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AUGUST 18, 2023


After a period of unusual calm in the world of cryptocurrency, things have taken a sharp turn this week due to concerns about interest rates and their impact on risky investments like Bitcoin. This led to a sudden drop in Bitcoin’s value, from nearly $29,000 to as low as $25,314 within just a day, with over $1 billion worth of investments being affected by this selling frenzy. While Bitcoin has had a good year overall, rising by 60%, it is facing challenges such as rising bond yields, regulatory pressures, and economic issues in China that could make people less interested in cryptocurrencies. The world’s largest crypto managed to recover some ground following the sharp decline, however, traders are now keeping an eye on the $25,000 level for Bitcoin, and if it drops below that, it could trigger more sell-offs. Moreover, the news that Elon Musk’s SpaceX sold its Bitcoin holdings also added to the negative sentiment.


According to recent trends, bond traders worldwide are beginning to accept that the era of extremely low yields may be over as long-term Treasury yields have been reaching their highest levels in over a decade due to factors such as the strength of the U.S. economy, mounting debt and deficits, and concerns over the Federal Reserve keeping interest rates high. As a result, experts at Bank of America Corp. (BofA) are cautioning investors to prepare for a return to the “5% world” that existed before the global financial crisis, as they perceive a remarkable repricing of longer-term rates. They believe that despite recent progress, there will be long-term inflation pressures, and macro uncertainty will persist for the next few years, requiring greater compensation for owning long-dated bonds. This shift in the bond market could have implications for various sectors, including consumer spending, housing, and tech stocks. Additionally, the U.S. government’s financing costs could increase, exacerbating already significant deficits.


Goldman Sachs analysts have changed their earlier prediction and now expect a slight increase of 1.8% in home prices for the whole of 2023, with a further rise of 3.5% in 2024. This shift comes as home prices have reversed their decline and are on the rise, despite high mortgage rates posing challenges for potential homebuyers. The analysts initially believed that rising mortgage rates would push home prices down, but the ongoing demand for housing, driven by household formation and seasonal turnover, has countered this expectation. Although affordability has worsened due to high mortgage rates, Goldman Sachs anticipates a potential stabilization in affordability if mortgage rates decrease by about 1% by the end of next year.


Many Americans seem to be struggling to make ends meet, living paycheck to paycheck and lacking financial security, as a recent LendingClub report found that 61% of adults rely on their regular paychecks to cover essential expenses, with little money left over. In addition, according to a survey by Bankrate, 72% of Americans feel financially insecure, with over a quarter believing they will never achieve financial security. Furthermore, stagnant wage growth, rising inflation, and increasing interest rates contribute to this financial strain. Moreover, with median rents and mortgage payments accounting for a significant portion of take-home pay, coupled with expenses for food and healthcare, it becomes clear why many individuals feel overwhelmed and struggle to make ends meet.


Eurozone inflation has further decreased, including underlying price pressures, as revealed by recent Eurostat data, potentially relieving the European Central Bank’s (ECB) need for continuous interest rate hikes following its rapid rate escalation. Nevertheless, despite the ECB’s attempts to manage consumer prices, which went from 5.5% in June to 5.3% in July, and the stable measurement of prices excluding food and energy, remaining at 5.5%, there are concerns as inflation in services increased to 5.6% due to its wage-dependent nature. Moreover, these relatively stable figures may not entirely resolve the ECB’s decision on future rates, as predictions of another rate hike to 4% this year persist.

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