SAFE HAVEN ASSET

Bitcoin is emerging as a safe haven asset, gaining popularity as investors have lost confidence in U.S. Treasury bonds amid the Israel-Hamas conflict. Mohamed El-Erian, chief economic advisor at Allianz, explains that people are now considering Bitcoin and equities as the “safe assets” of choice due to concerns about interest rate risks associated with government bonds. Typically, government bonds, particularly those issued by the U.S. Treasury, have been considered reliable investments during times of economic and political uncertainty, however, recent developments have challenged their reputation. For instance, the yield on the 10-year U.S. Treasury note has increased by 4.9%, indicating a decline in its perceived safety. Consequently, investors are turning to alternative safe assets such as Bitcoin, which has experienced a 23% surge in value, reaching $34,460 since the conflict began on October 7.

MODERATE GROWTH

According to the payrolls processing firm, ADP, private sector payroll growth in October increased slightly but fell short of expectations as although companies surpassed September’s figure of 89,000, with 113,000 workers during the month, this result was below the estimated 130,000. In addition, wages also saw a 5.7% increase compared to the previous year, marking the smallest annual gain since October 2021. In terms of sectors, education and health services saw the largest growth with 45,000 new jobs, while trade, transportation, and utilities also experienced notable gains with 35,000 new jobs, followed by financial activities and leisure and hospitality, with 21,000 and 17,000 new jobs respectively. Most of the jobs created were in service-providing industries, while goods producers contributed only 6,000 jobs. Additionally, firms with 50-499 employees made the largest contribution with a gain of 78,000 jobs. ADP’s chief economist, Nela Richardson, noted that no single industry dominated hiring in October, and the substantial post-pandemic wage increases appear to be in the past. Overall, the job numbers for October paint a well-rounded picture, indicating that although the labor market has slowed, it still supports strong consumer spending. Moreover, this report comes just before the official nonfarm payrolls report by the Labor Department, which is expected to show an increase of 170,000 jobs and includes government positions, unlike the ADP report.

SHIFT IN TREND

As mortgage rates continue to climb and reach levels unseen for more than two decades, prospective homebuyers are being compelled to explore riskier mortgage products in order to fulfill their dreams of homeownership. According to the Mortgage Bankers Association, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased slightly last week, although it still remains 80 basis points higher compared to the same period the previous year. However, in an attempt to secure a more affordable option, more individuals are turning to adjustable-rate mortgages (ARMs). This option is considered riskier due to the fact that the interest rates are fixed for shorter terms, yet it offers potential savings. The average contract interest rate for 5/1 ARMs decreased last week, further increasing its appeal. MBA economist, Joel Kan, highlights the growing popularity of ARMs, stating that they accounted for 10.7% of all mortgage applications, the highest level in almost a year. Nonetheless, despite this rise, overall mortgage demand continues its downward trend, as refinancing applications fell by 4% compared to the previous week and were 12% lower than the same period the previous year. Similarly, applications for mortgages to purchase a home decreased by 1% and were 22% lower compared to the previous year. Kan further emphasizes that this decline is primarily attributed to the impact of higher interest rates, with purchase applications reaching their lowest level since 1995 and refinance applications hitting their lowest level since January 2023. The market is now anxiously awaiting the Federal Reserve’s announcement, hoping for any sign of relief from the burden of soaring interest rates.

MIXED SENTIMENTS

Despite the strong performance of the economy, Americans are feeling increasingly gloomy and dissatisfied as recent survey data indicates that consumer confidence is depressed, with concerns about the country’s direction and low approval ratings for President Biden’s handling of the economy; and although inflation has decreased from its peak, it remains a significant factor contributing to the discontent. Nonetheless, there are still other factors that should alleviate some of the concerns as wages are now keeping up with inflation, and job satisfaction is relatively high. Additionally, households have benefited from pandemic relief, leading to stronger finances compared to pre-pandemic times. Furthermore, the median household wealth has increased by 37% due to rising housing and stock prices. Yet, despite these positive signs, Americans seem to feel pessimistic about the economy as the absolute level of prices is also bothering consumers. Examples include the rising cost of a cup of Starbucks coffee and high home prices that make homeownership unattainable for many. Moreover, political polarization may also be contributing to the dissatisfaction, but it is worth nothing that it does not fully account for the overall sentiment. Overall, the complex mix of these factors are currently puzzling economists who are trying to understand why Americans are still not more positive about the economy.

THIRD QUARTER REBOUND

Macro trades, characterized by betting on political and economic events, have experienced a significant turnaround in the third quarter, emerging as the top-performing hedge fund strategy. According to data from Citco, a leading fund administrator overseeing over $1 trillion in global hedge fund assets, macro funds achieved impressive asset-weighted returns of 3.07% from July to September. In contrast, multi-strategy and equities funds reported marginal losses during the same period. This positive shift marks a departure from a challenging first half of the year, in which macro managers struggled amid market volatility and economic uncertainty. The recent resurgence can be attributed to an upswing in volatility and a clearer outlook on interest rates, which created a favorable trading environment for macro strategies. Notably, Asian macro hedge funds have outperformed their global counterparts, banking on trades that capitalize on weakening yen and yuan, as well as relative-value arbitrage with Australian and New Zealand assets. Astignes Capital’s Asia Rates Master Fund, for instance, recorded a substantial surge of 3.2% in September alone. Moreover, it is worth highlighting that while the third quarter has been lucrative for macro funds, they are still down by approximately 1.7% for the year as Citco reported that macro funds experienced losses of 1.14% in the first quarter and 2.15% in the second quarter, with some funds suffering more significant losses. Nonetheless, industry experts remain optimistic about the prospects of securing positive results for the entire year, as global market sentiment, influenced largely by the U.S. yield curve, continues to present trading opportunities.