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OCTOBER 17, 2023

UNCERTAINTIES REMAIN

There are signs of a challenging winter ahead for the crypto market as the recent launch of exchange-traded funds (ETFs) tracking ether (ETH) has been reflecting the overall gloominess, with investors shying away from risk in the face of the current economic uncertainties and geopolitical conflicts. Despite high anticipation, the six ETFs introduced in early October garnered less than $10 million in their first week of trading, and there were outflows of $7.5 million from overall Ethereum products. This underwhelming performance comes as Treasury yields reached record highs and investors withdrew from riskier assets. Moreover, the timing of these ETFs seems unfavorable, according to industry analysts, as the macroeconomic outlook grows increasingly murky. Nonetheless, amidst these challenges, Bitcoin has managed to maintain some stability as the original “digital gold,” and it has outperforming ether with minimal declines this month. Furthermore, it is worth noting that although Bitcoin’s price cooled down from the significant rise it had experienced due to the erroneous report that BlackRock Inc. had gained approval for a spot exchange-traded fund (ETF), this false event has highlighted investors’ positive response to the potential approval of a spot bitcoin ETF.

STRONG RETAIL SALES

According to the Commerce Department, September retail sales in the US exceeded expectations, signaling the ongoing resilience of American consumers despite concerns of a possible slowdown. Sales increased by 0.7% compared to the previous month, surpassing Wall Street’s projected growth of 0.3%. In addition, excluding auto and gas sales, there was a 0.6% increase, contrary to estimates of a 0.1% decline, and August’s sales were also revised upward. Furthermore, this recent report indicates that consumer spending remains robust, even as the Federal Reserve aims to curb inflation through interest rate hikes. However, companies anticipate a future slowdown, with JPMorgan and Bank of America CEOs observing signs of reduced cash reserves and decelerating spending.

RESILIENCE SHINES

Bank of America reported a 10% increase in its third-quarter profits compared to the previous year, thanks to higher interest income and a strong performance from its Wall Street division. The bank’s earnings reached $7.8 billion, and its revenue was $25.2 billion, marking a 3% year-over-year increase. In addition, net interest income, which measures the difference between what the bank earns from loans and pays for deposits, also saw a 4% rise. Despite the challenges of a slowing economy, Bank of America’s CEO, Brian Moynihan, highlighted the bank’s resilience, however, the bank still faced difficulties with its investment portfolio, resulting in substantial losses due to rising interest rates. Investors are closely watching this situation, though analysts do not anticipate the need for the bank to sell its holdings. Moreover, there were concerns about rising borrowing costs impacting some of the bank’s customers, as evidenced by increased net charge-offs and higher provisions for future loan losses. Furrhermore, the bank’s CFO, Alastair Borthwick, expressed caution about the prospects of a full-scale recovery in investment banking, especially in equity capital markets.

HEIGHTENED VOLATILITY

The Treasury market is currently experiencing heightened levels of volatility, similar to the turbulence seen during the pandemic in 2020. The surge in the U.S. 30-year yield, reaching its highest levels in over three years and averaging close to 13 basis points over the past five trading days, poses significant challenges for investors. These high yield levels have not been witnessed in a decade and highlight the risks faced by investors who anticipate a recession caused by the Federal Reserve’s interest rate hiking cycle, despite contrary statements from policymakers. Blake Gwinn, Head of U.S. Rates Strategy at RBC Capital Markets, explains that if the Federal Reserve remains anchored at the front-end, longer-end yields will undergo substantial shifts. Supply and deficits have become a focal point with the 30-year bond’s yield surpassing 5% this month for the first time since 2007, indicating concerns about the Federal Reserve’s policy tightness. In addition, the disappointing response to a bond auction on October 12 reinforced worries about the increasing supply of Treasury debt. However, it is worth noting that yields experienced significant declines last week as investors sought refuge in safe-haven assets amidst escalating tensions in the Middle East. This demand led Marko Kolanovic, Chief Global Markets Strategist at JPMorgan Chase & Co., to recommend that investors increase their bond allocations, citing geopolitical risks, attractive valuations, and reduced market positioning uncertainties.

INTERNATIONAL NEWS

China’s distressed property market, which emerged as a lucrative opportunity for distressed-debt investors, has turned out to be less fruitful than anticipated. The nation’s real estate sector has been severely impacted by a prolonged slowdown, resulting in widespread defaults on international bonds issued by Chinese developers. Despite the initial influx of distressed-debt funds into the market, seeking to acquire cheap bonds and negotiate debt restructuring plans, the strategy has largely fallen short. Only a small number of property companies have so far repaid investors, while the majority of bonds are trading at significantly reduced prices. As a result, investor confidence has waned and uncertainty looms large. Complicating matters further, negotiations for debt restructuring have been hindered by government intervention aimed at mitigating the economic fallout from the property market downturn. China’s sluggish consumer demand, declining exports, and lack of inflation have added to the challenging landscape. While a few successful restructuring cases have served as examples, the overall outlook remains uncertain. However, distressed-debt investors are still optimistic about the potential in China’s property market, albeit with the caution that it requires patience and meticulous analysis to navigate the uncertainties ahead.

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