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OCTOBER 2, 2023

POSITIVE START

As a new month kicked off, Bitcoin and other cryptocurrencies experienced a notable increase, with Bitcoin reaching a six-week high. Interestingly, although there has been a decline in global equities, the crypto market has exhibited robust buying activity, potentially driven by the start of a new accounting quarter and investors seeking alternative assets. Additionally, there was a positive influx of stablecoins on the Ethereum blockchain, suggesting increased interest from traders. Nonetheless, despite these positive developments it is worth mentioning that Sam Bankman-Fried, who had contributed to the crypto market’s growth with FTX, is currently facing legal troubles. He is presently in jail awaiting trial on fraud charges related to FTX, adding a touch of controversy to the overall cryptocurrency landscape.

SHUTDOWN AVOIDED

The U.S. Congress has successfully passed a temporary funding bill, avoiding a government shutdown that would have disrupted services and impacted federal employees. The bill received strong support from the House of Representatives, with rare unity shown between Democrats and Republicans. Without this bill, federal agencies would have been forced to suspend non-essential work and withhold paychecks throughout the duration of the shutdown. However, this is only a temporary solution, as discussions will resume within the next 45 days in Congress to prevent another shutdown, and if no agreement is reached by November 17, federal workers, including military personnel and civilian employees, may face delayed paychecks once again. The root cause of this shutdown crisis was a faction of hardline Republicans who opposed several proposed temporary funding measures, demanding significant spending cuts instead. Consequently, concerns have arisen regarding the future of House Speaker Kevin McCarthy’s position, as his ability to maintain leadership was in question. Moreover, as the U.S. faced this government shutdown standoff, troubling worries have also emerged regarding the nation’s creditworthiness. This concern follows closely on the heels of the recent near-default on the U.S. government’s $31.4 trillion debt earlier this year. In particular, the rating agency Moody’s has cautioned that the ongoing crisis could potentially harm the country’s creditworthiness, although it currently holds the highest rating.

HIGH RATES CHALLENGES

According to strategists at Goldman Sachs, the rising interest rates in the U.S. are starting to impact corporate profits, potentially breaking a historical trend. S&P 500 companies have experienced the biggest increase in borrowing costs in nearly two decades, which could hinder their ability to take on more debt and affect long-term profitability. For years, lower interest expenses and increased leverage have contributed significantly to the return on equity (ROE) of S&P 500 firms. However, in the current “higher for longer” rate environment, the key risk is higher interest expenses and lower leverage, which could deviate from the established trend. While U.S. stocks have struggled recently due to rising bond yields and subdued economic growth expectations, Goldman Sachs strategists have identified stocks less vulnerable to higher borrowing costs. Additionally, they also suggest that U.S. technology stocks may be poised for a turnaround. Moreover, the profitability of the S&P 500, excluding financials, has declined this year, primarily due to increased interest expenses, and analysts anticipate a stabilization in ROE with limited potential for significant growth due to sluggish economic conditions.

INTERNATIONAL NEWS

The World Bank’s forecasting for China’s economic growth remains consistent, with a projected growth rate of 5.1% in 2023, maintaining its previous estimate in April. However, there has been a downward revision for 2024, with the prediction adjusted to 4.4% from 4.8% due to the ongoing weaknesses in China’s property sector. Moreover, in the wider context of East Asia and the Pacific, the bank has slightly reduced its 2023 GDP growth forecast to 5.0% from the previously estimated 5.1%. Furthermore, looking beyond 2023, the regional outlook has been revised to a 4.5% growth rate, influenced by external factors such as a sluggish global economy, high interest rates, and trade protectionism. A notable concern raised by the World Bank is the significant increase in global trade restrictions, with almost 3,000 new restrictions imposed in 2022, triple the number observed in 2019. This has hindered China’s economic rebound, given the country’s elevated debt levels and challenges within the property sector, and to foster sustainable growth, the World Bank suggests implementing stronger structural reforms, including the liberalization of the residency permit system, reinforcing social safety nets, and providing regulatory predictability for investments in innovation and sustainability. However, meeting the Chinese government’s growth target of around 5% for this year will need additional policy support and structural reforms.

KEY EVENTS HAPPENING THIS WEEK

Monday: Construction spending report for August, and S&P final U.S. manufacturing PMI and ISM manufacturing reports for September.

Tuesday: Job openings report for August.

Wednesday: Mortgage bankers association (MBA) reports, Factory orders report for August, and ADP employment, S&P final U.S. services PMI, and ISM services reports for September.

Thursday: Initial jobless claims report for week ending on September 30, and U.S. trade deficit report for August.

Friday: U.S. employment and unemployment rate reports for September, and Consumer credit report for August.

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