Does a 'recession' mean 'risk-on session'?

GB Market Commentary 01/08/2022

by Marcus Sotiriou

Following last week’s compelling events, including the busiest week of Q2 earnings, latest FOMC meeting and Q2 GDP growth data, crypto finished July strong.

Why did we see a huge rally last week?

1. Significant events being priced in

What usually happens when you have huge uncertainty like we saw last week, where there’s potentially negative data being released, or an impactful event occurring, there’s a lack of buyers leading into it.

We saw this occur in the 2020 presidential election - a sell off leading up to the event and then once it happened the market climbed to new highs after (Biden got elected and people realised the world wasn’t going to end). Here, we have seen an episode of Déjà vu – a sell off leading into the event, then a 75 basis point rate hike as expected, and earnings actually being better than analysts’ estimates. Also, US GDP declined by 0.9% in 2022, meaning that the US is now technically in a recession, which was also highly anticipated despite the official estimate being a growth of 0.4%.

2. Federal Reserve U-turn?

In addition to the market pricing in bad news, there is another reason, in my opinion, why global markets rallied last week.

Historical data shows us that during every single recession over the past 50 years, there is one thing they all have in common. The stock market bottomed in each recession when the Federal Reserve U-turned - by U-turning, I mean going from a stance of tightening monetary policy to accommodative monetary policy (this could be pausing rate hikes or even re-introducing rate cuts). The fact that the U.S. is now confirmed to be in a recession with Federal Reserve Chairman Jerome Powell claiming that we are starting to see a reduction in spending, means that many buyers have started to price in the probability of the Federal Reserve U-turning in the coming months.

Now, we still have extremely high inflation currently and this may persist for longer with more 75 basis point rate hikes. However, the market is forward looking, and many buyers will want to front-run the Federal Reserve’s U-turn.

The Bitcoin chart is looking considerably more bullish today, as Bitcoin closed above the 200 weekly SMA (simple moving average) for the first time in 7 weeks. This is an indicator that many analysts are keeping a close eye on, as it was tested in previous bear markets yet always held as support.

Could the reclaim of the 200 weekly SMA be a sign of a market reversal?

The Fed is still indeed tightening, and inflation is still at a 40-year high, so we cannot be convinced of a market reversal currently. But the fact that Jerome Powell has started to say that the rate hikes have had a noticeable impact, signals to me that we are in the later stages of this bear market which we are around 8 months into.