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DECEMBER 11, 2023

SUDDEN PLUNGE

Bitcoin and several other cryptocurrencies have experienced a period of heightened volatility when Bitcoin suddenly plummeted to $40,000 earlier this morning before rebounding to $42,245, signifying a loss of 3.6%. This downturn was reflected in Ether, XRP, Polkadot, and Cardano as well, with the top 100 digital assets collectively dropping about 4%, representing the most significant decline since November 22. Nonetheless, despite its recent volatility, it is still important to remark that Bitcoin’s year-to-date increase has surpassed 150%. Moreover, the market leverage increase led to a substantial fall and the liquidation of approximately $312 million worth of crypto trading positions. Looking ahead, investors are now awaiting the release of U.S. inflation data as well as the Fed’s final 2023 policy meeting, leading to a cautious approach in global stocks including cryptocurrencies.

RATE CUT UNCERTAINTY

Bond investors are currently anticipating a shift in the Federal Reserve’s interest rate policy. Portfolios have been adjusted as many predict that U.S. yields will decrease, and the Federal Reserve will not cut rates as early as previously anticipated. This comes in spite of strong U.S. economic data showing a robust labor market and a leveling off of inflation. The market’s projections for an early rate cut have declined, prompting investors to move away from longer-duration bond positions and towards portfolios that are more consistent with current market conditions. This realignment indicates that investors are currently betting against the expectation of lower rates in the near term and are transitioning towards a more “neutral” position. Nevertheless, the ultimate goal for investors remains to extend their positions, as they expect the Federal Reserve to eventually reduce rates. The anticipation is for a policy shift in the second quarter, followed by rate cuts in the latter half of the year. This expected shift in policy would lead to an increase in the value of longer-duration securities, prompting investors to plan ahead for such a scenario.

SPIKE IN 401(K) LOANS

An increasing number of Americans are tapping into their 401(k) retirement savings due to financial pressures brought on by inflation. In the third quarter of this year, approximately 2.6% of retirement savers borrowed an average of $10,778, up from 2.3% during the same period last year. Similarly, Fidelity reported an increase from 2.4% to 2.8% over the same time frame. Furthermore, according to industry data, the average 401(k) loan taken by workers jumped from $10,000-$11,000 in 2018-2021 to $15,000 in 2022. Moreover, it is worth noting that although 401(k) loans do offer quick access to cash at lower interest rates, they also carry potential risks, particularly for individuals with uncertain job stability. However, in certain scenarios, such as when urgent financial support is required for essential expenses or to invest in assets with growth potential, taking a 401(k) loan may be justifiable.

PRICE REBOUND

After a prolonged decline, oil prices saw a rebound, driven by concerns over excess supply outweighing demand, particularly linked to worries about Chinese demand. Reports from key energy organizations and the U.S. Energy Department are expected to offer clarity on the supply-demand balance. midst the market tumult, consumers, particularly airlines and utilities, have capitalized on the lower prices to secure extra oil reserves. However, future price outlooks for crude oil show weakness, with Brent and WTI three-month spreads sustaining a bearish contango structure, indicating lower pricing. Timespreads further reflect the non-optimistic outlook, with Brent’s three-month spread at 13 cents in contango in comparison to 86 cents a month prior in the opposite bullish backwardated structure. The prevailing price level may prompt consideration for replenishing the U.S. Strategic Petroleum Reserve stockpile, though it remains uncertain whether this marks the genuine floor for oil prices.

KEY EVENTS HAPPENING THIS WEEK

Tuesday: Consumer price index (CPI) and monthly U.S. federal budget reports for November.

Wednesday: Producer price index (PPI)  report November, FOMC interest-rate decision, and speech from Fed Chairman Jerome Powell.

Thursday: Initial jobless claims for week ending on December 9, import price index, U.S. retail sales, and business inventories reports for November.

Friday: Empire State manufacturing survey for December, and industrial production and capacity utilization reports for November.

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