What you need to know in markets this week: the future of Ethereum, what’s next for oil, and inflation is on the rise
Ethereum’s price soared by more than 25% this week. Yu Chun Christopher Wong/S3studio/Getty Images
CME Group will launch Ethereum futures this week and the price is at a record high.
The three major forecasters will publish their assessment of the outlook for oil demand in 2021.
Inflation is picking up - should investors be worried? Analysts say “no.”
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The army of Reddit day traders appears to be moving on, having pumped up everything from cryptocurrencies, to tiny biotech stocks in the last week, now that their firing up of GameStop, AMC, Nokia and co seems to have mostly run its course.
This coming week, we’ll be looking at the future of Ethereum, the pickup in consumer inflation and what the major forecasters are saying about the outlook for oil, now the price is trading around one-year highs.
The dawning of the age of Ethereum
Another week, another cryptocurrency at a record high. Earlier in the year, it was bitcoin, then XRP, then “meme token” DogeCoin, which got swept up in the Reddit-driven trading frenzy and given an extra shout-out on Twitter by Tesla CEO Elon Musk.
This time, it’s Ethereum grabbing the headlines. The second-largest cryptocurrency by market value after bitcoin has seen the price soar by more than 25% this week to record highs above $1,600. It’s not just down to the Wall Street Bets guys, either. Exchange operator CME group will launch its first Ethereum futures contract on February 8, another offering in the crypto market alongside its bitcoin futures and options.
At the same time, crypto fund manager Grayscale reopened its Grayscale Ethereum Trust, after having closed the fund to new investors in late December for “administrative purposes.” In this week alone, the trust has seen inflows of nearly 100,000 ETH. Grayscale now manages nearly $5 billion in Ethereum.
JPMorgan estimates that initial volumes in Ethereum futures are likely to be low, much like bitcoin in the early days, but this will change quickly.
“The listing of CME bitcoin futures coincided with all-time highs in bitcoin prices, and researchers at the San Francisco Fed suggested that, by providing a market where bearish positions could be more readily expressed, the listing of these futures contributed to the reversal of bitcoin price dynamics,” JPMorgan analysts led by Nikolaos Panigirtzoglou said in an note last week.
“In a similar vein, it may be that this week’s listing of ethereum futures contracts will be followed by negative price dynamics by enabling some holders of physical ethereum to hedge their exposures,” they said.
Read more:Investors are flocking to trade Dogecoin and other hot digital tokens on Voyager, a platform with no Robinhood-style restrictions. Its CEO says Bitcoin will hit $100,000 this year - and shares 3 other cryptocurrencies to watch.
Oil - full speed ahead
The oil price hit its highest in a year this past week, leaving Brent crude futures trading just shy of $60 a barrel. The catalyst for the rally wasn’t the Reddit crowd, but ongoing evidence of the rollout of COVID-19 vaccines in the UK and US in particular that many hope will pave the way out of lockdowns and into more normal activity.
The futures market shows traders and fund managers are more optimistic about the prospects for oil demand than at any time in the last year. The most recent data on oil inventories shows stocks of unused crude are at their lowest since last April, when a frenzied scramble for storage led to the WTI crude futures price dropping to -$40 a barrel.
This coming week, the three major forecasters will release their most recent assessments of demand and their estimates of demand growth. OPEC, the International Energy Agency and the US Energy Information Administration will release their regular monthly reports.
The EIA, which issues longer-term demand forecasts, expects to see the global crude market tilt into a modest deficit over 2021 as a whole, with consumption forecast at 97.77 million barrels per day, against supply of 97.13 million barrels per day. The IEA expects demand to grow by 5.5 million bpd, following a record contraction of almost 9 million bpd last year, while OPEC is looking for a more optimistic 5.9 million bpd.
OPEC and several partner countries continue to restrict daily oil production to keep a safety net under the price. Investment bank UBS says the group will remain “in full control of the oil market” this year and this, together with the advent of an effective vaccine, means the price of a barrel of crude will continue to rise.
“Given that we target Brent at $63 a barrel in 2H21, we continue to advise investors with a high-risk tolerance to be long Brent or to sell its downside price risks,” UBS strategist Giovanni Staunovo said in a note last week.
Inflation and, more to the point, the market’s expectations for inflation, is creeping up. A combination of increases in the price of things like oil and food, as well as vast amounts of cash flowing through the financial system are slowly translating into a pickup in consumer inflation. But this isn’t necessarily a bad thing, analysts say.
The oil price is at its highest in a year, while food prices - as measured by the United Nations' Food and Agriculture Organization - rose by more than 4% in January to hit their highest since mid-2014. Central banks generally use inflation measures that strip out food and energy prices when setting monetary policy, but that hasn’t stopped investors from betting on more increases to come.
Pumping up inflation
This coming week brings inflation readings from the US and China, as well as Brazil, India, and Mexico among others. In the US, consumer inflation is forecast to have risen by 1.5% in January, at the same rate as in December. The bond market shows investors believe consumer and producer price pressures are going to continue rising.
Analysts at DataTrek said in a note last week US five-year Treasury Inflation-Protected Securities (TIPS) have done “a reasonable job” of forecasting the stable rate of inflation seen in both producer and consumer prices over the last decade.
“The most recent move higher for 5-year inflation expectations (2.18%, the highest since 2013) is therefore significant,” DataTrek analyst Nicholas Colas said.
“Importantly, TIPS are NOT saying rampant inflation is just around the bend. The 2.2% forecast embedded in those bond prices is simply a validation of the idea that the US will see a reasonable and lasting economic recovery in the years ahead,” he added.
The so-called breakeven inflation rate - derived by subtracting the yield of the five-year TIP from that of the nominal five-year Treasury note - has risen to 2.25% this week, its highest in almost eight years, having doubled in the space of eight months.
“While the chatter around the inflation outlook is elevated now, we would expect it to become even more intense as we approach mid-year if our CPI forecasts are right,” strategists Ralph Axel and Olivia Lima at Bank of America wrote last week. They forecast a consumer price inflation (CPI) rate of 3.4% by May, which might prompt investors to revise their view on when the Federal Reserve may begin to tighten monetary policy - but they add a caveat.
“History shows that markets tend to overreact to positive developments and price in hikes long before the Fed actually delivers,” they said.
Read more: Morgan Stanley says inflation is heating up and these are the 12 undervalued stocks in a ‘sweet spot’ that you need to own thanks to their pricing power
Chart of the week - GameStop
The army of Reddit retail traders is still active, but it would appear most have booked profits on their positions in the likes of GameStop and AMC - GameStop is now worth just over half of what it was at the height of the Wall Street Bets frenzy one week ago.
Daily chart of GameStop shares TradingView
Earnings for the week ahead
2/08 Softbank
2/09 Cisco
2/09 TOTAL
2/09 Twitter
2/10 A.P. Moeller - Maersk
2/10 Coca-Cola
2/10 Commonwealth Bank Australia
2/10 Uber
2/10 Vestas Wind Systems
2/11 AstraZeneca
2/11 Walt Disney
2/11 L’Oréal
2/11 PepsiCo
Ethereum Upgrade Could Pump Price By Burning Billions in ETH Each Year
In brief A recent report by Grayscale predicted that EIP 1559 would create “a positive feedback loop for Ether’s price."
Decrypt spoke to Ethereum experts Eric Wall and Tim Ogilvie, who both agree that EIP 1559 is bullish.
Technical feasibility and miner resistance hinder the implementation of EIP 1559.
A report from crypto investment fund Grayscale on Thursday predicted that a proposed upgrade to the Ethereum blockchain, if implemented, would create “a positive feedback loop for Ether’s price”. Decrypt spoke to analysts to understand why.
Per the upgrade, Ethereum Improvement Proposal (EIP) 1559, the Ethereum blockchain would use Ethereum transaction fees to buy ETH on the open market and then destroy it, reducing ETH’s overall supply.
“It’s like a company that earns a profit and buys back shares,” Tim Ogilvie, CEO of Staked, an Ethereum infrastructure services company, told Decrypt.
Burning billions of dollars in ETH could pump up the price of ETH, he said. “The net effect is that the remaining shares increase in value because the supply is smaller.”
“It’s extremely bullish,” said Ogilvie.
He estimates that at ETH’s current market cap, close to $200bn, the network would burn 1-4% of the supply each year. “If you like BTC’s hard cap at 21 million tokens, you’ll love ETHs declining supply."
Under EIP-1559, fees would become less volatile
Implementing EIP-1559 would also introduce a set fee for processing Ethereum transactions, replacing the current auction-style market that confronts users with ever-changing transaction fees.
The hope is that introducing a set fee would stop miners from manipulating transaction fees that extract large amounts of money from users, making fees less volatile. That would be a godsend for users that this week had to pay, on average, fees of over $20 per transaction.
Instead of buyers and sellers setting fees, the network would automatically generate a “BASEFEE” price in line with network activity. If the network is busy, the BASEFEE would go up. If the network is quiet, the BASEFEE would go down. Users could still tip miners extra money to process transactions, but it’s not necessary.
The Ethereum network would use the money raised from the BASEFEE to buy, and then burn, ETH.
One of the most exciting features of EIP1559 is the BASEFEE opcode It will allow smart contracts to estimate congestion (by comparing historical basefee behavior) and programmatically adjust parameters such as dispute periods in optimistic rollupshttps://t.co/fLBUmUQKeY — Georgios Konstantopoulos (@gakonst) January 25, 2021
Ogilvie doesn’t expect that the proposal will immediately solve the problem of high transaction fees.
But he said it would make it easier for financial analysts to value ETH, who could be sure that the amount of money paid in fees isn’t manipulated or prone to volatility—encouraging investors into the network.
Eric Wall, CIO of crypto fund manager Arcane Assets, also thinks that EIP-1559 is bullish. “I think this is one of the most important proposals for the long-term health of Ethereum, on par with the move to proof-of-stake,” he told Decrypt.
Why hasn’t EIP-1559 been implemented?
If the potential for EIP-1559 is self-evident, why hasn’t it been adopted yet?
One reason: it’s not ready yet. “There’s still one outstanding [cyber security] risk issue with EIP-1559 that needs to be addressed,” Wall told Decrypt. “After that is fixed and it gains approval, it needs to get included in the next Ethereum hard fork, which would be sometime later this year—summer, perhaps.”
I think it should be “ready to be considered for mainnet” in the next few weeks. See this checklist for what’s left to do: https://t.co/l2kEfwgNZs We want to get the “Client Level Open Issues” done before we present it on AllCoreDevs. — Tim Beiko | timbeiko.eth (@TimBeiko) February 6, 2021
And the proposal faces staunch resistance from Ethereum miners, Ogilvie told Decrypt. “Miners are naturally resistant as this will transfer a portion of fee revenue from miners to holders of ETH,” he said—burning Ethereum could increase its price; that would be good for HODLers but it would do nothing for miners.
Still, many are excited about the forthcoming EIP-1559 implementation. “And that excitement alone increases the price,” said Wall.
Ethereum, Litecoin, and Ripple’s XRP – Daily Tech Analysis – February 6th, 2021
Ethereum
Ethereum rallied by 7.75% on Friday. Reversing a 4.26% slide from Thursday, Ethereum ended the day at $1,721.06.
It was a mixed start to the day. Ethereum fell to an early morning intraday low $1,589.17 before making a move.
Steering clear of the first major support level at $1,536, Ethereum rallied to a late afternoon intraday high and a new swing hi $1,763.93.
Ethereum broke through the first major resistance level at $1,679 and the second major resistance level at $1,761.
A late pullback saw Ethereum fall back through the second major resistance level to $1,680 levels before wrapping up the day at $1,721 levels.
At the time of writing, Ethereum was up by 0.53% to $1,730.23. A mixed start to the day saw Ethereum fall to an early morning low $1,720.01 before rising to a high $1,739.60.
Ethereum left the major support and resistance levels untested early on.
For the day ahead
Ethereum would need to avoid a fall through the pivot level at $1,691 to support a run at the first major resistance level at $1,794.
Support from the broader market would be needed, however, for Ethereum to break out from Friday’s swing high $1,763.93.
Barring an extended crypto rally, the first major resistance level and resistance at $1,800 would likely cap any upside.
In the event of an extended crypto rally, Ethereum could test resistance at $1,950 before any pullback. The second major resistance level sits at $1,866.
Failure to avoid a fall through the $1,691 pivot would bring the first major support level at $1,619 into play.
Barring an extended sell-off, however, Ethereum should steer clear of sub-$1,600 levels. The second major support level sits at $1,517.
Looking at the Technical Indicators
First Major Support Level: $1,619
Pivot Level: $1,691
First Major Resistance Level: $1,794
23.6% FIB Retracement Level: $1,367
38.2% FIB Retracement Level: $1,121
62% FIB Retracement Level: $724
Litecoin
Litecoin rallied by 6.82% on Friday. Partially reversing a 7.06% slide from Thursday, Litecoin ended the day at $155.15.
Story continues
It was also a mixed start to the day. Litecoin fell to an early morning intraday low $143.63 before making a move.
Steering clear of the first major support level at $137.96, Litecoin rallied to an early afternoon intraday high $156.99.
Litecoin broke through the 23.6% FIB of $148 and the first major resistance level at $155.79 before hitting reverse.
The reversal saw Litecoin fall back to sub-$150 levels before closing out the day at $155 levels.
While failing to break back through the first major resistance level, the 23.6% FIB limited the downside late on.
At the time of writing, Litecoin was up by 0.29% to $155.60. A mixed start to the day saw Litecoin fall to an early morning low $154.91 before striking a high $156.00.
Litecoin left the major support and resistance levels untested early on.
For the day ahead
Litecoin would need to avoid a fall through the $151.92 pivot level to support a run at the first major resistance level at $160.22.
Support from the broader market would be needed, however, for Litecoin to break out from Friday’s high $156.99.
Barring an extended crypto rally, the first major resistance level would likely cap any upside.
In the event of an extended breakout, Litecoin could test resistance at $170 before any pullback. The second major resistance level sits at $165.28.
Failure to avoid a fall through the $151.92 pivot level would bring the 23.6% FIB of $148 and the first major support level at $146.86 into play.
Barring an extended sell-off, Litecoin should steer clear of sub-$140 levels. The second major support level sits at $138.56.
Looking at the Technical Indicators
First Major Support Level: $146.86
Pivot Level: $151.92
First Major Resistance Level: $160.22
23.6% FIB Retracement Level: $148
38.2% FIB Retracement Level: $125
62% FIB Retracement Level: $87
Ripple’s XRP
Ripple’s XRP rose by 1.49% on Friday. Following a 12.12% jump on Thursday, Ripple’s XRP ended the day at $0.45276.
A bullish start to the day saw Ripple’s XRP rise to an early morning intraday high $0.47230 before hitting reverse.
Falling short of the first major resistance level at $0.4917, Ripple’s XRP slid to a late morning intraday low $0.42657.
Steering well clear of the 38.2% FIB of $0.4070 and the first major support level at $0.3905, Ripple’s XRP revisited $0.46 levels before easing back.
At the time of writing, Ripple’s XRP was down by 0.01% to $0.45273. A mixed start to the day saw Ripple’s XRP rise to an early morning high $0.45688 before falling to a low $0.44863.
Ripple’s XRP left the major support and resistance levels untested early on.
For the day ahead
Ripple’s XRP will need to avoid a fall back through the $0.4505 pivot level to bring the first major resistance level at $0.4745 into play.
Support from the broader market would be needed, however, for Ripple’s XRP to break back through to $0.47 levels.
Barring another extended crypto rally, the first major resistance level and Friday’s high $0.4723 would likely cap any upside.
In the event of an extended rally, Ripple’s XRP could the second major resistance level at $0.4963 and resistance at $0.50.
Failure to avoid a fall back through the $0.4505 pivot would bring the first major resistance level at $0.4288 into play.
Barring an extended sell-off, Ripple’s XRP should steer clear of sub-$0.40 levels. The 38.2% FIB of $0.4070 and the second major support level at $0.4048 should limit the downside.
Looking at the Technical Indicators
First Major Support Level: $0.4288
Pivot Level: $0.4505
First Major Resistance Level: $0.4745
23.6% FIB Retracement Level: $0.6274
38.2% FIB Retracement Level: $0.5285
62% FIB Retracement Level: $0.3687
Please let us know what you think in the comments below.
Thanks, Bob
This article was originally posted on FX Empire
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