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Fed decision helps to buoy US stocks as positive data abounds
Ever since the post-pandemic boom in the US stock market came to an abrupt end in late 2021, it's been an arduous slog for many companies to try and regain some of the ground lost during the slow grind lower of 2022. The start of this new year seemed to offer an olive branch to the battered stock market as major indices gained over 10% in January 2023 alone. However, by the end of July, the wheels had already begun to come off the recovery.
Since then, the country's two biggest indices — the S&P 500 and Nasdaq 100 — have both lost close to 10%, dropping from $4,576 and $15,826 to $4,193 and $14,409, respectively, in the space of just three months. But movements this week would seem to suggest there could be light at the end of the tunnel for tortured stock market investors.
The release of the latest Consumer Confidence numbers saw the S&P 500 rise 0.7% on 31 October, while the Nasdaq managed to move up 0.5%. These gains were then built upon further the next day as the Fed's decision to hold rates steady saw respective jumps of 1.1% and 1.6% for these major indices. The gains might not look like much on the face of it, but they're a sign that equity prices are responding positively to key economic data despite the ongoing (and worsening) geopolitical instability. As the world begins to interpret the Fed's latest decision and post-meeting comments, traders and investors everywhere are wondering what the implications for the stock market will be up to the end of this year and beyond.
Positive data releases surprise market
With the increasing geopolitical instability that has now spread to the Middle East, persistent inflation, and higher costs of borrowing, many would expect key economic indicators to be suffering. However, in the US, at least, the muted impact of these multiple factors has left analysts scratching their heads. While the recent Consumer Confidence figures released this week by the Conference Board were indeed down from a month ago, the decline to 102.6 from 103 in September was much less than the full three-point decline predicted by a Reuters poll of economists.
Meanwhile, the US job market appears completely unfazed by the pervasive uncertainty as it continues to defy all the odds. After adding 336,000 jobs in September, unemployment remains steady at a very healthy 3.8%. The US Labor Department's Job Openings and Labor Turnover Survey (JOLTS) also showed layoffs dropping to a nine-month low, while job openings — a key yardstick of labour demand — were up 56,000 to 9.553 million on the last day of September. Overall, the survey reported that there were 1.5 open jobs for every unemployed person in the US, which is a stark contrast to the pre-pandemic average of 1.2.
While it's not entirely clear why the labour market is performing so well at present, there's no doubt that this is a positive factor for equities that could lead to sustained growth in the near-to-medium term.
Fed feeds confidence in risk assets
In a move welcomed by investors, the US Federal Reserve decided to hold rates steady for a second consecutive month at its meeting on 1 November, similarly opting to maintain the federal funds target rate at 5.25% to 5.5%. This has been interpreted by many to mean that the US regulator is finally finished with its rate hike cycle, which is why the stock market responded so favourably to the news.
However, as is always the case with these FOMC meetings, it's the closing press commentary where we can find some of the biggest pearls of wisdom. In his post-meeting comments, for instance, Powell upgraded his assessment of the economy, saying that "economic activity expanded at a strong pace in the third quarter" compared to the "solid pace" he referred to back in September.
Ironically, it appears that the Fed policymakers think that it is precisely the strong labour market and higher-than-expected GDP growth that is keeping inflation high, with Powell stating that "we will need to see some slower growth and some softening in the labour market to fully restore price stability". Despite the latest hold on interest rates, policymakers don't seem worried about making further rate hikes if needed, even if they elect to keep rates steady for a third time in December. This all but amounts to a tacit commitment by the central bank to a more dovish policy, which is good news for stock market investors. Once the market accepts that the rate-raising cycle is truly over, money will begin to flow freely back into risk assets.
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Has gold lost its glisten?
There's been talk of a commodities super cycle for years now, and yet hard assets continue to disappoint. With the pandemic and then post-COVID hyperinflation, many had reasonably expected an explosion in safe-haven assets, of which gold is perhaps the quintessential. Sadly for gold bugs, it never seemed to come. Following the initial 25% gain in the first half of 2020, the yellow metal has been decidedly flat, and with inflation hitting double digits for much of last year, this actually represents a decline in real terms. Barring natural swings and corrections, gold has been steady in and around its current price of $1976 since September 2020. And now, as the global geopolitical situation grows increasingly tense month after month, precious metals investors are wondering what it will take to finally see some sizable moves to the upside for gold and silver.
The current illogical lull in precious metals is yet another reminder that old models and theories don't always hold true in today's MMT world. The world's biggest economy, the US, is full of contradictions, and a more certain model doesn't appear to be forthcoming just yet. Despite all the conventional wisdom suggesting that haven assets should be booming, metals continue to slide lower, with gold dropping another 0.7% on 7 November. So, what are the causes of the seemingly unstoppable rot in gold and silver, and what can we expect over the coming months and years as the global community faces more and more instability and uncertainty?
Strong dollar overshadows gold's shine
As a dollar-denominated asset, there's no way that gold can escape the influence of the US national currency. Assuming all other factors remain equal, if the dollar loses value, then gold must axiomatically gain in value. It's worth remembering the historic achievement of EUR/USD parity from September to November 2022 and how that left gold prices looking artificially stagnant.
In reality, what had happened was that gold's real-world gains had merely moved in lock step with the greenback's and were thus invisible to the untrained eye. Now, the Fibre did eventually return to a more familiar 1.12 this June but then edged slowly back down to 1.05. Now that we've seen some more encouraging movement to the upside for EUR/USD throughout October, the yellow metal actually managed to gain more than 6% in October, outperforming euro gold by more than one whole percentage point. And though it has now declined by 0.75% since the start of November, this is less than half the drop seen in the euro price per Troy ounce (-1.9%). Silver managed about 75% of the net gains of its more valuable counterpart, recording a 3.26% rise over the last 30 days. With a strong labour market and inflation close to under control, however, we might be wise to expect the dollar's strength to grow given the ECB's more dovish monetary policy compared to the Fed. This could then negatively impact dollar-denominated precious metals' prices.
A lack of interest
The next major factor affecting the prices of precious metals is also connected to central bank policy: rising interest rates. As we've already touched upon, the Fed has been much more hawkish in its rate-rising cycle, and this has finally paid dividends in the form of a return to the semi-normal inflation rate of 3.7% this month. It's still not quite at the 2% target rate, but Fed Governor Lisa Cook believes the central bank's current interest rate of 5.25-5.50% is adequate to get price pressure down to where they want it.
The problem gold and silver have with this is that they are non-yielding assets. This means that their holders do not receive any interest for holding them. On the other hand, corporate and even Treasury bonds pay their holders a return in addition to the principle, and these increase as central bank interest rates rise. The US 2-year Treasury note now pays a handsome 4.934%, and many AA/AAA corporate bonds are paying well above 5%. In fact, even vanilla high-yield savings accounts are offering 4.5-5.5% interest at the moment.
This easy availability of above-inflation, highly liquid investment options will make it very hard for gold to remain attractive to its target market of risk-off investors looking for stable returns and protection against inflation. For this reason, gold bugs might be disappointed over the coming months, save for a drastic change in the macroeconomic situation worldwide.
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Crypto rally “overdone” or just getting started?
A horrible couple of years for crypto left HODLers covering their eyes and counting their losses. Over a protracted thirteen-month decline, the flagship digital currency, Bitcoin, plummeted almost 75%, and it seemed as if there was no bottom in sight. Thankfully, from the start of this year, things have been looking up. In fact, BTC has managed to post gains of 118% since January, and it would now appear that the bulls could be back on the run at last.
As always, the factors behind this growth are numerous, but an undoubtable driver over recent months has been the buzz surrounding the potential impending approval of a raft of spot Bitcoin ETFs by the US Securities and Exchange Commission. After kicking the can down the road for almost the entirety of its permitted 240-day comment period, the SEC is finally expected to greenlight the first of the 10 ETF applications currently under review by 17 November or, at the very latest, in January 2024.
And while the excitement around spot ETFs has played a huge role in BTC's fortunes this year, the effect of similar products on altcoins has been much more muted. It's worth remembering that ETH has already had its own spot ETF approved, and yet this coin has barely managed half the YTD gains of BTC. This is because altcoin investors are typically more savvy and are led more by functionality than transient positive news factors.
That said, the week starting 13 November did see XRP go through a sharp rise (+10%) and similarly steep correction (-9%) following the circulation of a fake Ripple spot ETF filing purportedly by Blackrock, which was subsequently later outed as a forgery. However, as we head into the final few weeks of 2023, investors and traders everywhere are wondering whether a fresh crypto boom is on the cards.
Slow and steady
The first thing to note about this latest bull market is that it's much more controlled this time around. Instead of an over 500% increase in price over six months like the one seen in 2020/21, this cycle has taken almost double the time to record a 118% gain. And while many love huge returns, the volatility and uncertainty that came with Bitcoin's previous booms and subsequent busts made it a very tricky space to invest in for the long term. The hope is that this more reasonable pace will allow the uptrend to persist much longer, especially in the wider positive market context.
Spot Bitcoin ETFs, for example, are just on the horizon, with approval of up to 10 such products expected in Q1 2024. It's hard to imagine a scenario where this doesn't result in an increase in BTC's price, as the investment firms offering such ETFs will be required to purchase large amounts of Bitcoin to back these instruments. This effect will then be amplified by the subsequent influx of institutional investment via these new, easy-to-use vehicles. If this wasn't enough, we then also have the next BTC halving to look forward to in April next year.
Historically, Bitcoin prices have rallied following previous halvings. Six months after the first halving in 2012, BTC's price shot up to $126 from $12. Then, after the second halving in 2016, it rose from $654 to $1000 within seven months. And following the last one in 2020, Bitcoin's price more than doubled to reach $18,040 from $8,570. With only 2 million coins out of a possible total of 21 million remaining, it's surely going to be a bloodbath on the mining market once the rewards drop their next 50% to 3.125 BTC per block, but this is only good news for the long-term price.
Maybe it's all priced in?
With an asset class like crypto, anchoring is always an issue. It's hard to see Bitcoin's current YTD gains as anything less than the tip of the next bullish iceberg, given the history of price dynamics in this notoriously volatile space. However, despite BTC's fairly recent highs, a gain of almost 120% in less than a year is pretty good going in any situation.
In a research report last week, JPMorgan gave its reasoned rebuttal of the two arguments suggesting significant growth ahead, namely the SEC's spot ETF approvals and impending halving. Firstly, the investment bank's analysts believe that capital will likely just be moved into the newly approved spot ETFs from existing BTC products such as the Grayscale Bitcoin Trust (GBTC), futures ETFs, and listed mining companies, thus not having any meaningful impact on real BTC demand. In short, it believes the crypto rally is "overdone". The lead author of the JPMorgan report, Nikolaos Panigirtzoglou, similarly noted that such ETFs already exist in Canada and Europe and have gained "little interest from investors since their inception".
Another argument is that this decision, coupled with Ripple and Grayscale's recent court victories, will force lawmakers to change their stance. However, Panigirtzoglou deemed this unlikely, given the freshness of the memory of the FTX scandal. He also believes that the halving is already priced in for the most part, citing this as the main reason for the recent upward motion and suggesting that any further growth will require new, organic drivers.
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Stocks look to end 2023 on a high amid global insecurity
As we head into the final month of 2023, it’s worth noting that this has been a much-improved year for US stocks after two torrid years of ever-lower lows from 2021–2022. Despite huge geopolitical uncertainty across Europe, the Middle East and Asia, above-target inflation, and energy shortfalls, equities have somehow managed to avoid the typical declines associated with global instability. Since January, the US’s Big Three indices – the Nasdaq 100, S&P 500 and Dow Jones Industrial Average have managed to gain 47.54%, 18.9% and 6.08% respectively as at the time of writing (22/11/2023). And this doesn’t even tell the full story since some individual stocks such as Microsoft, Tesla and Nvidia have risen by as much as 57.5%, 118% and 252.2% respectively.
And while these YTD numbers are of course useful, momentum is what investors are interested in for the most part. Well, the good news is that a large bulk of these gains have been made in the last 3–4 months, with little to suggest a slowdown on the horizon. As usual, the main factors remain US monetary policy, the labour market and consumer confidence – all of which are looking fairly conducive to stock market returns at present. With the end of the year in sight, we’ll be looking at how these key fundamentals are likely to evolve in the coming months and the expected effect on US equities.
Right said FED
The impact of monetary policy on stocks is well known and the US regulator is without a doubt the most influential of all central banks. Amid runaway inflation back in 2021–2022, the US Federal Reserve acted decisively to raise interest rates while its counterparts in Europe and the rest of the world were hesitant – though it did take nearly a year of “transitional” hyperinflation to convince them. Despite the initial pain, the Fed’s strategy has proven to be the correct one as price pressure in the US sits at a much healthier 3.24%, while much of the eurozone remains above 5% and some EU nations continue to battle double-digit inflation. There has been much speculation as to whether the US regulator is done with its current rate hike cycle, with Fed Governor Lisa Cook stating that the central bank's current 5.25–5.50% rate is sufficient to bring inflation back to the 2% target. CitiBank analysts stated in a report earlier this week that it believes “Fed officials are most likely done raising rates this cycle”, while the CME Group's FedWatch Tool actually assesses the odds of a rate cut after Q1 at about 57%. Needless to say, stocks' strong performance over the past three months have been driven at least in part by the rapid drops in inflation and anticipation of an end to the Fed’s hawkish policy. If we get confirmation of this, then it can only be good for equities well into 2024.
Lucky numbers
The other major positive factor affecting risk assets like stocks is unsurprisingly the wider macroeconomic context – and this is typically measured by key economic indicators like the labour market, consumer sentiment, and various PMIs. In spite of high inflation and general uncertainty, the US labour market has counterintuitively been at its strongest in years. According to the latest non-farms payrolls reports, unemployment is at a very healthy 3.9%, with 297,000 new jobs added in September and 150,000 in October. What’s more, seasonal employment around the holidays is expected to see even more positions created before the end of the year. And while The University of Michigan consumer sentiment for the US is lowish at 60.4 for November, this is expected to improve as global tensions ease and the market’s strong performance becomes apparent. After all, consumer sentiment is based on the subjective opinions of ordinary people, which often tend to lag behind the market. For a services-based economy like the US, the non-manufacturing PMI is a huge indicator of general economic health and, despite not pulling up any trees, it has stayed solid above 50 for over six months now and is only likely to rise further as the Christmas and New Year celebrations boost demand for both goods and services. Let’s not forget that the market can often trail somewhat behind the key data – that’s why they call them leading indicators. With this in mind, these favourable numbers combined with a more dovish Fed policy could see the equities’ bull market continue into next year.
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What lies ahead for crypto after the historic Binance settlement?
Last week marked a momentous occasion in the history of the cryptocurrency market, but this one wasn't exactly cause for celebration. After an investigation lasting almost six months, a record $4.3 billion pre-court settlement was reached between Binance and the US Securities and Exchange Commission that included the departure of former CEO Changpeng Zhao amid pending money laundering charges. The recent past has been a bit of an eye-opener for crypto investors following the FTX scandal and a number of fines for celebrities backing dubious altcoins.
But it's not all doom and gloom. There's hope that this gargantuan fine will prove a watershed moment for the industry that sees the proper application of AML and KYC regulations and the eventual elevation of cryptocurrencies to an asset class on par with equities and forex.
As we prepare for a raft of spot Bitcoin ETF approvals in early 2024, the original cryptocurrency is currently eyeing a move up to the key level of $40,000 as bears and bulls battle over its next move. With a massive hash rate of over 500 exahash, miners clearly feel confident that the uptrend that has already seen BTC gain almost 130% YTD will continue. But as has already become clear since Bitcoin's institutional adoption, the biggest movements in any crypto bull cycle now tend to come in the altcoin space. With this in mind, we'll be looking at the top three alternative coins to watch in 2024 as we attempt to predict what factors will drive or restrain their growth in the New Year.
Cardano (ADA)
As a recent but revolutionary blockchain platform with a focus on security, scalability, and sustainability, Cardano has been garnering significant attention from crypto aficionados in recent years. With its strong smart contract capabilities, we can expect this altcoin to do well as such technology becomes more widely used in the financial industry. ADA has already gained over 54% since the start of this year, which, while significantly less than Bitcoin, is still impressive and leaves plenty of room for additional growth in 2024. Crypto Capital Ventures founder Dan Gambardello, for instance, predicts ADA's market cap could reach $400 billion by 2025 when it believes its price could rise as high as $11. Despite having an inflationary mechanism, Cardano's PoS Ouroboros protocol makes it a provably secure platform. Coupled with its longstanding commitment to scientific research and peer-reviewed protocols, this is likely to help boost its credibility and adoption in the growing smart contract space. A break above $0.40 will allow it to break into a bullish channel and should pave the way for further growth.
Polkadot (DOT)
As a multi-chain platform enabling different blockchains to interoperate and share information, Polkadot's unique chain-based design has caught the eye of both investors and insiders for its scalability and innovation. Despite only launching in 2020, it's already managed to rise to 15th in CoinMarketCap's rankings, amassing total capital of over $6 billion in its short history. And while it has only gained a comparatively paltry 25% YTD, this only tells half the story. A dip in the middle of the year saw the coin drop to as low as $3.63 in October, and so its current price of $5.38 (as of 29/11) actually represents a nearly 50% gain in the space of one calendar month. As DeFi becomes increasingly popular in 2024 and beyond, we can expect Polkadot's demand to grow steadily on account of its highly functional relay and para chain model coupled with its user-friendly interface. The technical analysis has DOT showing bullish indicators across the board, with Altfins scoring it a "Strong Up (9/10)" for both the short- and medium-term. If DOT can get above $6 in the near term, this will be good for its longer-term prospects.
Solana (SOL)
Solana positively exploded onto the scene back in 2020 and was quickly tipped as an Ethereum killer. This high-performance blockchain platform, which was created for high-speed decentralised applications (dApps), is capable of up to 2,500 transactions per second. With the sixth-largest market cap, SOL is already attracting institutional interest despite its relative youth and firm altcoin status. In fact, in this month alone, Solana has witnessed institutional inflows of over $40 million. This is many times more than any other altcoin and more or less half of what Ethereum has attracted. And they don't call it smart money for nothing. SOL is up a massive 340% YTD, nearly triple the gains achieved by BTC over the same period. With huge potential in DeFi, smart contracts, and dApps, Solana definitely has a bright future. In terms of technical analysis, the Relative Strength Index (RSI) has moved above the neutral line into the bullish zone. What's more, the Moving Average Convergence Divergence (MACD) indicators also show a red bar recession, which would suggest waning bearishness. Longer-term prices are difficult to predict, but many analysts see SOL above $100 by 2025, which still leaves it plenty of room to its ATH of $258.78.
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Oil and gas prices back in the spotlight as snow hits Europe hard
Anyone with a car or gas central heating will surely remember the huge price increases these staple fuels experienced back in 2022, just as inflation on all other goods was also running wild. Brent hit a high of $122.70 per barrel last summer. Meanwhile, the decidedly seasonal natural gas also shot up massively, with the Dutch TTF Natural Gas Futures chart rising almost to ten times the amount of its November/December 2020 level to reach a whopping €290.05 per MWh in late August of last year.
After that peak, however, both these energy resources experienced a heavy downward trend, one which is still decidedly in effect for natural gas. Oil's trajectory has been slightly different but with much the same destination. Brent crude dropped more sharply to hit a low in March 2023 that has remained for the most part ever since.
But what investors would like to know just as the heating season got well and truly underway with a bang this week in Europe is this: What can we expect from the prices of these fuels up until the end of winter? Will the OPEC production cuts yield the desired result of higher prices? And will the cold winter ahead be enough to drive up the landed cost of LPG even after Europe and the US have had a full year to plan for this eventuality? Let's find out the answers to all of these questions and more in today's article.
Gas heating up
As we already touched upon briefly, natural gas has been almost in freefall since its huge growth back in the summer of 2022. Now, the critical energy source stands at the lower end of its historical average range, with the Dutch TTF showing €39.60 per MWh and the Henry Hub trading at $2.72 per MMBtu (as of 6 December), which represents an almost 80% average discount on last year's peak prices.
This is not without reason, however. Europe learnt its lesson from last winter and has steadily been increasing reserves to capacity. As a result, inventories are now at record highs, while European gas demand has fallen to 15–20% below its pre-pandemic levels on reduced industrial demand. One would, therefore, expect that everything should be under control for this winter's heating demand peak, right?
Well, perhaps it's not quite that simple. While energy security is in a much better place than it was 12 months ago, we would do well to avoid being overly optimistic. Gas will remain tight in Europe until Q1 2025 at least, with the latest wave of supply projected to hit the market in 2025–2026. If this winter proves to be as harsh as some predict, we might be caught off-guard, particularly if there are any supply disruptions or increased industrial demand in Asia and beyond. After all, inflation appears to be stabilising, and PMI will likely then return to growth territory, even in Europe.
If this happens, the likelihood of gas price rises will increase exponentially, with the Henry Hub even more likely to gain given the relative strength of the US economy and labour market and the Fed already moving away from its hawkish policy and inflation almost stable.
Oil is still a contender despite the green agenda
Crude is another key energy commodity that has fallen from dizzy heights down to more manageable levels within the past year. And despite supply-side issues related to regional geopolitical instability — this time both in Europe and the Middle East — Brent has somehow managed to avoid revisiting the zenith of $120+ per barrel. In reality, there are multiple downward pressures working against oil, but to little avail, it would seem.
First, we have the overwhelming global trend towards greener sources of energy, with electrified vehicles leading the charge. Then, there is the extremely powerful factor of OPEC and its associated oil-producing nations. The cartel, with Russia and Saudi Arabia leading the chase, has already agreed to sustain production cuts.
Back on 5 November, both the KSA and Russian Federation agreed to extend their voluntary output cuts of 1 million bpd and 300,000 bpd, respectively, through the end of the year. In fact, according to Reuters, the two major OPEC players are expected to convene later this month in order to decide on "extending, deepening or increasing" their daily cuts. The knock-on effect of this phenomenon, coupled with rising demand from a resurgent Chinese industrial sector, is expected to drive prices up in the final quarter of 2023.
The US Energy Information Administration predicts that Brent will hit $93 by the end of 2023, with Light Sweet and WTI not far behind. If oil does hit this level by year's end, the probability of continued gains in 2024 can only rise.
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China slips further into deflation as the West breathes a sigh of relief
Many have predicted that the next century will belong to China, and the narrative of a rising star in the East has become stronger and stronger since the turn of the millennium. This is not without its basis in reality. Since 1978, China has averaged 9% annual GDP growth and lifted 800 million people out of poverty. However, the pandemic and particularly the CCCP's zero-COVID policy have predictably thrown somewhat of a spanner into the works. In 2020, Chinese GDP growth fell to just 2% as international trade dried up amid the global shutdown. But then it shot right up above 8% as western economies reopened before crashing straight back down to 2% in response to the party's draconian citywide lockdowns throughout 2022.
Now, after a period of intense global inflation, something both strange and worrying is happening in China: prices are actually falling. That's right. Following November's consumer price index report that showed a 0.5% year-over-year decline, China is officially experiencing deflation. It might seem like a good thing on the surface, but unchecked deflation is actually the worst kind of price pressure since it prompts people to defer consumption in anticipation of lower prices. So, what are the implications of this likely to be on instrument prices both in China and worldwide?
A long time coming…
China's economic woes didn't emerge in a vacuum, nor were they totally unpredictable. Beyond the effects of zero-COVID, a part has also been played by the long-standing property bear market, youth unemployment, and the government's tech crackdown. These factors were then exacerbated by accelerating foreign capital outflows following the pandemic and a strain in relations with the US over Taiwan. For Chinese tech stocks, the effect has been nigh-on catastrophic. Tencent and Baidu, for example, have both lost close to 50% since late 2021. Meanwhile, the global household name Alibaba has tanked by around 65% over the same period. And with prices now positively falling in key sectors, it's understandable that consumers would avoid purchases where possible, which will only hurt these consumer-focused apps even further.
Even international fuel sources like oil and gas are down significantly year-over-year, and yet Chinese industry is unable to take full advantage due to weaker domestic and international demand. Pressure is mounting on Beijing to take decisive action. As such, all eyes will be fixed on this month's upcoming Politburo and Central Economic Work Conference (CEWC) meetings for confirmation of PBC governor Pan Gongsheng's pledge for more "accommodative" monetary policy aimed at boosting domestic demand and banishing deflation. If the expected CCCP support is forthcoming, we could feasibly expect a resumption of growth in these multi-year low Chinese stocks in 2024.
Winners and losers
It's no secret that the West has been suffering economically of late, but here, it's almost a mirror image of China. Inflation has been out of control and still remains significantly above target in both the US and EU, while fuel shortages associated with the geopolitical instability in Eastern Europe have been punishing both industry and ordinary consumers. As a result, the EURO STOXX 50 index has been fairly stagnant, barely gaining 5% over the past two years. Until just a few weeks ago, it was actually down, managing to gain a full 10% in a little over a month. This movement has been reflected almost one-to-one by the S&P 500.
It is believed that this sudden uptick could be attributable to China effectively "exporting" its downward price pressure to the West. Indeed, China represents 20% of all of Europe's imports in a trade relationship that is worth $2.5 billion per day. In sentiments that were later echoed by Societe Generale analyst Albert Edwards, Thierry Wizman from Macquarie wrote, "The longer that China fails to show that it can recover, the likelier that inflation expectations will decline in the West, as fears that China can export its deflation to the rest of the world through international trade will gain ground."
If this trend does continue, we could see an organic normalisation of inflation in the US and EU, which would lead central banks to finally normalise monetary policy and year over yearperhaps even adopt a more dovish stance in 2024. This would, of course, be great news for equities across the West.
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Powell pivot wakes up Wall Street's bears
After more than a year of rate hikes and hawkish monetary policy, not just from the Fed but from central banks the world over, many risk-on investors had all but lost hope. Interest rates increased from historic lows of 0.08% in February 2022 to over 5.3% in July of this year. This policy was essentially mirrored by the Bank of England and the Reserve Bank of New Zealand, with the European Central Bank and the Reserve Bank of Australia lagging only slightly behind at 4.5%. It might not seem like much, but the knock-on effect for anyone with debt — from mortgage holders to people with a car payment — has been nothing short of devastating. For fixed-income investors and those with savings, however, the relatively higher rates were a welcome boon, especially once price pressure had been brought under relative control.
But now that inflation is down near the golden 2% target at 3.1% in the US and 2.4% in the EU (per November's numbers), it looks like the Fed and ECB are finally preparing to pivot. This has led many of Wall Street's most committed bears to admit they may have been a little hasty in their pessimistic prognoses for stocks, which have counter-intuitively been rising steadily throughout this rate hike cycle. So, what does this mean for both equities and risk-off assets like government bonds and precious metals into 2024? In this article, we'll explore the likely implications of a more dovish central bank policy on these key asset classes.
Taking stock(s)
Following a massive crash in the wake of the COVID bubble, US stocks have been steadily gaining ground since the start of 2023. This occurred despite depressing predictions from the likes of Morgan Stanley and Piper Sandler and Co., suggesting that higher rates would push the US economy into a recession. Since the start of the year, the Dow Jones IA, S&P 500, and Nasdaq 100 are up 13%, 24%, and a whopping 54%, respectively. While rates were already up nearly 4% when the bull run began, the pace of the increases slowed significantly during the first half of 2023 and increments were reduced from 0.5% to 0.25%.
It's well known that the stock market tends to lead real economic data, and the 'smart money' likely pre-empted the end of the Fed's rate-hike cycle in July. Now, with Powell last week all but confirming the hikes are over and even hinting at cuts next year, Wall Street strategists have become much more optimistic about stocks for 2024. Major players, including Bank of America, Deutsche Bank AG, and BMO Capital Markets, have all now predicted that the S&P 500 will hit or surpass 5,000. Goldman Sachs has even gone as far as to revise its forecast just one month after setting it, predicting that the S&P 500 will rise another 9% by year's end to hit 5,100.
It seems, then, that it's no longer a question of "if" the stock market will rise but rather "by how much". Investors would do well, however, to keep watching the Fed minutes in the months that follow for any changes in stance from the regulator.
Not-so-fixed income
For around fifteen years now, fixed-income assets like T-bills, debt-based securities, and other cash-like assets have been generating uncharacteristically low returns. The reason for this, of course, has been the ultra-low central bank interest rates introduced following the 2008 Great Financial Crisis. In an unexpected benefit of the recent economic downturn, the series of rapid Fed rate hikes following the collapse of Silicon Valley Bank have seen yields on 3-month and 6-month Treasury bills hold steady above 5% since March of 2023. Quality corporate bonds have also been up around this level for much of the year. And though inflation was 'stealing' much of the real-world gains that investors could make on these kinds of assets, it was hoped that since inflation was creeping back towards its 2% target, there might be an opportunity for more conservative investors to book some actual gains.
Unfortunately, however, recent rhetoric from Powell would suggest that these atypically favourable conditions for fixed-income assets are likely to be short-lived. The US regulator is looking to engineer a soft landing for the economy, but some economists have warned that they could be risking the opposite outcome by pivoting to a dovish stance too soon. Apollo Global Management's Chief Economist Torsten Slok warned in a recent whitepaper that "higher borrowing needs by the US Treasury, the loosening of yield-curve control policy in Japan, and reduced buying and diminished inventory of US debt held by China" could all lead to a need for a return to more hawkish policy next year.
For now, it would seem the best way to play the Federal Reserve's pivot toward monetary easing is to load up on shorter maturity debt (such as 3-month and 6-month notes) that still offers a yield solidly above 4%. Since the situation is still very dynamic, investors will have to remain vigilant.
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All eyes on altcoins as crypto market kicks of 2024 with a bang
It's been a rough year for much of the world, but you wouldn't know it by looking at the financial markets. Despite the economic uncertainty, geopolitical instability and higher interest rates, many risk assets like stocks and crypto have been performing surprisingly well. Indeed, these typically risk-reducing conditions appear to have even illogically helped drive demand for famously volatile instruments like digital currencies. But as one might expect, some coins have fared much better than others.
The OG, Bitcoin, has gained a more-than-respectable 105% in the last 12 months, while Ethereum has risen around 63.5% over the same period. As impressive as these results might seem, though, they've got nothing on some of the most performant altcoins of 2023. Polkadot and Cardano, for instance, have managed to gain over 100% since October 2023. However, the undeniable top dog — with six-month gains of a whopping 650% — has been Solana. But what's propelling the fortunes of some altcoins, and why are others lagging behind? And what are the factors crypto investors should be watching for the rest of 2024?
What's the use?
In a trend that has been slowly developing since before the pandemic, the success (or lack thereof) of coins and tokens is becoming increasingly tied to their real-world utility over competitors. It's no surprise, then, that the above-mentioned altcoins are all major players in the smart contract, DeFi, and dApp spaces. And the best-performing of them all, Solana, is by far the fastest and cheapest for transactions.
Unlike its closest competitors — Cardano, Ethereum and Polkadot — Solana employs a special Hybrid consensus that merges features from the Proof-of-Work (PoW) and Proof-of-Stake (PoS) algorithms with its own unique Proof-of-History (PoH). This distinctive hybrid protocol enables it to reach speeds of 65,000 transactions per second (TPS), while Cardano and Polkadot average just 1,000 TPS by comparison. The original smart contract blockchain, Ethereum, can only manage a paltry 15-20 TPS, though the project's team has predicted that Ethereum 2.0 will hit 100,000 TPS in the next year.
Nevertheless, Solana Labs' value proposition goes well beyond mere transaction speeds. It's clearly headed by a forward-thinking team with big ambitions. The upcoming release of its much-hyped Beta Gameshift product, which promises to unite blockchain with the immersive experience of Web2 gameplay in the form of a user-ready API, is proof of exactly that. In fact, if anticipation around Gameshift can bring about a full-on bull run, Analytics Insights predicts that SOL could hit $200 by the year's end.
Whale watching
With legacy coins such as Bitcoin and Ethereum, the risk of large coinholders moving the market significantly in a short period of time is much lower now than in the early days of crypto. However, for up-and-coming projects like Solana, whales can still have a huge impact on price movements. And while we've already mentioned Solana's more than six-fold price increase over as many months, it has actually fallen nearly 30% since December. Some analysts have posited that this could be due to a 'pump and dump' routine by the leading figures of a major firm whose integrity has already been called into question once.
It's well known that FTX owns over 55 million SOL, which is worth almost $5.5 billion right now. And as Solana's value has risen over this year, so, too, have the number of bankruptcy claims being made against Sam Bankman Fried's ill-fated exchange. Now, luckily for Solana holders everywhere, around three-quarters of FTX's tokens are locked up. But this won't be the case forever.
Back in November, FTX unstaked 1.6 million tokens in a move that rocked the market. With so many people owed large sums by the FTX estate and debt claims soaring, there will continue to be a huge spectre hanging over SOL until FTX has sold its massive holding. This is likely to be a factor that will restrain growth in the medium term. Ethereum, on the other hand, doesn't have anywhere near the same susceptibility to thrashing whales overturning its boat. And if the promises of Ethereum 2.0 in terms of transaction speeds prove true, 2024 could be a good year for Ether, too.
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Time to stock up on equities?
Following a fairly severe bear market in 2021-2022, US stocks enjoyed an overwhelmingly positive 2023 – and this despite us seeing some of the highest interest rates in recent memory. Even with the Fed hiking its effective funds rate from 0.33% to over 5% in the space of just 12 months, equities were able to start and end 2023 on a high. The S&P 500, Nasdaq 100 and Dow Jones Institutional Average gained over 30%, 40% and 10%, respectively. And it wasn't just high interest that should've spooked investors. There was a sharp uptick in geopolitical unrest and significant economic uncertainty around the globe. The appetite for risk, however, remained unsated, and the charts continued to rise well into 2024.
And now that the erstwhile-runaway inflation is finally moving closer to the fabled 2% target, the Fed is rumoured to be preparing to announce rate cuts for later this year. The question many traders and investors are asking themselves is: Will this traditionally positive signal for stocks translate into an extension of the bull market, or will the contradictions continue in 2024? In this piece, we'll be looking at some of the key factors for equities this year and beyond as we try to work out the market's likely movements over the coming months while seeking to explain some of the unconventional behaviour we've seen of late.
The price is right!
It's a well-known and oft-parroted theory that the stock market generally moves well in advance of the real-world conditions that would ordinarily explain its behaviour, with much of the effect of any identified future factors being already "priced in". Despite sounding somewhat cliché, in this case, the seemingly asymmetrical increases in the major share indices alongside high (and even rising) interest rates can be explained by this phenomenon.
While interest rates were indeed over 5% when equities began their upward trend in January 2023, the pace of the Fed's hikes had fallen from 0.75% monthly to just 0.25%. What's more, inflation had fallen over 3% in the previous six months, while Powell had intimated that the US regulator would be ready to switch to a more dovish policy eventually if this positive trend continued. In something of a self-fulfilling prophecy, inflation continued to drop to 3% in the next six months without any significant rate increases from the Fed.
Judging from the persistent stock gains since then, it would appear that some small rate cuts may already be priced in for now, but if the FOMC elects to slash down to pre-pandemic levels, we could see equities make even sharper upside movements in coming months. Conversely, the Fed's failure to take rates back below 5% would probably cause stock gains to falter later in the year.
Nowhere else to go
One major factor that many fail to consider is that there simply aren't many alternatives to stocks and indices for today's investors. Whether the market situation and context would typically be conducive to risk or not is largely irrelevant. They have modest spare income to invest, and stocks offer the best balance of risk to reward. Crypto is too volatile, fixed-income assets are offering below-inflation returns, and real estate is beyond their budget. Another important point to note is that savings interest may well have risen, but it is still barely keeping pace with inflation.
Short-term Treasury bonds have offered much more attractive yields than in recent years, yet for many investors, one per cent above inflation simply won't cut it, given the more moderate capital sums available to them. In such a context, there are very few vehicles that can compete with stocks — indices and ETFs even more so — when it comes to potential returns versus capital risk. If we take the S&P 500, for instance, and look at it over the past five years (2018-2023), we see that it has returned over 70%, and this despite the COVID crash and 2022 bear market. Of course, those who invested everything at the peak in 2021 wouldn't have fared anywhere near as well, but they would at least not have lost anything compared with today's levels. This only emphasises the importance of dollar cost averaging, a strategy that potentially gives investors the best chance of success over time.
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Oil on the up again as tensions rise
After the Covid crisis, post-pandemic inflation, and volatile markets, many had high hopes for 2024 and expected a long-overdue normalisation. Unfortunately, it increasingly looks like we're in for more uncertainty ahead as geopolitical tensions rise both in Europe and the Middle East.
While things are indeed looking up for stock and crypto investors, commodities have been rather stagnant since their huge gains in the summer of 2022. Oil famously reached a heady height north of $120 a barrel, while the Natural Gas EU Dutch TTF topped EUR 330/MWh – more than ten times its current level. Even the more volatility-insulated Henry Hub Natural Gas Spot Price was down around 80%.
However, after much sideways movement, prices on energy resources are making significant moves to the upside. Brent is up around 5% to $81 per barrel over the past month, while Light Sweet and WTI are both up closer to 10% over the same period. The key natural gas indices have also seen a notable uptick, and this despite the end of the heating season soon approaching. But what are the reasons behind this sudden resurgence, and how can we expect the situation to develop over the rest of the year?
Dangerous times
It's no coincidence that the latest oil price rises have followed virtually exactly in line with increasing instability in the oil-rich region of the Middle East. The latest flashpoint between major producers Iran and the US has been a particularly powerful catalyst. Despite all the talk about electrification and green energy, oil is still the lifeblood of the world's economy, and any potential threat to supply is immediately counterbalanced by price increases on the spot markets.
The existing crisis in Eastern Europe and associated measures had already curtailed the supply of crude significantly, and this additional factor simply added fuel to the fire. Meanwhile, demand has actually increased as China's industrial sector continues to recover. At the same time, Yemeni actions have forced ships delivering goods to Europe to travel around the Horn of Africa as opposed to cutting through the Suez Canal, translating to significantly higher fuel consumption.
These natural factors are, of course, naturally limited in time, but there's always a risk that they could get worse before they get better, and their unpredictable nature makes them hard to guard against. Looking back at the start of the Syrian war in 2010, we see that prices didn't reach a peak for at least 18 months and remained high until as late as 2014, which would suggest that we may be in for a protracted bull market.
Don't forget OPEC
It's all well and good discussing the natural factors at play, but when it comes to oil, there's a pretty huge elephant in the room: OPEC+. While supply may be reduced and demand increased, we have to remember that the world's oil-producing cartel has a significant artificial impact on real supply. We will all surely remember that Saudi Arabia and Russia agreed to maintain voluntary production cuts amounting to 1.3 million barrels per day for much of last year, and just as the agreement was about to expire, the two OPEC behemoths agreed to extend it into the first quarter of 2024.
In fact, they have also convinced the other members of the group to add additional cuts of 900,000 bpd. This means that the total voluntary production cuts implemented by OPEC+, which accounts for around 40% of the world's total supply, now amount to 2.2 million bpd. With an average global production of 94 million bpd, it's clear that any change to this voluntary shortfall could easily affect prices significantly.
Another important factor is the potential for grey market fuel supplies to help alleviate any supply-side problems that may arise as a result of a worsening of the geopolitical situation. Russian, Iranian, and Venezuelan crude has been subject to international sanctions and price caps for some time, and yet countries such as India frequently import it at favourable prices and then refine it into value-added products that can then be freely sold on the open market, thus bypassing economic restrictions. In theory, therefore, runaway prices should be held in check by strategic supply increases in response to demand spikes. However, it's also important to bear in mind that high prices suit OPEC+ members just fine, so the likelihood of near-term price increases remains high.
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Currency markets hotting up as dollar remains mixed
Since 2020, it's been a period of perpetual uncertainty for the entire globe. Once the coronavirus crisis came to an end, the world was plagued by runaway inflation, forcing central banks to take severe action to raise interest rates. No regulator was swifter or more aggressively hawkish than the US Federal Reserve. That fast action appeared to pay dividends in the form of a rapid reduction in inflation to near-target levels without compromising the labour or stock markets. This naturally caused a rapid strengthening of the dollar in 2022, even bringing the greenback to historic parity with the euro and multi-year highs against all of its closest competitors, from the Aussie dollar to the British pound.
Now, just 18 months later, the US national currency is losing ground against virtually all of the world majors at an alarming rate. Treasury bond yields are at their lowest level in two years, and it seems as if a normalisation on the forex market is close at hand. But what are the factors driving these moves and the implications for currency investors, and where are the major pairs likely to be headed during the rest of 2024?
It's all political
After a string of rate hikes to deal with inflation, the Fed has been holding steady for several months now. With inflation now stable, rumours have been circulating about a Fed rate cut. Although Fed Chairman Jerome Powell has stated that we shouldn't expect this to come in March, the CME Group's FedWatch Tool estimates the probability of a cut by May at 96%.
It's important to note, however, that the US regulator was much more aggressive when it came to rate increases back in 2021-2022. Even now, US interest rates are almost a full percentage point higher than in the eurozone. Nonetheless, the psychological effect of a pivot from raising to reducing rates will always exaggerate the impact on national currencies. That said, the EUR/USD pair has still gained almost 3% in the last month, showing that markets recognise the dollar's overall better health compared to the euro.
Meanwhile, the tone of the Bank of England, which famously followed the Fed's lead and hiked aggressively, remains hawkish. There is no firm commitment from the BoE to cut its current interest rate of 5.25-5.5%, and this has been reflected in the Cable, which has gained almost 5% since November 2023. The RBA, like the ECB, on the other hand, only hiked its rate to 4.35% before moving to a wait-and-see approach. It seems that this has harmed the Aussie's progress against its US counterpart, with the AUDUSD slipping 5% to 0.65 YTD. If a rate cut does come before May, we should see a normalisation of these pairs to the pre-pandemic averages.
Beyond the banks
In addition to the impact of the major central banks' monetary policy, movements in much of the rest of the world are driven by other factors that are often overlooked. Huge economies such as China and India, for instance, are highly sensitive to domestic factors, developments in the commodities market, and global industrial sentiment. The rupee, for example, has managed to make modest gains against the US dollar of late amid the announcement of a favourable national budget that sets lower-than-expected fiscal deficit and gross borrowing targets for the financial year starting April 1. The industrial PMIs of both India and China have been rising for the past two months to reach 56.90 and 49.20, respectively, which has naturally helped to maintain the strength of the countries' national currencies. China's renminbi has also received a separate boost in the form of wider adoption as a trading currency in the rest of the world, where it is fast taking market share away from the dollar. In the past two years, the yuan's share of Russia's exports has increased from 0.4% to 34.5%, and efforts to expand BRICS further could lead to additional increases in RMB's appeal.
Meanwhile, a traditional haven currency, the Japanese yen, has had a torrid time over the past two years. Having failed to increase rates sufficiently, the BoJ has overseen a nearly 25% reduction in the yen's value since January 2022. Following a more hawkish post-meeting speech by Governor Kazuo Ueda in January and a second consecutive month's growth in the Manufacturing and Services PMIs, the JPY/USD pair looks like it could be reaching a turning point after testing the 50-day SMA. As always, it would make sense for forex investors to diversify in order to maximise their protection from volatility in individual currency pairs.
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Farmer protests puts spotlight back on commodities
Many of us thought things would get back to normal after the end of the pandemic. Oh, how wrong we were! Since then, we've had to contend with hyperinflation, rising energy prices, geopolitical instability, international conflicts, and more, with no end to the drama in sight. This time round, it's European farmers who are up in arms once again, with the latest round of protests closing several major capitals, including Brussels and Paris, as well as a host of key border crossings throughout the Old Continent.
This is a crisis that has been long in the making, but it seems the big catalyst for these latest actions was the EU's so-called Green Deal, which would see subsidies slashed, especially on agricultural diesel. For farmers, it's a simple economic calculation: costs are rising and set to rise further, yet prices for their produce are falling amid tariff waivers on low-cost Ukrainian grain imports.
It would seem that the action by agricultural producers is reversing this trend, however. Over the past month alone, wheat rose a full 10% to break through the key support of $600 a bushel and is tipped to jump further as protests continue. Given prices of around $1200 in May 2022, there's plenty of room for further rises. And with oil prices increasing simultaneously on separate geopolitical factors, investors would certainly be wise to consider their weighting of agricultural and energy commodities in the coming months. In this article, we'll take a look at some of the key drivers of price action in these markets as we try to predict where they could be headed during the rest of the year.
Politics make the world go round
Despite accounting for only 4% of the European workforce, farmers represent a vital cog in the machine, without whom Europe lacks food security. This is increasingly important as global tensions rise, and Brussels would do well to recognise this fact. There's a lot of buzz in political circles surrounding the European Net-Zero Industry Act (NZIA) and Green Deal, but many farmers worry that the requirements are impractical and unlikely to bear fruit. Targets, such as halving pesticides, cutting fertiliser use by 20%, devoting more land to non-agricultural use, and doubling organic production to 25% of all EU farmland — all by 2023 — are viewed as totally unrealistic by producers.
What's more, the €55 billion-a-year subsidy known as the common agricultural policy (CAP) has encouraged the consolidation of farms and favoured larger holdings. In fact, the CAP has seen the number of farms in the EU fall by more than a third since 2005, leading to a concentration of large, overleveraged landholdings whose low margins force them to maximise output, a decidedly un-green business model. With the NZIA now making it a legal obligation to comply with these net-zero targets, it's hard to see how EU agricultural producers can survive without prices of staple products like wheat going through the roof. The band-aid solution of allowing cheap imports from Ukraine and beyond is ultimately self-defeating and leaves Europe vulnerable in a conflict scenario.
A double whammy
As we touched upon earlier, increased hostility and the threat of global war should be bringing issues of food security into the foreground. However, another important effect of world conflict has been rising energy prices, an additional straw on the proverbial camel's back for farmers. Oil, electricity and gas have all risen sharply in the past few weeks, with Brent and Light Sweet up 10% and 9%, respectively, and OPEC+ extending its voluntary production cuts for yet another quarter. Henry Hub Natural Gas futures may be trending down, but they're still significantly above pre-pandemic levels, and a secure, reliable supply for Europe is still far from assured. Now, diesel costs are famously subsidised for European agricultural workers, but it's a drop in the ocean when many countries enjoy at-the-pump prices of around 30% of the average European price per litre.
With the European Union set to gradually withdraw its subsidy support for "dirty" fuels like diesel, something will have to give. In the absence of any other factors, the only possible result would be higher prices for agricultural products produced in the EU. This, of course, doesn't take into account the possibility that Brussels will continue to permit the tariff-free sale of lower-quality imports from third countries. However, it would be a tough ask politically, given the environmental impact of the production process in such countries and the seemingly pointless detriment to EU-based producers. In this context, it appears as though there's a reason for both wheat and oil prices to increase in the short term and stay elevated.
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Bitcoin bulls out in force as Monero falters on Binance delisting
There’s never a dull moment in the cryptocurrency market, is there? After Bitcoin lost 70% of its value in just one year from November 2021 to December 2022, the BTC bears were out in force as talk of a long crypto winter abounded. But what happened next sent the cynics fleeing with their tails well and truly between their legs. From the start of 2023, it’s been a seemingly endless bull run for Bitcoin as the original digital currency has smashed key resistance after key resistance to finally break above the major psychological level of $50,000. And it doesn’t look like it plans to stop anytime soon. With huge positive factors, such as the upcoming halving and increased institutional adoption following the approval of spot Bitcoin ETFs last month, the sky really is the limit.
As they say, a rising tide lifts all ships, and this is especially true of Bitcoin and the wider cryptocurrency market. Consequently, many other major coins and tokens have also enjoyed a positive trend of late. With one notable exception: Monero. Shooting to fame as a reliable, cheap and fast privacy coin, XMR took the crypto market by storm to match Bitcoin’s gains in the last bull run of 2021. But since Binance’s delisting and talks of tighter regulation, it’s been in virtual freefall. In this piece, we’ll take a closer look at the reasons behind these two polar opposite coins differing fortunes and their possible future movements.
It’s all coming up Bitcoin
It truly has been a whirlwind year of growth for the OG crypto coin. Since January 2023, Bitcoin has risen from $16,529 to $51,097 as of the time of writing (on 21 February 2024) to record a highly respectable 210% increase. But even more importantly, this time round, the growth was steady and, crucially, based on solid fundamental factors. It wasn’t like the 5x in 5-month bubble cycles of 2020 and 2017. These gains were steady and explainable using traditional analysis methods.
First, we had the long-anticipated approval of numerous spot ETF applications by the SEC, which drove the BTC price throughout the whole of last year. There were also other key regulatory milestones, such as the EU’s adoption of comprehensive and innovative regulation on markets in crypto assets (MiCA) in June 2023 and high-level discussions in all major crypto focus areas in over 40 countries worldwide, including the Bahamas and Japan.
All of the above helped to push digital currency adoption in 2023 as more and more institutions added Bitcoin to their portfolios. In fact, we saw over $1 billion worth of BTC inflows from institutional investors last year, bringing Bitcoin’s market capitalisation to more than $1 trillion for the first time in its history. This is clearly a good sign for HODLERs and those looking for stable returns from crypto and has even helped to drive the prices of most other major currencies like Ethereum, Solana, and Avalanche, though there have been some notable exceptions, as we’ll discover.
Everyone’s (not) a winner
As we’ve touched upon already, not all popular digital currencies were able to ride the coattails of Bitcoin this past year. Perhaps the biggest newsmaker amongst these was Monero, the true privacy coin for those who wish to maintain full anonymity in the cryptosphere. Monero uses a unique transaction mixing approach with the help of “ring signatures” and creates one-time addresses to ensure fund transfers are untraceable. It also has super-fast transaction speeds and very low fees. This has made it a darling of darknet merchants, which has understandably drawn the attention of regulators across the world. Countries including Japan, Australia, and the UAE have long been discussing the need to outlaw such anonymous coins precisely for this reason. It all came to a head on 6 January 2024 when Binance announced that it would be delisting XMR, sending its liquidity down to an all-time low of $1.8 million. Having reached a high of north of $170 in December 2023, it suddenly crashed to $105 in the weeks following the news. This was clearly against the grain for the market as a whole.
But what’s particularly interesting is what happened next. The actual delisting took place this week, and far from dipping further as many expected, Monero has shocked the pundits in its reaction to the move. It’s now up 10% in the space of just a few days and looks set to recoup its losses in the coming weeks. Whether regulators like it or not, Monero certainly has utility, and there’s every reason for us to expect further XMR gains as legacy coins like BTC diverge further and further from the “original vision” of cryptocurrencies.
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Libertex traders gear up for bumper Reddit IPO
The US stock market finally reached a new all-time high this month after over a solid year of steady gains. Now, it seems as if the bulls are out in full force, with the dark days of 2022 little more than a distant memory. Indeed, the S&P 500 currently (19/03) sits at $5,172.39, while the Nasdaq 100 is valued at a cool $18,026.33, both around 75% higher than they were in December 2022. With prices at record levels, it's natural that companies would want to take advantage of higher valuations by taking this opportunity to float their firms. It may have been a while since we last had a high-profile IPO, but they don't come much bigger than a legacy social media giant like Reddit.
Reddit is set to start trading under the ticker RDDT this Thursday. Its initial public offering has already garnered huge interest from retail and institutional investors keen to take this opportunity to own a piece of this unique household name. And Libertex clients will be able to do just that via the Libertex platform. But what price is the stock likely to open at, and what kind of performance can we expect in both the short and long term? In this article, we'll try to answer these questions and more on this momentous occasion for the global equities market.
It's only a number
First, it's important to note that this isn't Reddit's first attempt at going public. It was revealed that the company confidentially filed for an IPO in December 2021 but ultimately decided not to go ahead with it. While we didn't have details of target price ranges or Reddit's financials back then, this time around, the data is much more extensive.
First, we have a firm target range of $31-$34 per share for a valuation of around $6.4 billion, down from the $10 billion they had hoped for in 2021. Nonetheless, in less than surprising fashion, the Reddit IPO is already oversubscribed by about five-fold, which means we could see prices at the end or beyond the target range. That said, the general appetite for growth stocks has taken a veritable nosedive since 2021, with interest rates at almost 20-year highs since the Fed's interest rate hike spree. Most recently, we saw this in action with the IPO of Instacart (CART), which went public at a valuation of $10 billion, which was roughly a quarter of its 2021 valuation. However, it's quite likely that over the long term, a high-profile stock like RDDT will manage to move with the wider market.
Don't sell yourself short
Another important factor with any IPO is the potential for organised shorts of the newly listed stock. Many feel that the famous maxim of "It's Probably Overpriced" holds true for many new listings, especially when made at times of all-time highs. Still, there's also a possibility that the retail cartel Wall Street Bets (which ironically shot to fame on the Reddit platform itself) could seek to turn RDDT into the next meme stock. This would mean that we might see a furious rise in the ticker's fortunes over the near term, followed by a severe crash when the bubble finally bursts.
However, we would be wise to remember that these kinds of pumps have not typically been devastating. Just look at GameStop (GME). While it's 75% down from its 2021 highs, it's still nearly 300% up from its pre-meme days. As with any stock, the chances of making gains will increase exponentially with time held, and the Reddit IPO will be no different in this regard.
Play the long game
As we've already touched upon, the short-term response to any IPO is very difficult to predict, but with Reddit, investors would be wise to look at the long-term prospects. Reddit, too, appears to have an eye on the future with its efforts to keep its user base loyal in the wake of the public offering, considering its previous opposition to attempts to monetise the platform.
For instance, Reddit has reserved around 1.76 million shares for top Redditors with high karma scores and strong moderator activity. In addition to having the option to buy at the opening price, they will also be able to sell right from the day of the IPO, an option that usually isn't given to preferential buyers. And while the company isn't yet officially profitable, its revenue was up 21% to $804 million in 2023, while losses fell 43% to $90.8 million. Moving into this year, Reddit plans to offer more advertising to its 73 million daily active users via microtargeting, which should help it grow its ad revenue going forward. The social media firm also recently signed a new $60 million per year licensing deal with Google that will see the search engine train its AI models using Reddit conversations. All of these bode well for RDDT's longer-term potential for growth.
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BoJ rate hike fails to halt yen's decline
With all the excitement in the European and US currency markets over the past couple of years – from the historic Euro-USD parity achieved in late 2022 to yoyo-ing Treasury bond yields – it's understandable that many Westerners' attention hasn't been on Asia. However, something historic in its own right has been playing out in the Far East all the while.
Unbeknownst to many, the Japanese yen has been falling quietly yet precipitously against the US dollar (and other majors) since 2021. In fact, the yen has now lost almost a third of its value, and, at its current level of 151.17 (27/03), USD/JPY hasn't been in this position for over 30 years. Even the BoJ's momentous decision to hike interest rates for the first time since 2007 last week didn't help stop the rot. The yen actually weakened further following the news.
The decline did stabilise, however, after Finance Minister Shunichi Suzuki said he would not rule out any measures to cope with the yen's woes, yet fears remain that any intervention by the Japanese central bank will inevitably be insufficient given the near 350 bps difference in the US and Japanese 10-year bonds. So, what is behind this epic downtrend in the national currency of one of the world's major economies, and how is it likely to play out long-term in the markets?
A long time in the making
It's a well-known fact that Japan has had some of the lowest interest rates in the world for decades. Indeed, until this recent increase, the BoJ's funds rate had been in negative territory for some time. Coupled with an aggressive QE policy that intensified during the pandemic, this devaluation of the yen was practically axiomatic. And despite wage growth suggesting the inflation can be managed, the low yields in the local bond market have forced major Japanese investors to keep about $3 trillion in foreign bonds and yen trades, which could otherwise be repatriated.
Unfortunately, it's hard to see how the Bank of Japan can compete with percentage yields above 4% without bankrupting the nation. Another potential pressure on the yen in a higher rate environment is the potential reduction in carry trades, a process by which large-volume traders purchase yen with the intention of investing the proceeds of the trade in higher-yielding currencies. For now, the yen is still the most attractive of the majors for this purpose. However, if rates continue to rise, there could be a further reduction in yen inflows going forward. Much will depend on whether we see a move further up towards 155 or back below the key support of 150, where we would expect to see long positions on the yen begin to flood in.
Look at the positives
As we've already touched upon, the Japanese labour market is strong, which means it can support some of the inflation generated by ultra-low rates, but not indefinitely. It appears as if the rise above 150 in the yen's pair with the US dollar has been taken as a watershed moment by the BoJ, as Finance Minister Suzuki has now promised to take "decisive steps" to strengthen the currency. Indeed, 151.94 was the point at which the central bank began actively purchasing yen back in October 2022, and it's no great leap to assume this is what the BoJ will begin doing again soon. It's hard to imagine that this policy won't result in a stronger yen, particularly if coupled with additional modest rate increases over the rest of 2024.
As with all things, the key will be striking the perfect balance between keeping the national currency under control and minimising the negative effect on the domestic credit market, where the extended period of ultra-low rates has seen huge amounts of borrowing that could leave debtors overleveraged if hikes are too sharp. Another important balance that must be borne in mind is that of imports and exports. The weaker yen has made imported products more expensive for the local market, but Japan is a huge exporter of high-value goods like cars and electronics, which have become much more attractive against this backdrop. For this reason, the BoJ will be hoping to hold USD/JPY somewhere in the 140–150 range.
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Reddit IPO success could push more firms to list
Amid a stock market that has been slowly recovering from a whirlwind period of extended volatility and out-of-control inflation, traders and investors are only just starting to regain confidence in equities despite the key US indices making steady gains for the past eighteen months now. In fact, the big catalyst for the restoration of faith was the new all-time highs recorded in late March, which saw the S&P 500 and Nasdaq 100 top $5,200 and $16,400, respectively.
Then came one of the biggest IPOs in recent years: internet giant Reddit. Trading began under the ticker RDDT last Thursday, 21 March, with the social media firm's initial public offering garnering massive demand from retail and institutional investors alike. Reddit initially targeted a price of $31–$34 for a $6.4 billion valuation, but they didn't anticipate what would happen next.
In an explosion of interest from the full spectrum of investor profiles, RDDT opened at around $50 per share. By Tuesday the next week, it had gained another 30% to rise above $65. Since then, the decline has been sharp, but at $50.25 as of 3 April, RDDT is worth pretty much exactly the same as it was on IPO day and over 50% more than the level the company had initially valued it at. So, what does this mean for Reddit and other US stocks going forward, and is this positive market trend likely to spark a spate of IPOs in the near term?
Beware the IPO
As Warren Buffet likes to say, IPO stands for "It's Probably Overpriced". While this isn't always the case, it can often be true of high-profile offerings at times of market highs. In the case of Reddit, there definitely was an aspect of this at play, but it appears to have been more than balanced by organised short-selling surrounding the launch of the ticker. In the end, we saw typical IPO behaviour of elevated volatility in the immediate aftermath of the listing, followed by a normalisation over the subsequent week. With a current price in and around its opening level and the targeted shorting apparently at an end, one has to think that Reddit's prospects look fairly positive from here on out.
As we've already mentioned, a price of $50+ is a solid 50% more than what Reddit was hoping for when it published its 2024 IPO documents. This puts the company's market valuation closer to its 2021 target of $10 billion and bodes well for investors' assessment of RDDT's future growth potential. If anything, this is confirmation that the best strategy for IPOs is to wait for the dust to settle and make an informed decision about if and how much to invest once the initial excitement has subsided. Having gained almost 10% on 2 April alone, it looks like Reddit could be on track to set a new high over the coming weeks as wider risk appetite appears to be increasing amid a strong US labour market and tamed inflation.
The first of many?
IPOs are a lot like buses in that you can wait forever without seeing one, and then several will come at once. Now, it's safe to say that the Reddit IPO has been a relative success, and with the scintillating stories of other lesser-known names already this year, we could be in for a raft of listings in the coming weeks and months. Perhaps the most successful of 2024 so far has been that of Santa Clara-based chipmaker Astera Labs, whose stock skyrocketed over the first week of trading last month (20–25 March). Much like Reddit, a slew of profit-taking and shorting brought declines in the days that followed, but the tech stock seems to have settled to a respectable $72.25 as of 3 April. That's a full 16.4% above its opening price of $62.03.
With over 32 late-stage startups worth $2 billion or more in the Bay Area alone, there are plenty of potential candidates for a 2024 IPO. In fact, Denver-based digital promotions startup Ibotta is already planning its stock market debut, and many analysts have suggested that Stripe and Databricks — worth an estimated $50 billion and $43 billion, respectively — are also likely to want to take advantage of the increase in bullish sentiment to bring in maximum funding for minimal equity. All of this will likely buoy the S&P 500 and Nasdaq 100 through to the end of the year, provided that the US Federal Reserve delivers on its more dovish policy promises.
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Oil on the up as conflict threatens Middle East
Just when it seemed like energy prices were getting back under control following the huge spike of 2022 in the aftermath of the pandemic, oil is on the rise again. Back then, it was a combination of supply chain ruptures, huge demand increases following a return to business as usual, and high dollar inflation. Now, it’s a combination of geopolitical uncertainty and voluntary supply cuts by OPEC+ that are keeping oil prices high. The tense situation in the Middle East, escalation between Israel and major oil producer Iran, and continuing sanctions on other oil-producing countries could all contribute to a new all-time high in the coming months. Indeed, Brent is now back above the key level of $90 a barrel and looks set to keep on rising, while WTI and Light Sweet are both above $86 and similarly seeking further gains.
This couldn’t come at a worse time for ordinary consumers, who were just about managing to get back on their feet after historic price pressure tested their resilience to the limit. But as traders and investors know, wherever there’s a crisis, there’s also opportunity. So, with that in mind, let’s take a look at the likely trajectory for oil over the next weeks and months and see what factors will determine its movements over the rest of 2024.
Rising tensions
It’s been a recurring theme over the past couple of years, but it seems like the global geopolitical stakes have increased once again with the current situation in Israel and the wider regional stand-off underlying it. The attack on Iran’s embassy in Damascus has stoked concerns of an escalation involving this key oil producer and its potential impact on prices going forward. Now, though Iran’s oil is already subject to US and European sanctions, its availability has a significant knock-on effect on the global market since the plentiful supply of cheaper oil to countries not party to the sanctions reduces the amount of Brent and other US crude types required by these countries.
When one tap is turned off, all crude inevitably rises. The conflict in Eastern Europe is also making its mark on the supply side, with renewed attacks on refineries adding additional fuel to the fire (pardon the pun). The extent of the impact that such conflicts have on the global market will, in some way, be moderated by the US as the major power broker in the two theatres and a key producer in its own right. Whether this comes through diplomacy or market manipulation remains to be seen, but with an election around the corner, Biden will surely feel the pressure to keep crude below the $100 mark.
Artificial controls
As we all know, the oil market is far from free of outside influence, and its movements are often the result of government policy as much as they are supply and demand forces. Perhaps the most well-known price-fixing organisation is OPEC+, which has been implementing voluntary production cuts for well over a year now. Both Russia and Saudi Arabia have been cutting output by 1 million and 500,000 barrels per day (bpd), respectively, with Russia now reducing this to 471,000 bpd but switching export curbs for full production cuts. High prices typically suit these oil-producing countries, and artificially low production helps to elevate prices. However, they also like to be able to benefit from the higher prices, which requires producing and selling more oil. It’s a delicate balancing act that works well to keep prices within reasonable bounds.
The US is also a significant enough player to impact prices. Its current aim is to keep oil in check ahead of the major driving season so as to avoid creating malaise amongst the population just before they go to the polls in November. With this in mind, the US Energy Administration already upped crude reserves to 3.2 million barrels in the final week of March, despite a poll of Reuters analysts expecting a 1.5-million-barrel drop. If this policy persists and OPEC+ countries look to continue taking profit, we could well see oil move back towards the $80 mark and even below it.
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Chinese stocks back on radar as regulators bring clarity
For anyone holding Chinese stocks, the past few years have been quite the rollercoaster ride. From the US crackdowns on American depositary receipts (ADRs) to internal Chinese antitrust action against the country's tech giants, equities in the world's second-biggest economy have been under constant pressure.
As a fast-growing market with low correlation with the US and Europe, Chinese stocks were initially seen as a key asset class for risk-tolerant investors looking to diversify and maximise gains over time, but while other markets have enjoyed envious bull runs over the past 3-4 years, China's household tech names have endured a seemingly endless grind lower, followed by a period of post-COVID stagnation.
To put things into perspective, while Amazon has more than doubled in value since the start of 2023, Alibaba was at the exact same level on 17 April 2024 as it was in November 2022. It's a similar story for Tencent Holding and Baidu, which have barely managed to record 10% growth over the same period. But there finally appears to be some light at the end of the tunnel following welcome news from the China Securities Regulatory Commission that a wave of delistings will not be forthcoming. So, does this mean that now's the time to get back into China, and what are the factors that will drive or stunt growth in the rest of 2024?
Regulating fear
As is typically the case, the markets' fear of the implications of new regulation appears to have been exaggerated. This was then amplified further by the relative opacity and unpredictability of the Chinese regulatory environment. In the draft rules released on 12 April, the China Securities Regulatory Commission (CSRC) committed to raising the bar for initial public offerings, forcing unqualified companies to delist and enhancing its oversight of high-frequency trading. This led to a two-day sell-off that saw the market shed almost 10% of its value.
Now, however, the regulator has clarified that the new rules won't, in fact, lead to mass delistings but rather simply weed out "zombie shell companies" and bad actors, ultimately leading to a more transparent market framework and sustainable financial environment.
With precisely such concerns scaring many foreign investors out of Chinese equities, the new legislation could lead to a sustained inflow of international capital over time. The impact of the US's attack on ADRs has already been neutralised by equivalent listings by many affected firms on Hong Kong's Hang Seng. On top of that, given that the effect of last year's amendments to the CCP's Anti-Monopoly Law (AML) has already been baked into prices, the path to growth appears to be clear at last.
Unbeatable value
It's no secret that China's big tech stocks are available at unfathomably attractive prices. This is unsurprising following four years of steady declines. We've already touched upon the fact that Alibaba, Tencent, and Baidu have failed to register any significant growth in the past 18 months, but this is only half of the story.
Let's take Alibaba as an example. The global e-commerce titan is currently trading at an eight-year low of US$69.61 (HK$68), and with a PE ratio of 12.97, it is a veritable steal for a growth stock. At $HK300.80, Tencent similarly hasn't been lower in over six years and represents a 50% discount on its recent ATH. As for Baidu, its share price hasn't been this low (HK$93.10) in more than a decade, and its P/E ratio of 12.47 is almost as low as ultra-safe US value stocks like Wells Fargo and Bank of America.
When we take into account the fact that these companies have arms focusing on hot, scalable sectors like fintech, cloud computing and AI — all in a domestic market of almost 1.5 billion people — it's clear that hyperbolic levels of fear and mistrust are what have kept their share prices artificially low all this time. With evidence to suggest that a combination of new regulation and increased openness from the Chinese authorities could remove many of these investor barriers, we could look back on these opportunities in the same vein as Amazon and Apple stocks after the dot-com bubble.
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What does the Bitcoin halving mean for crypto in 2024?
The past 18 months have been a period of unusually stable and uninterrupted growth for Bitcoin. Since its December 2022 low of $16,529, BTC has been on a gradual climb that has seen it more than quadruple in value to reach its current level of $66,459. There have, of course, been lulls and corrections during this time, but for the first time in, well, forever, the original cryptocurrency has managed to make serious gains over time without a clear bubble dynamic forming. The reasons for reduced BTC volatility are manifold, but the big factors in recent years have been increased institutional investment and the implementation of a more sustainable regulatory framework in many major economic regions.
Much of the recent growth, however, has been attributed to a combination of the mass approval of spot Bitcoin ETFs driving inflows from previously untapped markets and anticipation of the next major halving, a phenomenon that occurs about once every four years and sees the block mining reward reduced by 50%. But now that the biggest event in the crypto market calendar for 2024 has finally come and gone, what are the likely implications for both Bitcoin and the wider digital assets market as a whole?
We're halfway there
At some point between 19 April and 20 April, the 840,000th block was finally added to the Bitcoin blockchain, and thus, the much-anticipated fourth Bitcoin halving came to pass. While the immediate response has been somewhat muted (a mere +3.75% gain over the past five days), this is largely because the event had been priced in over the weeks and months leading up to the actual halving. In fact, it's a positive sign that we haven't seen a slight correction as whales have taken their likely sizable profits on the news. Indeed, Bitcoin has already moved up 95.83% in the last six months, and one would have surely expected a mild dip as the anticipation reached its climax.
Whether or not a short-term correction does eventually come about, the historical data from 2012, 2017, and 2020 would suggest that this halving will have a net positive effect on BTC's price in the coming six months. The increased mining difficulty and lower supply that the halving marks are also expected to help control volatility even further. This should have the effect of leading to even wider institutional adoption, which has been facilitated greatly by the advent of the spot Bitcoin ETFs this year. We already saw more than $1 billion in institutional inflows in 2023, and with this new investment vehicle and lower overall risk profile for BTC, this figure could easily be beaten in 2024. In this context, Cathie Wood's famous $1 million Bitcoin prediction could prove well-founded.
Miners' strike
One important side-effect of increased difficulty is the potential impact on miners. Many were already quite overstretched financially amid high energy prices and stricter environmental legislation. Now, the amount of power required to earn one Bitcoin has essentially doubled. One concern is that we could see a similar scenario as in the summer of 2022 when many miners simply downed tools because they could no longer make money. While this would, in theory, buoy prices due to reduced supply, the much slower transaction speeds that it would entail would likely reduce overall transactions significantly.
Another potential threat of lower profitability could be that mining companies begin selling off their BTC reserves to fund operations, thus swelling outflows. Of course, some profit-taking is to be expected anyway, given that Bitcoin is now at an all-time high. However, this should likely normalise over time (barring an escalation in the Middle East leading to even higher energy prices). Then, the expectation is that new, more powerful ASICs will close the technological gap and allow the surviving miners to return to profitable activity.
The one possible spanner in the works for Bitcoin could, in fact, prove to be the Federal Reserve. After months of more dovish rhetoric, the markets had all but accepted multiple rate cuts this year. However, with the current pressure on the dollar, the central bank may be forced to keep rates high for some time, reducing interest in risk assets like Bitcoin.
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Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74.91% of retail investor accounts lose money when trading CFDs with this provider. Tight spreads apply. Please check our spreads on the platform. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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BoJ intervenes to save yen as Fed paves way for cuts in July
The post-pandemic era has been filled with ups and downs for the currency markets in general. We’ve seen the euro and US dollar reach parity for the first time in over 20 years. Then, there was the runaway inflation eating away at fiat currencies the world over. Finally, albeit slightly less well-publicised in the West, we had the undeniable and seemingly endless decline of the Japanese yen. Ever since 2021, the yen has been falling hard against all the majors and, by March 2024, had already lost almost a third of its value against the greenback.
From the start of April, however, the Bank of Japan has been making significant efforts to stop the rot and prevent USD/JPY from surpassing 160, a level unseen since 1990. The BoJ’s first move was to announce a historic rate hike, its first since 2007. With a less-than-rapturous response from the market, Finance Minister Shunichi Suzuki pledged that he wouldn’t rule out “any measures’’ to support the yen, which seemed to breathe some life into the Asian currency. Now, starting 1 May, we’ve seen a rollercoaster week for JPY as this promised intervention appeared to take shape. But the BoJ isn’t the only central bank on the move. So, what will be the forces driving the global forex market this year, and what can we expect for the yen, US dollar, and euro in the rest of 2024?
Banking on it
As we’ve already touched upon above, the biggest driver in the Japanese yen’s recent resurgence has undoubtedly been government and central bank intervention to prevent a continued descent towards almost unchartered territory for the Japanese national currency. Although it is unconfirmed, the JPY’s move to the upside this past week has been largely attributed to active purchasing by the BoJ, with data indicating that it may have spent $5.5 trillion yen ($35 billion) boosting the currency on 30 April. While we did see a move back towards the near-term target of 140, the pair then reached as high as 157 in inter-day trading before settling around its current level of 154.53.
It began to look suspiciously as if Tokyo’s intervention would prove insufficient to overcome the bearish pressure on the yen. If the pair had managed to cement a hold above 158, which would mark a 61.8% Fibonacci retracement of Monday’s decline, it’s likely that the bears would have been emboldened enough to push on towards 160. The market appears to have calmed during this week following BoJ Governor Ueda’s comments that he is ready to raise interest rates further if inflation proves higher than expected this month. However, thus far, each intervention appears to be providing nothing but a temporary stopgap on the way to 160.
An unlikely ally
Despite the appearance that the Japanese authorities are doing little more than treading water, their hard work could now get a much-needed boost from the world’s most powerful central bank: the US Federal Reserve. Speaking last Wednesday (1 May), Fed chair Jerome Powell finally broached the issue of potential “paths” for interest rates this year. And while he appeared to rule out any move at this month’s meeting, the possibility of a long-anticipated rate cut in July was put on the table. If this does indeed come to pass, the expected effect will naturally be a weakening of the greenback and a buoying of risk assets, a welcome result for both the BoJ and US stock market investors. After all, the yen’s woes are not just down to its own weakness but rather the dollar’s historic strength. Indeed, the unusually strong dollar is precisely why the BoJ have been swimming against the tide with their recent interventions.
That said, the June “dot plot” will likely show the majority of Fed officials favour two or fewer rate decreases in 2024, and it’s difficult to say how many had already been priced into the dollar given the ambitious expectations of multiple cuts earlier in the year. In this context, we’d be wise not to expect softer Fed policy to be a miracle cure for what ails the yen, but coupled with some much-needed hikes by the BoJ, we might just see USD/JPY trading in a much healthier 140–150 range by the end of the year.
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