Investor appetite for risk assets, including cryptocurrencies, has significantly weakened over the past 18 months, with central banks aggressively increasing borrowing costs to tighten liquidity and tame inflation. While price pressures have subsided this year, the situation could worsen again due to the recent rally in oil prices, according to some crypto observers.
The per barrel price of West Texas Intermediate (WTI) crude, the U.S. oil benchmark, has surged by 30% this quarter, topping the $93 per barrel mark for the first time in 2023.
“This [oil rally] will feed into core inflation and hurt consumption, which should keep rate expectations high while hurting stock valuations. Risk-off,” Noelle Acheson, author of the popular Crypto Is Macro Now newsletter, told CoinDesk.
Higher oil prices are often transmitted to retail fuel prices, raising key inflation metrics like the Consumer Price Index (CPI). That, in turn, weighs over households’ disposable income. Less disposable income means weak consumption, economic growth, and less inclination to invest in high-risk, high-reward assets like bitcoin and technology stocks. It’s notable that Bitcoin’s positive correlation with stocks has recently made a comeback.
Stickier CPI also means the U.S. Federal Reserve and other central banks could raise interest rates further and keep them elevated for longer, also denting the appeal of risk assets. U.S. Treasuries already look the most attractive relative to risk assets in over a decade. The Fed has raised rates by 525 basis points since March 2022. JPMorgan CEO Jamie Dimon recently suggested U.S. rates could go as high as 7% in the worst-case scenario of the economy experiencing stagflation.
“The impact on inflation will keep U.S. rates higher for even longer, which will keep the U.S. dollar strong, which will also hurt developing economies and oil importers,” Acheson added.
Rising rates also tend to lead to a rising U.S. dollar, which tightens financial conditions globally, a bearish outcome for risk assets. Historically, bitcoin has mainly moved in the opposite direction of the dollar index.
“Looking ahead, the recent surge in oil prices will make things even more complicated as it will both worsen the economic slowdown but also push up inflation (or at least reduce the disinflationary trend). Balancing growth and inflation will become even harder, and future interest rate decisions will not only be determined by these two variables but also by central banks’ credibility,” analysts at ING said.
Per Singapore-based QCP Capital, traders should watch out for a potential WTI breakout above $100.
“One thing to keep closely on the radar is oil – which we believe has taken over as the leader of macro markets, and where a break of $100 will likely kick off the overall risk sell-off in earnest,” QCP’s market insights team said in an update published early this month.
1970s again?
One of the most discussed topics in financial markets is whether the present inflation scare is similar to 1970s, when the U.S. economy saw multiple waves of inflation led by an energy crisis. A repeat of the 1970s would mean stagflation, the worst outcome for risk assets.
Per ING, this time is different, thanks to anemic wage growth.
“Back then, real wage growth remained positive even during the spikes of the oil crises, which allowed inflation to remain above 7% for more than a decade (1972-84). Indeed, the countries that experienced higher real wage growth for the period also experienced the highest inflation over this period,” ING analysts said.
“The current surge in inflation is different in that real wage growth turned negative quickly, which has slowed consumer demand drastically. This makes the chances of a prolonged second spike in inflation much smaller,” the analysts added.
