The current macroeconomic position is similar to that of the 2001 Afghan war, when a post-invasion surge in the US equities benchmark cleared the way for a further decline.
If the impact of prior battles on the S&P 500 is any indication, bitcoin bulls betting on a protracted rally would be disappointed, according to QCP Capital.
The S&P 500, Wall Street’s benchmark equity index, dropped on early headlines anticipating a military conflict in four of the previous five wars involving a superpower, according to a study published by the Singapore-based crypto trading firm, only to rally in the months following the outbreak of hostilities.
The only time this didn’t happen was during the 2001 invasion of Afghanistan. The S&P 500’s post-invasion rise then peaked in three months, before resuming a downturn associated with the dot-com bust and establishing new bear market lows. Risk assets are expected to follow a similar path this time, according to QCP, because macroeconomic fundamentals today are similar to those of 21 years ago.
In a research report released on Monday, it wrote, “Given the historical trend, we expect global markets to stay supported in the near term.” “However, given the current macroeconomic challenges, we remain extremely cautious.”
“Given the similarities, the closest parallel to the current scenario is the 2001 Afghan war: 1. Markets were under pressure due to dot-com deleveraging. 2. The threat of stagflation, with inflation at a decade-high of 3.5 percent,” according to QCP. “During the Afghan war, markets experienced a three-month relief bounce before resuming their downturn and breaching below the post-invasion lows.”
While many in the cryptocurrency community perceive bitcoin to be the digital counterpart of gold, historical data indicates that it is a risky investment. Last week, the cryptocurrency’s 60-day correlation with the S&P 500 reached a new high.
Since mid-November, markets have been primarily on the defensive, owing to fears that the US Federal Reserve would tighten the liquidity tap sooner than expected to keep inflation in check. When Russia-Ukraine tensions began to escalate two weeks ago, Bitcoin was already down over 35% from its record high of $69,000 set on Nov. 10.
Analysts are concerned that Russia’s exports of all commodities, including oil, metals, and wheat, could suffer as a result of the West’s tougher sanctions on Moscow over the weekend, pushing the world economy into stagflation — a state of poor or sluggish growth combined with high inflation.
The Fed and other central banks may be under even more pressure to remove liquidity as a result of this. The Federal Reserve is projected to boost borrowing costs by 25 basis points this month, followed by at least five more quarter-percentage-point hikes by the end of the year. As reported in Monday’s First Mover Americas, Goldman Sachs expects the Fed to raise rates four times next year.
“One significant distinction between the Afghan war and the current conflict is that interest rates were 6.5 percent at the time. “This provided Alan Greenspan’s Fed a lot of leeway to cut rates all the way to 1%,” according to QCP. “Markets are under comparable pressure this time, but the Fed has exhausted its easing alternatives. Interest rates can only rise from here, and the Federal Reserve’s balance sheet can only decrease.”
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.