Another big week for central banks, and another big day for Bitcoin ..... well, aren't they all
It's not as though Wednesday's rate decision from the Federal Reserve (19.00hrs, NYT) is likely to take too many people by surprise -- a 25 basis point hike is as close to a "done deal" as makes no difference. It's what the Fed has to say about the future that will be more market-sensitive. Investors will be particularly keen to find out if there have been any adjustments to the Fed's "dot-plot", their method of mapping out what individual policy-makers believe to be the course of interest rates in the future.
Some of the talking heads on the financial news channels this morning were speculating whether the robust US economic performance, even before the beneficial effects of any tax cuts are taken into account, might prompt the median expectation amongst Fed members to be moved from 3 further hikes in 2018 up to four, and for another two in 2019 to be upgraded to three.
After such a long period of ultra-low rates, that seems like an awful lot of rate rises in a pretty short amount of time. True enough, but we've got to remember (especially those comparatively new to markets) that in the past repeated small hikes would not have been considered out of the ordinary if the circumstances demanded it . It's only post-crisis that markets have become used to aggressively easy monetary policies. Pushing rate regimes back up into more positive territory, where so many would be more comfortable, is not known as "rate normalisation" for nothing.
Perhaps a more pertinent question is whether projections for such rate increases are realistic in an environment that still refuses to exhibit any substantial inflationary tendencies. To be frank, we're not sure whether the brains trust at the Fed are any closer to being able to explain the apparent mystery about the lack of inflation than anyone else. But on balance they seem to retain enough faith in long-established economic theory about falling unemployment begetting upward pressure on wages and prices (the Phillips Curve) to believe that inflation must become a factor again sooner or later.
Besides, hawks might point out that even if we assume that Fed Funds are raised to 1.5% on Wednesday, REAL interest rates (i.e. Fed Funds MINUS inflation) would still be in negative territory. By historical standards, rates have quite a lot of room on the upside before they would be considered overly restrictive.
There's no doubt that global growth is finally prompting central banks across the planet to consider less generous policies. Theoretically, there are rate decisions to be made on Thursday by the European Central Bank, the Swiss National Bank and the Bank of England (amongst others). Don't expect any change from any of these guys, but DO listen closely to see if the impressive performance of the Eurozone economy causes ECB boss Mario Draghi to adjust his famously cautious approach to ending monetary stimulus packages.
And what's new with Bitcoin today ? Well, another jump of double-digit percentage points for one thing (last at $16,600) although that's almost become "de rigeur". What is unarguably new this morning is that Bitcoin futures started trading on the Chicago
Board Options Exchange (CBOE). Next week, it's larger competitor the Chicago Mercantile Exchange (CME) will launch it's own contract. This is a significant development as the inclusion of Bitcoin derivatives by respected exchanges lends credibility to the cryptocurrency.
It's being argued in certain quarters that the facility to trade futures will help to dampen down some of Bitcoin's volatility. It's true that the risk-hedging attractions of futures contracts can fulfil that role in other markets, but it seems like a pretty optimistic reading of the situation where Bitcoin's concerned. One of the main reasons given for Bitcoin's stratospheric rise is actually the simplest one possible when it comes to trading any commodity -- supply and demand. There is an absolute ceiling to how many of the things can be created : 21 million, in fact. That means there can only ever be just under five million more Bitcoin to be "mined".
That's not a great deal of supply in a charging market ( and certainly won't be if Bitcoin's enhanced legitimisation after the inception of futures contracts causes more mainstream investors to get involved). But the point is, in the early stages at least it seems likely that futures will be used mostly as another vehicle for speculators to get "long" of Bitcoin, not to hedge exposure. We seriously doubt the market-calming properties of any futures contract in those circumstances.
Anyway, even those who believe that Bitcoin is a bubble that MUST burst -- and bear in mind that it has now left the Dutch Tulip mania of the 17th Century far in it's wake as far as manias go -- are having to concede the possibility that it may yet go some way before the great collapse.
Bitcoin's proponents meanwhile continue to shoot for the moon. Dave Chapman of Octagon Strategy, who predicted the move through $10,000 this year when the price was less than $4,000, has brought up the possibility of Bitcoin hitting $100,000 in 2018. One could argue that as M.D. of a company trading in cryptocurrencies he might possibly be talking his own book just a touch. Maybe ..... but after the craziness of the past 12 months not even the doomsayers will be too keen on broadcasting a top for this market.