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OCTOBER 19, 2023

ANTICIPATION MOUNTS FOR APPROVAL

Excitement is building as the court is set to issue a mandate on Friday regarding the potential conversion of Grayscale Investment’s Bitcoin trust (GBTC) into an ETF. After winning a lawsuit against the Securities and Exchange Commission (SEC), Grayscale’s victory has raised hopes for broader approval of a Bitcoin ETF in the US. This development could bring much-needed clarity to the often uncertain ETF approval process. Notably, other prominent players like BlackRock and Invesco are also pursuing their own applications. Some experts believe that multiple applications could receive the green light simultaneously. While the overall process remains complex, market sentiment has already improved, with Grayscale’s Bitcoin trust experiencing a narrower discount and increased investor interest.

GROWING DOUBTS

Tesla has experienced a significant drop of over 7% in its stock as concerns about its ability to maintain its exceptional growth emerged. This has led Wall Street analysts to question whether Tesla can continue to outperform other automakers in the electric vehicle (EV) industry. Even Elon Musk, Tesla’s CEO, who once referred to the company as “recession-resilient,” expressed worry about the impact of high interest rates on demand after the company failed to meet revenue estimates. These factors are expected to result in a loss of over $50 billion in Tesla’s market capitalization, making it no longer the most valuable automaker. Moreover, in order to achieve its annual goal of delivering 1.8 million vehicles, Tesla is anticipated to further reduce prices during this quarter. However, its gross margin has already contracted from 25.1% to 17.9% compared to the same period last year. Additionally, profitability is likely to be pressured in the coming months due to the introduction of the Cybertruck, inspired by the film “Blade Runner.” As a result of these concerns, ten analysts have lowered their price targets for Tesla, and the median expectation now stands at $260, according to LSEG data. In premarket trading, Tesla shares were at $224.89, nonetheless, despite this setback, investor optimism remains strong as they believe Tesla will fare better than its competitors in an uncertain economy and benefit from its self-driving technology in the long run. In addition, Tesla’s positive outlook is further bolstered by the difficult financial situation faced by small EV startups and the ongoing strike within the Detroit Three automakers.

UPWARD TREND CONTINUES

The steady rise trend in Treasury yields has continued, as investors closely follow earnings news and international efforts to address the ongoing conflict between Israel and Hamas. Specifically, the 10-year Treasury yield is gradually approaching the significant 5% level, while the 2-year yield has already reached levels not witnessed since 2006. This increase in yields can be attributed to several factors. First, concerns about inflation have prompted the belief that the Federal Reserve may maintain higher benchmark rates to combat it. Second, the consistent outperformance of the economy and labor market has also contributed to the upward trend in yields. Third, the swelling government deficits require a greater supply of Treasury bonds to be brought to the market, especially as the Federal Reserve has scaled back its purchases. And lastly, the term premium, which represents the extra yield demanded by investors due to the possibility of interest rate fluctuations over the bond’s holding period, has increased. Consequently, analysts and market commentators anticipate that the 5% mark for 10-year yields is inevitable. All eyes are now on Federal Reserve Chairman Jerome Powell, and it is anticipated that his statements will align with those of other Fed officials, who have indicated that interest rates are likely to remain elevated for an extended period.

POSSIBLE PAUSE

According to Federal Reserve Governor Christopher Waller, the central bank can hold off on interest rate increases while closely monitoring progress in combating inflation. As the Fed prepares to meet in two weeks, Waller has been assessing recent data to determine if the bank’s efforts to reduce demand and slow inflation are effective, but he maintains that it is too soon to draw definitive conclusions. While recent statements from multiple Fed officials have indicated that the rise in Treasury yields suggests tightening financial conditions, potentially negating the need for additional rate hikes, Waller and other officials remain cautious, as they have been caught off-guard in the past by temporary inflationary spikes. In addition, although Waller is known for his inclination towards higher rates and tighter policies, he is currently suggesting a potential pause in the near term without making any firm commitments beyond that, and if the real economy weakens, Waller believes there would be more room to delay further rate hikes and allow long-term rates to contribute to the stabilization process. However, if the economy continues to show strength and inflation appears to stabilize or accelerate, additional tightening of policies may be necessary, despite the recent increase in long-term rates. Moreover, to make informed decisions, Waller emphasizes monitoring various economic indicators, including labor market conditions, retail spending, nonresidential investment, construction spending, and upcoming GDP growth figures for the third quarter, as these data points will help shape the future direction of monetary policy.

INTERNATIONAL NEWS

In August, Chinese investors made the largest sell-off of US bonds and stocks in four years, raising speculation about the Chinese government’s motives behind this move. Data from the U.S. Department of the Treasury revealed that the majority of the $21.2 billion in sales were in Treasury bonds and US equities. This has led many to believe that the Chinese authorities may be taking steps to bolster their war chest in order to defend the weakening yuan. Furthermore, the timing of the sell-off coincided with a significant decline in the onshore yuan against the U.S. dollar, as it reached its lowest level since November. And in response, Beijing reportedly instructed state-owned banks to increase their intervention in the currency market. Consequently, analysts have suggested that the sell-off of U.S. bonds and stocks could be a strategy employed by China to liquidate some of its holdings and obtain U.S. dollar cash, which may be needed for future intervention operations to support the yuan. Moreover, Chinese investors also set a record by selling $5.1 billion worth of U.S. stocks in August. This further highlights the extent of their divestment from U.S. securities. In addition, while Chinese investors have been gradually reducing their holdings of U.S. Treasuries throughout the year, they had previously been increasing their investments in U.S. agency bonds, and this simultaneous sell-off of both types of bonds in August has caught the attention of investors who closely monitor the demand for U.S. debt.

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