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Will oil rally in 2016?
Will oil rally in 2016? Capital markets started the year against a backdrop of a strong rise in risk aversion. Over the last few weeks, fears concerning the health of the US economy, the future of Chinese growth and the collapse in oil prices have pushed investors to protect portfolios and continuously sell risky assets.
The price per barrel is suffering from weak global trade and Iran’s return to the group of oil-producing countries, but also from the particularly mild climate since the end of last year. Accordingly, financial markets are reducing risk, taking this fall in the oil price as the self-fulfilling prophecy of a sluggish global economy lacking momentum. Strong correlation is thus building between equities (including those in the eurozone) and energy commodity prices.
Chart 1
Correlation between equity and energy commodity
(Click to enlarge)
Clearly there are devastating consequences for oil-producing countries, as they watch revenue collapse and face investors withdrawing capital in anticipation of lower rates, on the grounds that emerging central banks will have to introduce more accommodative policies to support the clear slowdown in local activity. Here, too, the correlation between emerging market currencies and the price of Brent is increasing, with each additional fall in oil prices translating into a stronger US dollar versus emerging currencies.
Chart 2
Brent & dollar vs. emerging currencies
(Click to enlarge)
Chart 3
Currencies: US Dollar vs. Euro & emerging currencies
(Click to enlarge)
On the stock market this continuous fall in emerging currencies is penalizing equities for which performance depends, to a large extent, on the change in parity versus developed market equities. In fact, the deterioration in current account balances in emerging countries is creating economic difficulties for regions watching the price of their dollar imports rising constantly. The dollar is no longer rising versus the euro but continues to rise versus emerging currencies, which shows that the later are indeed weakening.
Chart 4
Brent spot price & US rig count
(Click to enlarge)
Is there any hope of an end to this phenomenon this year? We believe that oil may have bottomed out, or that even if it falls a bit further, there is light at the end of the tunnel. In fact, Saudi Arabia’s strategy to undermine US shale oil is working. Even if this industry will not disappear thanks to its high flexibility (the rig count is declining [see chart] but deep offshore drilling is under greater threat at these price levels), US banks may demand a higher cost of capital (defaults should at least rise towards 6% in the US high yield energy segment this year) and the regulator may require a more conservative valuation of reserves in the business models of alternative producers.
From here on in, voices has already raised to this effect. Concerted action could resume within OPEC in order to get better control of production. Indeed, at these prices, several countries will be tempted to buy social peace by rebalancing their budgets with an income boost.
So we can start to think about implementing investment strategies for this new situation. Directly purchasing commodities is not the only option. For an indirect play, energy sectors in US and European majors could be considered, break-even inflation points are at their lowest in the US today and could benefit from tensions with a barrel price which will initially return to around $40. Similarly, developed currencies linked to oil, such as the Canadian dollar (see chart), may also offer the opportunity to play this theme of the end of a great bear cycle for energy.
Chart 5
Brent price & Canadian dollar (vs. $)
(Click to enlarge)
Franck Nicolas
Head of – Investment and client solutions
www.nam.natixis.com
Natixis Asset Management
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Please find below Hashdex monthly crypto market update and performance attribution for Hashdex Crypto-Index ETPs for October 2024.
With October often showing strong seasonality for crypto assets, this month’s results reflect a promising trend for Bitcoin, although gains were more limited across Altcoins. As outlined in our latest CIO note, “Beyond Trump and Harris: Five Congressional Races That May Impact Crypto’s Future”, several upcoming US congressional races could shape the regulatory landscape for crypto, with potential implications for institutional adoption and future price action. Bipartisan support for the asset class is expected to grow, depending on the results of key races.
We will share some updates during the week, if you need any inputs on US elections, feel free to reach out to us.
Hashdex Crypto Index ETPs: performances (USD) as of end of October 24
• Beta Index ETP – Nasdaq Crypto Index ETP (HASH or HDX1) (largest Crypto Index ETP in Europe): October +7.1%, YTD +45%, 12M +89%.
• Smart-Beta Index ETP – Crypto Momentum Index ETP (HAMO or HDXM): October -0.5%, YTD +1.2%, 12M +71%.
Market Update – October 24
October, commonly known as ”Uptober” for its seasonally strong performance for Bitcoin, continued this trend in 2024. The month began with a volatile period, as the Nasdaq Crypto Index (NCI) initially gave back gains from September. All NCI constituents declined in the first ten days, with the exception of Uniswap, which announced plans for its own layer-two network on Ethereum.
Mid-month, the sentiment shifted, with a sharp rally that drove Bitcoin close to its all-time high by the 29th. The NCI ultimately closed the month up 7.1%, significantly outpacing traditional markets as both the S&P 500 and Nasdaq 100 declined slightly. This rally coincided with a sharp increase in former president Donald Trump’s odds in election betting markets, generating additional optimism around Bitcoin.
While Bitcoin posted a robust 10.6% gain, Altcoins generally underperformed. The notable positive exception among altcoins was Solana, which rose 9.0%. In contrast, Ripple declined 18.6% due to ongoing SEC litigation, and Polygon’s MATIC dropped over 20% as it migrated to a new token model (POL).
Nasdaq Crypto Index (NCI) relative to other asset class in October 24
Source: Hashdex, as of 30/10/24.
In comparison with traditional assets, the NCI’s 7.1% gain far outpaced the S&P 500 and Nasdaq 100, both of which posted slight declines. This performance underscores the potential for crypto assets to provide upside during periods of broader market uncertainty. The majority of this outperformance was driven by Bitcoin’s strength, underscoring its role as a cornerstone of the crypto asset class and its growing appeal as a macroeconomic hedge.
Performance attribution:
Nasdaq Crypto Index (NCI)
The NCI recorded positive returns for most of its primary constituents, with Bitcoin (+10.6%) leading the gains. Solana (SOL) also contributed positively, rising 9.0%. However, Ripple (XRP) and Polygon’s MATIC weighed on the index, with losses of 18.6% and over 20%, respectively. Ripple’s decline was largely attributed to ongoing legal issues with the SEC, while MATIC’s transition to the POL token created additional downward pressure.
Source: Hashdex, as of 31/10/24.
Crypto Momentum Factor Index
The Crypto Momentum Factor Index showed a slight monthly decline of 0.5% in October, reflecting the underperformance of altcoins in general. Although Tron (TRX) remained relatively stable, other altcoins in the index faced headwinds, leading to a small monthly loss for the index.
Source: Hashdex, as of 31/10/24.
Correlation (3m) to traditional asset classes
Source: Hashdex, as of 31/10/24. NCI for Nasdaq Crypto Index.
Hashdex Nasdaq Crypto Index ETP
Largest Crypto Index ETP in Europe, AUM ~$400m
ISIN: CH1184151731 / Tickers: HASH (SIX and Euronext) or HDX1 (Xetra) – tradable in USD, EUR, CHF and GBP
Hashdex Crypto Momentum Factor ETP
ISIN: CH1218734544 / Tickers: HAMO (SIX and Euronext) or HDXM (Xetra) – tradable in USD, EUR, CHF and GBP
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Microsoft considers bitcoin, UBS launches tokenized fund, and MicroStrategy will buy $42B in BTC
Crypto markets faced a volatile week as key macroeconomic events approached, with the upcoming US presidential election and anticipated Fed rate decision fueling uncertainty in risk assets. Bitcoin (BTC) rose 1.7%, ether (ETH) declined 1%, Solana (SOL) fell 8.2%, and the Nasdaq Crypto IndexTM (NCITM) was down 0.5%.
Microsoft to consider bitcoin investment starting December
According to a new SEC filing, Microsoft is considering the possibility of investing in Bitcoin as a hedge strategy against inflation despite opposition from its Board of Directors. This move, by one of the world’s largest companies, would mark a significant step in institutional adoption for Bitcoin.
MicroStrategy discloses plans to buy $42B of BTC
The firm announced bold plans to raise $42 billion over the next three years to acquire more bitcoin. This new wave of capital will be split equally, with $21 billion from equity issuance and $21 billion from debt offerings, in a project called the ”21/21” plan. This move, led by founder Michael Saylor, underscores bitcoin’s potential as a valuable hedge against inflation and highlights its appeal as a strategic investment option.
UBS launches its first tokenized fund on Ethereum
UBS Asset Management has launched its first tokenized fund, the USD Money Market Investment Fund Token (uMINT), a money market fund built on the Ethereum blockchain, available through authorized partners. The launch supports the growing demand for tokenized financial assets and leverages distributed technology to enhance fund issuance and distribution, as well as UBS’s broader strategy to expand its tokenization services.
Oct. 24 crypto market update & Performance attribution Hashdex Crypto Index ETPs
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