MARKET RESURGENCE
The total amount of capital locked in decentralized finance (DeFi) protocols reached a milestone of $50 billion this week, marking the first time in six months that the DeFi sector has hit this benchmark. This surge in locked capital can be attributed to the rise in underlying asset values and the growing trend of investors seeking yield on their crypto holdings. Data from DefiLlama indicates that since October 13, when the sector was at multiyear lows, the figure has increased by a substantial $15 billion, highlighting strong growth in the space. Notably, the newly announced layer 2 project Blast received over $700 million in deposits last week despite investors being unable to withdraw funds until March. In addition, Ethereum (ETH), the primary asset in DeFi, has seen a 42% increase in value since mid-October, outpacing the overall 41% market surge. Furthermore, Ethereum’s transition to a proof-of-stake blockchain has driven the sector’s expansion, particularly in the liquid staking market. For instance, Solana’s liquid staking protocol saw a notable $327 million in inflows since October 13. Moreover, new options like Jito, offering a 6.96% yield, have attracted $327 million since mid-October, signifying significant institutional demand for DeFi.
CONFUSING MESSAGING
The U.S. Federal Reserve’s messaging on interest rates is becoming unclear, but experts believe that people are wrong to expect interest rate cuts. The Fed may tolerate higher inflation instead of pushing the economy into a recession to meet its 2% target. However, financial markets are overreacting by expecting sharp rate cuts. Allianz Chief Economic Adviser Mohamed El-Erian warns that the Fed needs to regain its credibility with the markets in their forward guidance, or else it would weaken its policy. He also emphasizes that rather than aggressively tackling inflation now, the Fed should focus on keeping the promise of 2% inflation in the future and tolerate slightly higher inflation. Additionally, post-pandemic changes in the job market and supply chains may make a 3% inflation target preferable, but the Fed is hesitant to revise its 2% target to maintain credibility. Ultimately, the choice facing the Fed is whether to stick to 2% and risk recession, or tolerate slightly higher inflation and a steady economy.
POSSIBLE OVERBOUGHT FRENZY
Investors are expressing concerns that the stock market may have experienced an overly rapid surge last month as the start of this week saw Wall Street bearing losses, indicating that traders’ optimistic anticipation of an early and swift Federal Reserve rate cut in 2024 may have been excessive. There is a growing worry that the markets are in an overbought state, leaving traders vulnerable to potential corrections. As a result, some investment professionals are adjusting their strategies to account for these risk factors. Moreover, the market’s impressive one-month rally could prompt a period of consolidation, according to some experts; and this brief pause might be necessary following such substantial gains. This cautionary approach has been expressed by several investment professionals, who believe that the market’s recent surge may have already priced in a significant amount of positive news, and the cautious outlook is leading some to make strategic adjustments to mitigate future risks.
STILL POSSIBLE TO REDUCED TAX BILLS
As 2023 draws to a close, there is still an opportunity to make changes that can positively impact your tax situation. With the average federal refund for 2023 at $3,054, it is worth considering strategies to reduce your tax bill or increase your refund. You can take advantage of the remaining pay periods to maximize pretax 401(k) contributions and lower your adjusted gross income, particularly if you are not yet maximizing employer matching funds or wish to reduce taxable income before a year-end bonus. Another strategy is “bunching” charitable donations into a single year, aiming to exceed the standard deduction thresholds. This can be particularly beneficial given the increased standard deduction from the Tax Cuts and Jobs Act of 2018 that led fewer filers to itemize deductions. Additionally, it is important to make the most of your tax bracket before making decisions that add to your income in order to optimize your tax situation. There are also opportunities to trim your tax bill in the new year, including making pretax IRA contributions and health savings account contributions, which can offer deductions and tax breaks for qualified medical expenses. By carefully considering these strategies, you can potentially lower your tax bill, increase your refund, and save on future taxes.
INTERNATIONAL NEWS
Credit rating agency Moody’s downgraded its outlook for Chinese sovereign bonds to negative, citing risks from a slowing economy and a crisis in its property sector. China’s economy has already been slowing for some time now, leading to defaults by property developers, impacting local government finances and posing risks for lenders. This is why the downgrade, which is Moody’s first for China since 2017, reflects the risks stemming from financing troubles of local and regional governments and state-owned enterprises. Moreover, Moody’s has affirmed China’s A1 long-term local and foreign-currency ratings, but expects the country’s economy to grow more slowly, at around 4% annually in the years 2024-2025, and later falling to an average of 3.8% for the rest of the decade. In addition, Moody’s also emphasized the importance of China implementing “substantial and coordinated reforms” to strengthen consumer spending and higher value-added manufacturing for sustained growth. Furthermore, following Moody’s announcement, shares in China to retreat, with Hong Kong’s Hang Seng dropping 1.9% and the Shanghai Composite index down 1.7%.
