthening, with the setback of the past few months being mainly due to macroeconomic headwinds. This week could mark the beginning of a shift, with those headwinds weakening and fundamentals weighing heavier on the positive side.
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