RISING STRENGTH

Bitcoin’s technical fundamentals and use cases have seen significant improvements, resulting in a more robust asset leading up to its historically bullish halving event. The halving, a process embedded in the Bitcoin network’s code, aims to reduce inflationary pressure on the cryptocurrency by halving the rewards for successfully mining a bitcoin block. This effectively makes the acquisition of new bitcoins more challenging, a trend that has historically preceded bull runs. The recent introduction of Ordinals inscriptions and BRC-20 tokens has energized on-chain activity on the Bitcoin network, contributing to over $200 million in transaction fees for miners. This momentum is expected to continue, supported by renewed developer interest and ongoing innovations on the Bitcoin blockchain. Furthermore, the market structure for Bitcoin appears favorable post-halving, as lower rewards are anticipated to necessitate relatively less buying pressure to maintain prices. Additionally, the introduction of spot Bitcoin ETFs has garnered significant attention, accumulating over 192,000 bitcoins in holdings within a month of their launch, attracting substantial investment from individuals seeking exposure to Bitcoin without directly purchasing and storing the cryptocurrency.

MARKET OPTIMISM

The stock market opened the week on a subdued note after the S&P 500 hit a new record, driven by optimism about potential interest-rate cuts by the Federal Reserve and easing inflation. The uptrend in Big Tech that propelled the S&P 500 over the historic 5,000 mark last Friday appeared set to extend further as shares of Amazon.com Inc., Nvidia Corp., and Tesla Inc. ticked higher in premarket trading. However, broader market movements in S&P 500 and Nasdaq 100 futures trading, as well as for US Treasuries and the dollar, remained muted. The market’s focus now turns to Tuesday’s consumer price index report, with economists projecting a downturn in the annual US inflation rate to 2.9% in January, down from 3.4% the previous month. This pending data is expected to shape decisions on potential rate cuts.Amidst these developments, market pricing indicates reduced expectations for rate cuts, signaling an eagerness for central banks to begin cutting rates. Yet, some investors and analysts remain cautious, emphasizing that the market may have been overly exuberant in its support for rate cuts given the persistence of strong employment, healthy purchasing managers’ surveys, and robust economic growth. Meanwhile, the yen has weakened against all major currencies, hitting a two-month low following indications from Bank of Japan officials that they will proceed cautiously in raising rates.

DECLINE AFTER SURGING

Oil prices have experienced a decline despite the over 6% surge they saw the previous week due to escalating tensions in the Middle East. The West Texas Intermediate contract for March saw a decrease of 72 cents or 0.94%, reaching $76.09 per barrel, and the Brent contract for April was last trading at $81.37 per barrel, experiencing a drop of 82 cents or 1%. These price fluctuations were prompted by Israel’s rejection of a ceasefire proposal from Hamas, and its commitment to continue its offensive in Gaza, particularly targeting the city of Rafah near the Egyptian border. Israel’s Prime Minister, Benjamin Netanyahu, emphasized the objective to neutralize remaining Hamas forces in Rafah despite international concerns, while ensuring safe passage for civilians. However, despite ongoing tensions in the Middle East, oil prices have shown resistance to breaking out of a $10 trading range. Moreover, according to Tamas Varga, a PVM oil broker analyst, a significant surge in prices would necessitate more extreme circumstances, such as a direct U.S. military action against Iran, resulting in a substantial disruption of global crude supplies.

CHALLENGES FROM OFFICE LOANS

U.S. banks are grappling with challenges stemming from their commercial real estate loans, particularly those tied to office buildings. The uncertainty surrounding these loans and the declining values of office real estate could have far-reaching implications for the financial health of banks. Notably, issues related to commercial mortgage-backed securities (CMBS) are also coming to the forefront, with distress and declines in office building valuations becoming increasingly apparent. In 2023, the majority of office CMBS debts matured were not paid off in full, underscoring ongoing difficulties. Distressed loans have risen over the past year and are expected to continue on this trajectory as more CMBS office loans come due through 2025. Consequently, office building valuations have declined significantly, causing concern for banks and real estate investment firms alike. As such, the future of banks seems to be associated with dealing with the implications of problematic office loans, amid a backdrop of an uncertain real estate market. This indicates a looming concern for banks and investors as they navigate the potential risks associated with office loans and their impact on the broader financial landscape.

KEY EVENTS HAPPENING THIS WEEK

Monday: Speeches from Fed Gov. Michelle Bowman and Minneapolis Fed President Neel Kashkari, and Monthly U.S. federal budget for January.

Tuesday: Consumer price index report for January, and earnings reports from Coca-Cola, Restaurant Brands International, Biogen before market opens, and Airbnb, Lyft after market closes.

Wednesday: Speeches from Chicago Fed President Austan Goolsbee and Fed Vice Chair for Supervision Michael Barr.

Thursday: Initial jobless claims for week ending on February 10, import price index, U.S. retail sales and industrial production reports for January, home builder confidence index report for February, speeches from Fed Gov. Christopher Waller and Atlanta Fed President Raphael Bostic, and earnings reports from DoorDash, Coinbase, Draftkings after market opens.

Friday: Producer price index, housing starts and building permits reports for January, preliminary consumer sentiment report for February, and speeches from Fed Vice Chair for Supervision Michael Barr and San Francisco Fed President Mary Daly.