The Week of Truth

Developments in Crypto

Last week, Chainlink Labs announced its Cross-Chain Interoperability Protocol (CCIP) entering the mainnet early access phase. CCIP’s primary objective is connecting traditional financial institutions with both public and private blockchains. This protocol facilitates smooth transfer of data and value across different blockchain networks.

The Web3 ecosystem has evolved into a multi-chain system with Layer-1 blockchains and Layer-2 scaling solutions, but faces the oracle problem and lacks communication between traditional systems and blockchains. To address this, blockchain interoperability protocols like Chainlink are crucial. Chainlink serves as a reliable solution to the oracle problem, enabling wider adoption of smart contracts and facilitating trillions of dollars in transactions across industries.

The CCIP, powered by Chainlink's decentralized oracle networks, aims to solve blockchain interoperability issues, unlocking various use cases like token transfers, cross-chain collateral, gaming, and data storage. CCIP also bridges the gap between on-chain and off-chain worlds, with SWIFT and several financial institutions exploring its potential.

Prominent participants, including SWIFT, Swiss SIX Digital Exchange (SDX), and major banks, are collaborating for blockchain interoperability, signaling growing interest in the technology.

Chainlink's co-founder, Sergey Nazarov, expresses optimism about the potential impact of these efforts, envisioning increased interconnectivity between banks and public blockchains, leading to significant value flowing into the industry. Despite regulatory challenges faced by cryptocurrency exchanges, Nazarov remains optimistic about the future integration of blockchain in the financial sector, anticipating increased value as banks participate in public markets. Personally I think that while regulators love 100% traceability of the common people’s financial dealings, politicians, financial institutions themselves and other individuals above the law prefer loopholes in system design to keep certain things off the record. 

BTC/USD

1-Day Timeframe

Bitcoin remains in its consolidation range for over a month now, trying to bore everyone out of the market. FOMC this week could be the catalyst for a break in either direction. Beware of pre-FOMC volatility. Once price starts moving, it will likely be swift, like we have seen several times since the beginning of this year. While structurally I could see prices go as low as 26.7k if things go south, based on the PA since the end of June, a run of long stop orders towards 28.3k, then continuation towards the mid-30ks seems plausible. Especially if the stock market holds strong, and indices start to renew their all-time highs. I think this element will be crucial for BTC to gather the strength to run towards 40 - 44k.

If stock indices reject at their current key retracement zones (see the “Legacy” part below), I would expect BTC to fail at a sustained move higher from here.

ETH/USD

1-Day Timeframe

Since ETH rejected at the 2k$ mark on July 13 - 14, price has retraced back to the 1,867$ mark we have had our eyes on for a while now, which is now also in sync with the longer term trendline support. Overall PA is still showing higher lows and higher highs, although the higher lows are quite close in value to each other, showing weakness in the uptrend. This is understandable when we take BTC price action into consideration, still worth noting.

Legacy

Stocks extended their upward momentum last week, contributing to an impressive gain in 2023, with the S&P 500 now only 6% away from its all-time high. The recent corporate earnings announcements further fueled this growth, as companies demonstrated their ability to navigate challenges such as high but declining inflation and strong but moderating demand.

Since May, the market has been driven by growing optimism about a "goldilocks" scenario, where economic conditions strike a balance between avoiding high inflation and preventing a (strong) recession.

The rally in stocks has been significant since the low point of the bear market in October, recovering most of the 26% decline witnessed between January and October of the previous year. The recent rally has been supported by data indicating the economy's resilience despite the Fed's tightening policies.

Historically, equities have peaked about six months before recessions start, acting as an early warning signal for economic headwinds. While current market sentiment and current state of the S&P 500 does not suggest an impending recession, it is important to note that price is currently in the key fibonacci retracement zone (see chart below). If this absolutely crucial area can be cleared and the market signals that it’s ready to move on, a new all-time high could be in the cards, which would also potentially help Bitcoin and crypto at large, because crypto has mostly performed well once stock market indices showed strength into new highs.

Should a recession be avoided, it would join the rare instances of 20%-plus stock-market declines like those seen in 1987 and the mid-1960s that were not accompanied by a recession.

As long as stock market indices can hold and consolidate within their key retracement zones, as opposed to straight out reject here, the base-case view should be that stocks are not likely to dip below the lows of 2022, but investors should expect increased volatility compared to the relatively stable period of the past few months. This week’s FOMC announcement and press conference could set the tone for the medium term.

Regarding the broader economic trend, the labor market stands out as a crucial pillar supporting the current phase of the economic cycle. Unemployment rates are at their lowest in decades, and wages are rising, leading to robust consumer-spending growth in the first quarter of this year. Household consumption is playing a significant role in driving the economy, outpacing overall GDP growth by more than double. At the same time, the cautious view would be that historically low unemployment rates are a precursor of every past economic top. 

Historically, unemployment has increased moderately before economic contractions, followed by a more significant acceleration, with the unemployment rate rising by around 2% in the 12 months leading up to recessions. However, this time, the situation is expected to be different due to the current high number of job openings, indicating strong and sustained demand for workers. This healthy demand for workers should mitigate the decline in employment conditions, and the exceptionally strong labor market is anticipated to soften any potential economic slowdown ahead. From a data perspective both bull and bears have good arguments in their favor.

S&P 500 

1-Week Timeframe

Nasdaq 100 

1-Week Timeframe

Dow Jones Industrial Average 

1-Week Timeframe

The S&P 500, Nasdaq 100 and Dow Jones Industrial Average are all in or around their key 0.618 - 0.786 fibonacci retracement areas, measured from the all-time highs to the lows they put in around October 2022. Historically speaking, without failure, the time when price retraces 61.8 - 78.6% from their lows the disagreement between bulls and bears will heat up to its peak, bulls shouting for new all-time highs, and bears arguing that the retrace just has been a trap and that the u-turn in markets is near, each side calling the other a fool. 

When analyzing past charts of all kinds of asset classes (including currencies, crypto, commodities and stocks) we can see where this split opinion is coming from. The 70.2% retracement area is often the peak of the B wave of ABC type corrections. And the C wave often being similar or longer than the A wave, a rejection at the key retracement zones would open a possibility of the 2022 lows to be taken out over the next 6 - 12 months. 

The Nasdaq has already pushed above its 0.786 retracement level and started a bullish retest last week. And with the SPX and DJI being just under that same level, the next few weeks will be interesting, especially due to my view that strength in the stock market is necessary for crypto to perform well, at least until the crypto market as a whole and individual crypto projects are “properly” regulated.

Weekly Schedule

U.S.

The Federal Reserve is expected to resume raising interest rates at the July 26th FOMC meeting. According to the CME FedWatch Tool, there is a 99.8% probability that the central bank will implement a 25bps hike, bringing the target range to 5.25% - 5.50%, the highest level in nearly 22 years. After ten consecutive rate increases, the Fed paused at the June FOMC meeting. While a rate hike is expected this Wednesday, the Fed is likely to remain noncommittal about its actions in September. Economic data has been mixed, with strong labor data but cooling pricing pressures, providing support for Chairman Powell's argument that a soft landing, a slowdown that avoids a recession, is still possible. This rate hike might mark the end of the Fed's tightening cycle, but there will be two more inflation reports before the Fed makes a final decision on whether further rate hikes are necessary.

Apart from the Fed's actions, several other economic indicators and earnings reports could impact the markets. The flash PMI report on Monday is expected to show a softening in both the manufacturing and service sectors, with services still in expansion territory. Tuesday's Consumer Confidence Report by the Conference Board also might reinforce expectations of a soft landing. (* Both not depicted in the high-impact only schedule.)

On Thursday, the initial estimate of Q2 GDP is projected to show a slowdown in growth from 2.0% to 1.7 - 1.8% due to moderate consumer spending. 

Friday will see the release of personal income and spending data, along with PCE, the Fed's preferred inflation and wage gauges. 

Earnings reports will play a significant role this week in stock markets, with updates from various major companies across different sectors.

Eurozone

A 25bps rate hike by the European Central Bank (ECB) is widely expected at their meeting on Thursday. However, the outlook after this rate hike remains uncertain, with debates about whether there will be a pause in September. Recent statements from policymakers suggest that a pause might be possible, considering some progress in the inflation data. While the ECB has maintained a hawkish stance in previous meetings, President Lagarde and her colleagues might adjust their communication to leave the possibility of a pause open in the following meeting.

Additionally, flash inflation data from member states, including Germany, France, and Spain, will be released, along with flash PMIs from Germany, France, and the eurozone.

Lastly, Spain will hold a snap election over the weekend, making it an eventful week in the Eurozone.

Written by: Gunter Lackmann