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OCTOBER 20, 2023

PROSPECTS OF APPROVAL

Coinbase, the leading cryptocurrency exchange in the U.S., is confident in the approval of a U.S. bitcoin exchange-traded fund (ETF) by the Securities and Exchange Commission (SEC) as according to Coinbase’s chief legal officer, Paul Grewal, they believe that these ETF applications should be granted under the law. Grewal highlights a recent court ruling that prevents the SEC from rejecting these applications arbitrarily or capriciously, which gives them confidence that the commission will fulfill its responsibilities and approve a bitcoin ETF soon. Furtheremore, Coinbase stands to benefit significantly if a bitcoin ETF is approved as the largest crypto exchange in the U.S. is commonly held in portfolios designed to provide investors with crypto exposure. However, it is worth noting that the attempts from the asset management firm Grayscale to convert its bitcoin fund into an ETF are facing legal obstacles as its parent company, Digital Currency Group, and affiliated entities are currently dealing with a lawsuit accusing them of defrauding investors by over $1 billion. Nonetheless, despite these challenges, Grewal remains optimistic about the approval of more bitcoin ETFs in the near future, and he expects the SEC to adhere to the law and treat pending applications impartially.

ROBUST GROWTH

The latest report from the Labor Department has revealed that the number of Americans applying for new unemployment benefits dropped to a nine-month low, indicating that job growth continues to be strong, and that the labor market remains tight. The unexpected decline in initial jobless claims, coupled with solid retail sales and factory production in September, suggests that the economy is maintaining its momentum. The latest data has revealed that initial claims for state unemployment benefits have dropped by 13,000 to a seasonally adjusted 198,000. This is the lowest level observed since January, and although the labor market may be gradually cooling, it remains tight, with claims falling within the range of 194,000 to 265,000 for this year. Moreover, despite potential challenges and uncertainties, companies are hanging on to their employees as finding qualified workers becomes increasingly difficult. Christopher Rupkey, the chief economist at FWDBONDS in New York, notes that although companies may express concerns about the future and potential risks, they are still committed to retaining their workforce. Furthermore, the impact of recent United Auto Workers (UAW) strikes on the labor market has been limited so far, despite disruptions in supply chains. However, it is important to note that there was an increase in claims related to the industrial action in Michigan during the week ending October 7, and major automotive companies like Ford Motor, General Motors, and Chrysler-parent Stellantis have been forced to furlough and lay off non-striking employees.

OUTLOOK IMPROVES

Economists have raised their growth forecasts for the U.S. economy until early 2024, while also lowering the chances of a recession to a one-year low. This positive trend is largely attributed to continued consumer spending, with the economy likely expanding at a rapid rate of 3.5% in the third quarter – the fastest in nearly two years. Despite challenges such as high borrowing costs and inflation, the labor market remains strong, which in turn supports ongoing spending by households. In addition, employment projections for the next year have been revised higher, contributing to the more positive outlook, and this is why economists now see the odds of a recession in the next year as equally likely. Moreover, James Knightley, the chief international economist at ING, describes the U.S. economy’s recent performance as “stellar,” with robust consumer spending as the main driver, and it has been highlighted that in order to maintain their desired lifestyles, households have been relying on tapping into their savings and borrowing on credit cards, even as inflation chips away at their spending power. Furthermore, respondents foresee the personal consumption expenditures core price index, which excludes food and energy, rising by an average of 2.6% in 2024, aligning with the previous month’s projection.

CONTRARIAN SIGNAL

Investor sentiment has taken a bearish turn as of late, with concerns over various market factors leading to a decrease in confidence. However, Bank of America (BofA) strategist Michael Hartnett suggests that this negative sentiment might actually serve as a short-term rally signal. The BofA bull-and-bear reading has fallen, primarily driven by the outflow of funds from emerging market debt, high-yield bonds, and global equities. Simultaneously, there has been an increase in the allocation to cash. This drop in the reading below a specific threshold is typically viewed as a contrarian signal, indicating the potential for a near-term rally in the market. Furthermore, taking a look at historical data, during similar situations, the S&P 500 has recorded an average gain of 5.4%, while global equities experienced a rise of 7.6%. Consequently, Hartnett predicts that the S&P 500 will likely hold above the 4,200-point mark, and the yield on the 10-year Treasury will reach a ceiling of 5% over the next few weeks. Nonetheless, if the index fails to maintain its position above 4,200, despite the contrarian signals, it could potentially indicate underlying risks such as a credit event or a decline in economic conditions.

INTERNATIONAL NEWS

Bank of England (BOE) Governor Andrew Bailey has indicated the need for continued efforts to combat inflation, despite growing signs of a weakening UK economy. Charles Hepworth, Investment Director at GAM Investments, highlights persistently high inflation, an unusually warm September, and high borrowing costs as factors contributing to a depressed consumer sentiment and dwindling confidence in the economy’s trajectory. As a result, UK two-year yields have dropped, reflecting reduced expectations for further interest rate hikes. In addition, the likelihood of a quarter-point increase by early next year has diminished from 90% to around 60% based on money market predictions, and policymakers are carefully assessing the extent of measures required to rein in inflation, which currently exceeds the target rate by more than triple. Moreover, although Bailey did not discuss interest rates specifically, both he and Chief Economist Huw Pill have hinted at keeping the key lending rate at 5.25% until tangible evidence of declining inflationary pressures emerges, and despite wage growth remaining high, Bailey anticipates a gradual decrease in inflation, as current pay levels surpass what is deemed consistent with the target rate. Furtheremore, the BOE expects a significant drop in October’s inflation figures, primarily due to the exclusion of last year’s sharp energy price increase from the comparison, and subsequent declines may occur at a more incremental pace.

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