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AUGUST 21, 2023

LOSS IN VALUE

In the midst of its most challenging week since last November, Bitcoin has faced deepening losses, as the largest cryptocurrency experienced a near 1% decline, edging towards the $26,000 mark—its lowest value in two months—following a more than 10% drop over the past week. This trend was mirrored by smaller cryptocurrencies like Ether and XRP, and the decliness coincide with a global bond sell-off as expectations of prolonged restrictive monetary policies dampen demand for riskier investments. While optimism lingers, market analysts remain cautious about the potential for further downturns in the value of Bitcoin, particularly if U.S. Treasury yields continue their upward trajectory. Moreover, The crypto industry’s hopes hinge on the prospect of forthcoming applications for U.S. spot Bitcoin and Ether futures exchange-traded funds, aiming to catalyze a positive market shift, however, technical signals hint at more potential downsides for Bitcoin.

DIFFERING VIEWS

Following the recent three-week decrease experienced by the U.S. stocks, two leading strategists from Wall Street, Michael Wilson from Morgan Stanley and David Kostin from Goldman Sachs, have conflicting opinions regarding the future ahead for the market. Wilson, known for his bearish stance on equities, believes that if investors begin questioning the sustainability of the economy’s resilience, sentiment will further deteriorate. In contrast, Kostin contends that there is still room for investors to increase their exposure to stocks if the economy remains on track for a mild slowdown. Despite a recent drop in Kostin’s equity sentiment indicator, he expects it to be temporary and anticipates bullish bets to rise if market conditions improve. Wilson, on the other hand, argues that sentiment among stock investors has become excessively optimistic about a soft landing of the economy. He cites cooling inflation and potential waning consumer demand as factors that may erode corporate pricing power throughout the year. As market participants eagerly await Federal Reserve Chair Jerome Powell’s speech at the Kansas City Fed’s annual symposium, the contrasting perspectives of these two strategists add further intrigue to the already uncertain market climate.

BOND BETTING BLUES

This year, some of the world’s most influential money managers bet big on government bonds, convinced that a looming recession in the U.S. would make up for their harsh losses in 2022. Nevertheless, this gamble is now backfiring as Treasury yields hit a 15-year high, leading to lackluster returns and testing their determination as the sell-off intensifies week after week. Last week was particularly discouraging as returns on U.S. government bonds turned negative, reflecting the belief that interest rates could stay elevated for an extended period, supported by the economy’s resilience. Consequently, while bond bulls like Bob Michele from J.P. Morgan Asset Management remain undeterred and plan to buy bonds on price dips, other firms including Allianz, Abrdn, Columbia Threadneedle, DoubleLine Capital, and TCW Group think that the economy is only starting to feel the impact of the Federal Reserve’s rate hikes, signaled by a deeply inverted yield curve – typically a sign of a forthcoming recession. However, despite these recession forecasts, it a worth noting that the U.S. economy is actually growing and generating new jobs, leading even central bank staff to revise their recession predictions. In addition, Bank of America’s latest global survey reflects a growing investor consensus that a recession within the next 18 months is unlikely. Moreover, while bond bulls are currebly facing challenges and underperformance, they are exploring strategies to navigate potential losses, such as adjusting duration and allocations to counter risks.

INTERNATIONAL NEWS

Germany’s central bank, known as the Bundesbank, has projected that the country’s economy will remain stagnant in the current quarter, adding to a series of weak performances. Germany’s gross domestic product (GDP) did not grow in the second quarter, following declines in the two preceding quarters. These setbacks can be attributed to challenges such as high energy prices, increased borrowing costs, and weakened trade with China, a key economic partner. Even globally, with rising interest rates and the threat of inflation, the International Monetary Fund predicts that Germany will be the only major economy to contract this year. The Bundesbank’s monthly report indicates that the situation is unlikely to improve in the near term. While private spending may recover due to stable employment, significant salary increases, and lower inflation, industrial production is expected to continue being weak due to a decrease in foreign demand. Furthermore, high financing costs are anticipated to persist and negatively impact investments.

KEY EVENTS HAPPENING THIS WEEK

Monday: Earnings reports for Zoom (after market closes).

Tuesday: Existing home sales report for July, and earnings reports for Lowe’s, Macy’s, and Dick’s Sporting Goods.

Wednesday: Mortgage Bankers Association (MBA) reports, and earnings reports for Peloton Interactive, Foot Locker, Kohl’s, Abercrombie & Fitch (before market opens), and Nvidia (after market closes).

Thursday: Initial jobless claims report for week ending on August 19, Fed officials interviews from Jackson Hole summit, and earnings report for DollarTree (before market opens), Nordstrom, Gap, Workday, and Affirm Holdings.

Friday: Jerome Powell’s opening speech at Jackson Hole summit, and final consumer sentiment report for August.

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