Bitcoin’s Correlation With S&P 500 And Nasdaq Is On The Rise As Markets Await Fed’s FOMC Meeting
Meanwhile, Bitcoin’s correlation with gold has been mostly negative as the traditional safe-haven trades around $1,785 per ounce, down 14% from the $2,075 ATH hit in August 2020.
Bitcoin has had a rough start to a week in which central banks are set to meet and drive the markets.
“These once liquidity beneficiaries are the canary in the coal mine, and what the Fed giveth, they are now gearing to take away,” said Chris Weston, head of analysis with Pepperstone Financial Pty Ltd. But he added that “crypto has the added tailwind from the adoption story.”
On a decline for more than a month, ever since Bitcoin hit an all-time high at $69,000 on Nov. 10, the leading cryptocurrency went down to $45,750 on Monday.
Renewed selling during Asia session has been the source of recent weakness in Bitcoin pic.twitter.com/evfAmMMo61
— bithedge (@bit_hedge) December 13, 2021
Despite breaching the 200-day moving average at about $46,720, today, we are back above $47k.
“After any large move down, the market takes time to establish a base, and that is what we’re seeing,” stated Vijay Ayyar of crypto exchange Luno.
According to Glassnode, the number of active Bitcoin addresses reached the lowest level since the beginning of October. Meanwhile, the transaction volume has dropped to the lowest level since mid-September.
At the same time, Bitcoin exchange inflows have dropped after reaching a new high in nearly four months early last week. The current inflows are now close to the lowest since April 2015.
— Zhu Su 🔺 (@zhusu) December 14, 2021
The correlation of Bitcoin with traditional equities meanwhile continues to increase amidst the rising inflation.
As we reported last Friday, the US Bureau of Labor Statistics relieved the largest year-over-year annualized rate since the 1980s. While traditional markets did give a strong reaction before the close, Bitcoin experienced a rapid drop on Monday morning, contrary to its perception as an inflation-hedge.
“The idea that as it matured, the volatility would ease has not really materialized,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
“The volatility is deadly and its other supposed attributes, like a hedge against inflation, seems spurious.”
Inflation has been surging globally over the past year due to a rebound in demand and supply bottlenecks.
According to Kaiko’s latest report, emerging markets like Russia and Brazil experienced significant price growth than developed markets and, in response, aggressively raised interest rates over the past few months.
In developed economies, US inflation accelerated to about a four-decade high while the Euro Area CPI hit its highest level since the creation of its fiat currency.
Over the past few weeks, major US equities have been volatile, hitting a record high on Friday, while crypto assets have experienced a sharp pullback in response to a growing risk-off environment.
“Overall, Bitcoin’s correlation with traditional equities has been on the rise while its correlation with gold has been mostly negative,” it noted.
With risk-off sentiment driving crypto and equities, all eyes are now on the US central bank’s two-day December FOMC meeting.
The Federal Reserve's meeting starts on Tuesday, and investors now expect the central bank to announce an acceleration of tapering its bond-buying and give a signal to at least one interest rate hike next year.
Markets are actually betting on the first rate-hike by June and another one by November.
This hawkish Fed is supporting the dollar, which has been relatively quiet this week, climbed to a one-week high and is currently near 96.4, down from the 2021 high of 96.9 hit in late November high, a level last seen in early July 2020.
This coming Wednesday we'll know if bulls are forced to capitulate or if we get a Santa rally into year end.
— Alex Krüger (@krugermacro) December 13, 2021
While the euro inched higher, the pound slipped after British Prime Minister Boris Johnson warned about the impact of the new COVID-19 variant. The European Central Bank and Bank of England are also set to announce their policy decision on Thursday and the Bank of Japan on Friday.
“That leaves a very high bar for the Fed to deliver a ‘hawkish surprise',” wrote Westpac strategists.
“But even if the Fed merely matches elevated expectations, they are still streets ahead of the ECB, who is looking for ways to maintain accommodation” after its program is due to end in March.