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AUGUST 25, 2023

CLOSING CHAPTER

According to a research report by JPMorgan, the unwinding of long positions in Bitcoin futures on the Chicago Mercantile Exchange appears to be nearing its end, which suggests that there may be limited downside for the crypto markets in the near future. The recent correction in crypto markets can be attributed to a broader decline in risk assets, such as equities and technology stocks, due to excessive positioning, higher U.S. real yields, and concerns about China’s economic growth. Additionally, the report notes that Elon Musk’s SpaceX writing off its bitcoin holdings in the previous quarter added to the correction. The report also highlights the ongoing legal uncertainty surrounding the Ripple case, as the U.S. Securities and Exchange Commission (SEC) is appealing against a district court’s ruling, which could further impact crypto markets.

R* IMPLICATIONS

As the Jackson Hole symposium approaches, all eyes are on Federal Reserve Chair Jerome Powell and his potential address on the interest-rate measure, R*, where interest rates neither speed up nor slow down the economy. This metric holds immense significance as it determines the benchmark rate set by the Fed, influencing both the economy and financial markets. Any inclination towards an upward adjustment in R* would have profound ripple through global markets, necessitating a reevaluation of Treasury yields as it could result in further decreases in U.S. Treasuries. Factors such as the economy’s resilience, escalating budget deficits, shifts in spending, and technological advancements could justify considering an increase in the neutral rate. Moreover, should the Fed contemplate such a rise, it would imply that monetary policy is not as restrictive as previously believed, challenging market expectations of rate cuts.

TECH IN TROUBLE

Technology stocks are facing challenges as Bank of America Corp. experts, led by Michael Hartnett, predict that the influence of higher and extended interest rates will overshadow the excitement around artificial intelligence, highlighting the correlation between tech stock performance and central bank actions. Despite the Nasdaq reaching record highs, central bank balance sheets have reduced by about $3 trillion during the ongoing rate-hiking cycle. This perspective follows a recent drop in the Nasdaq 100 due to rising bond yields and Federal Reserve remarks, even as Nvidia Corp.’s strong AI sales forecast failed to counter the decline. Hartnett, known for his accurate predictions, maintains a bearish outlook for 2023 and predicts a 4% drop in the S&P 500, which can reflect a shift of focus from AI potential to monetary policy impact on high-growth companies. Nevertheless, BOA also suggested that Powell’s upcoming speech could potentially alter the expected market trend for September.

BALANCE SHEET RISKS

According to economists at the Federal Reserve Bank of St. Louis, the US Treasury’s heavy borrowing in the bills market may lead to a pause in the Federal Reserve’s balance sheet reduction efforts to maintain banking system stability. Since June, the Treasury has sold about $1 trillion of bills after the debt ceiling was lifted. Normally, money market funds would purchase these bills, but they have been hesitant due to the higher returns offered by the Fed’s overnight reverse repurchase facility. This could result in an excessive reliance on the banking system for funding, potentially causing a shortage of reserves and triggering regulatory constraints. As a result, the Fed may have to halt its quantitative tightening program. On the other hand, if money drains out of the Fed’s facility, the impact on the financial system would likely be manageable. Furthermore, the economists also suggest that higher reserve levels may be needed to prevent disruptions in money market rates. Overall, the situation calls for careful management to ensure market stability and regulatory compliance.

MIXED RESULTS CONTINUE

Mixed performances continued in the retail sector as Gap reported a combination of results marked by declining sales across its brands, attributed to an uncertain consumer landscape, and offered less-than-optimistic guidance for the upcoming quarter. While Gap managed to exceed earnings estimates for the fiscal second quarter at 34 cents per share (adjusted) compared to the anticipated 9 cents, it fell short on revenue, generating $3.55 billion against the expected $3.57 billion. Meanwhile, Nordstrom showcased signs of progress in its business turnaround, surpassing quarterly sales and earnings expectations. Despite its positive performance, Nordstrom remained cautious in its outlook, projecting a 4% to 6% decline in revenue and adjusted earnings per share ranging from $1.80 to $2.20 for the fiscal year.

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