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SEPTEMBER 5, 2023

ADAPTING TO ADVERSITY

Market making in digital tokens used to be incredibly profitable, but the current state of the crypto sector tells a different story. The recent $2 trillion downturn has led to bankruptcies and a lack of investor confidence, and in response, market makers are taking measures to mitigate future risks by diversifying their activities, storing assets away from exchanges, and borrowing tokens using their own inventories as collateral. However, these precautions have resulted in decreased profitability. The industry has been forced to recognize the need for higher costs and a change in business practices. Additionally, market makers are reducing exposure to centralized exchanges and focusing on the top tokens to minimize risks. Moreover, although there has been a partial recovery, digital assets still remain far from their all-time highs. Nevertheless, there is optimism for further gains if spot Bitcoin exchange-traded funds are approved in the U.S.

POSITIVE OUTLOOK

Goldman Sachs has recently revised its forecast and now believes that the possibility of a U.S. recession occurring in the next 12 months has decreased to 15%, down from their previous prediction of 20%. This change in prediction is based on positive data concerning inflation and the job market. In addition, the bank also predicts that real disposable income will see a rebound in the next year, thanks to continued strong job growth and rising wages. Furtheremore, the bank expects that the impact of tightening monetary policies will gradually diminish, eventually disappearing completely by early 2024. Moreover, Goldman Sachs perceives Fed Chair Jerome Powell’s cautious approach as indicative of no interest rate hike in September, with a substantial hurdle to overcome for a potential increase in November. Additionally, the bank foresees a modest quarter-by-quarter reduction of 25 basis points in interest rates, commencing in the second quarter of 2024.

ONGOING BORROWING

Nearly six months after the collapse of Silicon Valley Bank, the Federal Reserve’s emergency lending facility is still seeing increased borrowing. This may be due to lingering effects from the banking crisis, but it is more likely a result of opportunistic money management strategies by some banks. The Bank Term Funding Program (BTFP) saw a rapid increase in loans at its launch in March , reaching $79 billion in just one month; and since then, it has grown at a slower pace, reaching $108 billion in loans. However, it is important to note that this increase does not indicate a return to bank stress. Additionally, the terms of the BTFP loans are relatively favorable, offering credit at a modest interest rate over the prevailing overnight index swap rate. Moreover, other emergency lending programs, such as the Fed discount window lending, have not shown signs of stress or crisis.

POSSIBLE DECLINE

According to UBS research analysts, the recent ups and downs in U.S. Treasury yields are expected to calm down soon, and the yields are predicted to decrease in the next six to twelve months. This projection is driven by strict monetary policies and a decline in inflation. The analysts emphasize that the surge in long-term yields, outpacing that of short-term yields, is a short-term and country-specific trend within the U.S. market. Consequently, UBS analysts advise investors to seize the opportunity presented by the current high bond yields to secure favorable rates for an extended period.

INTERNATIONAL NEWS

Consumer expectations for inflation in the euro area increased slightly in July, remaining above the European Central Bank’s target of 2%. According to the ECB’s monthly survey, expectations for inflation in the next 12 months stayed at 3.4%, with expectations for the next three years rising to 2.4% from 2.3%. This data will influence the ECB’s decision on whether to raise or maintain interest rates next week. Additionally, recent data showed that underlying inflation slowed in August, although both headline and underlying inflation still exceed the ECB’s goal. Furthermore, following the release of this data, money markets are predicting a rate increase, but some policymakers have expressed concerns about the negative consumer sentiment and the weakening services sector.

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