Historically, a Santa rally happens in the weeks leading up to Christmas when a collective sense of goodwill bleeds into equity markets. This is typically a seasonal blip and nothing to write home about. But this year, we could see a far more significant rally as the United States Federal Reserve, the Securities and Exchange Commission and BlackRock line up to deliver a bonanza of holiday cheer.
The Federal Open Market Committee (FOMC) finished its penultimate meeting of 2023 on Wednesday, and it decided to hold interest rates steady. As we know, U.S. inflation has been tamed from a high of 9.1% in June 2022 to its current level of 3.7% thanks to the Fed’s aggressive interest rate hiking cycle that brought the Federal Funds Rate to 5.25-5.5% — its highest level since 2001.
However, while this campaign has been unquestionably successful, markets remain deeply concerned about the potential of higher rates, or even rates sustained at this level, to trigger a recession in the U.S. The Fed also now shares these concerns as it softens to some degree against inflation.
Should the next Bureau of Labor Statistics inflation reading on Nov. 14 show a move downward, we can expect to see money flooding into risk assets as investors anticipate the next interest rate decision to be a cut. This will, of course, have a positive impact on equity markets, and even bond markets as yields fall and the back end of the yield curve flattens.
GUNDLACH: THINK CPI WILL COME DOWN BASED ON INFLATION MODEL
— *Walter Bloomberg (@DeItaone) November 1, 2023
Crypto markets will follow suit, with Bitcoin (BTC) remaining strongly correlated to main markets. What will provide an extra shot in the arm, though, will be the approval of the first U.S.-based Bitcoin spot ETF — which is likely to come before Jan. 10, as J.P. Morgan predicts. This is underlined by the excitement that rumors of the approval of BlackRock’s application have generated over the past few weeks, which sent Bitcoin back up to $35,000: a level it hasn’t enjoyed since the pre-Terra Luna days of 2022.
Eventual approval will provide further impetus for Bitcoin, Ether (ETH), and large swathes of altcoin markets. However, if investors are following the old adage, “buy the rumor, sell the fact”, it may not be huge. We might even see a small dip before a more sustained rally. There is little doubt, however, that approval will be positive for cryptocurrency….