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JULY 10, 2023

BITCOIN’S BACKUP

Investors in Bitcoin are finding comfort in the remarkable rise the smaller cryptocurrency, Litecoin, which has outperformed the broader crypto market over the past year. Litecoin’s impressive growth of almost 90% in the past year can be attributed to its halving event – a process also on the horizon for Bitcoin, which will decrease the token’s supply. Halving events, occurring every four years, cut the rewards received by miners in half, effectively capping the total supply of Litecoin at 84 million and Bitcoin at 21 million tokens, respectively. Litecoin’s performance over the past 12 months has surpassed Bitcoin’s 39% increase and the 22% gain in a gauge of the largest 100 tokens. However, Litecoin’s growth has recently tapered off after reaching a peak in early July.

EARNINGS SEASON BEGINS

This week marks the beginning of the earnings reports season, but the expectations are not particularly high due to slowing economic growth and the impacts of inflation. There is a projected decline of 6.8% in year-over-year earnings, along with a contraction of 0.4% in topline sales, however, analysts are still hopeful that this quarter may represent the lowest point in earnings contraction, with optimism surrounding a potential rebound for next quarter. One critical factor that will be closely watched is the the ability of companies to pass on increased prices in order to protect profit margins. Moreover, as there is still a lingering sense of uncertainty – especially with plans for the Federal Reserve to increase interest rates in July, forward guidance from companies will play a crucial role in navigating the currently unclear economic outlook. This week, the spotlight will be on the eagerly anticipated kickoff of bank earnings on Friday, along with the release of earnings reports from twelve S&P 500 companies.

BANKS FACE LOAN LOSSES

The largest banks in the U.S. are expected to report a significant increase in loan losses due to rising interest rates and inflation. Although banks have benefited from higher interest rates through increased lending and investment income, banks are now experiencing the negative effects on borrowers. The six largest banks are predicted to write off a collective $5 billion from defaulted loans in the second quarter, and an additional $7.6 billion is estimated to cover potential bad loans. Credit cards and commercial real estate loans are causing the most concern, while investment banking revenues are expected to decline. However, analysts believe that the benefits of higher interest rates will outweigh the challenges for most big banks. JPMorgan is predicted to have the largest percentage jump in loan losses, followed by Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup.

FED’S BALANCE SHEET

During congressional testimony, Federal Reserve Chair Jerome Powell admitted that the central bank was caught off guard by the consequences of reducing its balance sheet four years ago. Although Powell reassured lawmakers that they are committed to avoiding a repeat of the 2019 repo market freeze, Wall Street economists and strategists warn that quantitative tightening (QT) remains complex and unpredictable. QT involves allowing maturing Fed bond holdings to expire without replacement, which reduces cash in the financial system. The full impact of the Fed’s current QT program will be felt in the coming months, and how it unfolds and how the Fed manages the process will shape its future use of the balance sheet. The Fed aims to prevent a repeat of the reserve scarcity that occurred in 2019 and plans to slow down QT when reserves are still plentiful. The reverse repo facility has played a role in maintaining liquidity, with money-market funds using it to hold cash, amounting to over $1.8 trillion.

KEY EVENTS HAPPENING THIS WEEK

Monday: Wholesale inventories and Consumer credit reports for May.

Tuesday:  National Federation of Independent Business (NFIB) optimism index report for June.

Wednesday: Consumer price index (CPI) report for June.

Thursday: Initial Jobless claims, Producer price index (PPI) report for June, Delta Air Lines and PepsiCo earnings reports (before market opens), and Federal budget report for June.

Friday: Import price index report for June, BlackRock, Citigroup, JPMorgan, UnitedHealth Group and Wells Fargo & Co earnings reports (before market opens), and preliminary Consumer sentiment report for June.

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