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NOVEMBER 7, 2023

DeFi RESURGENCE

The recent upswing in cryptocurrency prices has reignited enthusiasm for Decentralized Finance (DeFi), as evidenced by the spike in interest rates for stablecoin borrowing on the Aave, the leading DeFi lending platform, exceeding 10% for USDC and Tether. This trend indicates that traders are increasingly leveraging their crypto investments, contributing to the growing demand for lending and leverage in the market. Moreover, the reason behind this heightened interest in DeFi is further fueled by mounting investor enthusiasm in cryptocurrencies and heightened market volatility, and the return of positive funding rates in the crypto market is creating attractive trading opportunities for investors. Furthermore, the approval anticipation of Bitcoin exchange-traded funds by the US Securities and Exchange Commission is also contributing to the resurgence of DeFi, amplifying the wider cryptocurrency market rally and refocusing attention on DeFi projects.

UNCONNECTED TO MONETARY POLICY

Federal Reserve Governor Lisa Cook recently discussed the recent surge in long-term U.S. bond yields and emphasized that the increase is not driven by investors’ expectations of further interest rate hikes, but highlighted its potential implications. Cook noted that market yields influenced by central bank activities pose challenges, while those driven by other factors could independently tighten financial conditions, potentially slowing demand and inflation. In addition, Cook also expressed concerns about potential risks in non-bank financial institutions, including highly leveraged hedge funds, shadow banking, and exotic financial instruments, and she raised the issue of significant declines in the commercial real estate market in the event of an uptick in commercial mortgage delinquencies, particularly in office spaces affected by the pandemic. Moreover, Cook underscored the importance of a proactive approach, calling for closer monitoring of these emerging developments and associated risks, stressing the need to remain vigilant and be prepared to deal with the complexity of these situations.

STILL LOW

The U.S. trade deficit increased by nearly 5% to $61.5 billion in September, despite remaining close to a three-year low, revealing the intricate dynamics of global economic trends. This rise is attributed to the robust U.S. economic recovery from the pandemic, leading to increased purchases of foreign imports and reflecting the unparalleled interconnectedness of the global economy. While smaller deficits bolster the gross domestic product (GDP) and assert the country’s economic growth, the historically high trade deficits raise concerns about the future, prompting a closer inspection of the potential long-term consequences. On the upside, the U.S. is on track to observe its lowest trade deficit in three years in 2023, indicating a positive trajectory for the economy. Nevertheless, the continuing high deficits may indicate potential weakening of economic conditions.

BANKRUPTCY RESTRUCTURING

The well-known office-sharing company WeWork has recently filed for Chapter 11 bankruptcy protection in New Jersey, marking a crucial development in light of its ongoing financial struggles. This strategic move comes after the company successfully negotiated arrangements with majority of its secured note holders, with the bankruptcy proceedings specifically tailored to encompass its U.S. and Canada operations. WeWork has publicized staggering liabilities within the range of $10 billion to $50 billion, compounded by the arduous task of managing long-term lease obligations, amounting to nearly $16 billion. In order to navigate this challenging period of restructuring, WeWork has enlisted prominent legal advisors such as Kirkland & Ellis and Cole Schotz, and sought support from PJT Partners as its investment bank. In spite of these formidable obstacles, the company remains resolute in its commitment to reorganize and emerge stronger. Former CEO Adam Neumann, while expressing disappointment in the filing, remains optimistic about the company’s potential to overcome these challenges and has extended his support in the turnaround process.

INTERNATIONAL NEWS

The economic downturn in the euro zone deepened last month as the dominant services industry experienced a significant drop in demand, potentially signaling an increased risk of recession for the 20-country currency union. The final Composite Purchasing Managers’ Index (PMI) for October, which acts as a reliable indicator of overall economic health, plummeted to 46.5, the lowest recorded level since November 2020, and taking into account that this sustained contraction has persisted for five consecutive months, there still remains the likelihood of a recession in the coming months. Furthermore, manufacturing activity also saw a notable decline, with the new orders PMI indicating one of the steepest contractions since data collection began in 1997, and in the services sector there were also significant challenges, particularly in Germany, France, and Italy as Germany, saw a decline in services activity accompanied by persistently weak demand, France’s services sector shrank once again, and Italian services activity experienced its third consecutive month of contraction, reaching its fastest pace in a year. Nevertheless, despite these challenges, there were some positive news, as Spain saw a slight acceleration in its services sector growth last month. Additionally, there were also signs of optimism as investor morale in the euro zone rose more than expected at the start of November, according to Sentix’s index. Moreover, easing price pressures, as shown by the PMI survey, provide some relief for policymakers, particularly with both the input and output prices indexes falling from their September levels.

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