Introduction
The global market is continuously evolving, with various factors such as economic conditions, inflation rates, and regulatory changes affecting investor behavior. In the US, concerns over inflation and credit default risks are leading to a shift in investor attention towards European stocks, while the Securities Exchange Commission (SEC) tightening regulations on the crypto industry is causing banks to distance themselves from the market. In this article, we'll take a closer look at the recent Market Roundup and explore the potential implications of these changes for investors.
US inflation
Economic data from the US suggests the inflation in the country will persist which means that interest rate cuts have been put on a hold as the future market who suggested at least two interest cuts in 2023 have changed to either one cut or no cuts for 2023. This indicates the markets align with the Fed who proclaimed it will not lower rates until 2024. This all is happening despite the unemployment rate being at its all-time lowest of 3.4% since the last 53 years.
US markets
Stocks in the US market took a beating after initial hopes of reduction in the interest rates in the United States turned out to be false. In the past 2 weeks the S&P500 has fallen by 1.41%, the Dow Jones Industrial Average rose by 0.4% on Friday but still had a negative fall of 0.29% for the past 2 weeks, the Russel 2000 index and the Nasdaq have fallen by 1.97% and 1.70% respectively.
European markets
Following the newly published US data on Wednesday, worried investors are turning to European stocks with Stoxx being up 0.3%, Dax index 0.5% and FTSE 100 up by 0.2% whilst the American S&P 500 falling by 0.2% and Nasdaq falling by 0.3%. Additionally, expectations of a mild or no recession for Europe and the UK are growing, making the region an even more attractive option for investors.
Commodities
Europe's natural gas prices have significantly fallen by 85% since August 2022, now trading below €50 per megawatt hour as people start to think that Europe will not face shortages this winter. This turn of events comes as the continent was aided by the relatively mild winter and the efforts to find alternative suppliers for Russian gas, causing Russia's exports to fall in price. This fall in prices has also made the UK less dependent on Russian gas.
Credit default risk looming over the US
The non-partisan Congressional Budget Office (CBO) has warned that the government’s limit to borrowing will be reached by around July/September and that is considering the extraordinary measures the government is taking to honour their payments. The exact date should be decided by the income tax receipts due in April. The CBO does not plan on using further extraordinary measures such as minting a high-value coin or utilising special presidential privileges. The government is currently delaying certain investments and redeeming others early as a last resort tactic to postpone the rising of the debt ceiling until an agreement is reached.
Bonds
The producer price index (PPI) tracking the average change over time in selling prices received by domestic producers of goods and services in US has risen to 0.7% over January which is 0.3% higher than the projected PPI by analysts. These conditions have led to the US 2-year Treasury bill climbing to 4.661% from 4.625% on Wednesday. 10-year and 30-year treasury bills also experienced an increase of 0.047% and 0.056% respectively.
Currencies
UK’s pound fell by 1.5% to $1.198 compared to US dollar following the release of UK data showing inflation was lower than projected targets. This let the Bank of England to have less pressure to keep on raising interest rates to combat the inflation. The BoE still raised rates by half a percentage point to 4% but indicated that it could be the last raise.
Several currencies have experienced devaluation since the recent US data on inflation which pushed the dollar even higher. The pressure to use the scarce foreign reserves to maintain their exchange rates was too high for countries such as Egypt, Lebanon and Pakistan who abandoned their well-established policies of pegging their currency to the dollar. The afore mentioned countries depegged their currencies to access emergency finance from the IMF. Currently 60% of low-income countries are in debt-distress or are at-risk of one.
Tighter regulations for crypto companies based in the US.
The Securities Exchange Commission (SEC) is finally cracking down on crypto exchange platforms and is tightening the regulation on the industry which was largely outside the scope of traditional financial regulations. This decision comes after notable players in the market such as Voyager Digital, Celsius Network and FTX collapsed the previous year leaving many people with an irrecoverable loss in their portfolio. The SEC has already but some of the biggest crypto companies under the gun with Binance being forced to stop the circulation of their stable coin BUSD in the US putting roughly $1B worth of BUSD out of circulation as well as making crypto exchange Kraken to stop a scheme which promoted more than 20% return to investors.
Many banks who had decided to jump on the crypto trend the recent years have started to distance themselves from the industry following the FTX scandal. The new regulations seem to have been the final nail in the coffin for many banks as after the announcement bankers became concerned with making deals with clients under the increased scrutiny of the SEC.
Despite these factors the crypto market rallied on Wednesday after the SEC’s proposal to tighten restrictions on exchange platforms such as Coinbase Global who’s shares went up by 17% on that day. This phenomenon suggests that crypto currency investors were already prepared for regulations and actually priced in a bigger crackdown on crypto. A majority see these regulations as a good thing for the long-term future of the crypto industry, however, some view this as an attack aimed at destroying the core values of crypto which are decentralisation and no regulations.
Conclusion The economic conditions in the US, including persisting inflation, credit default risk, and a hold on interest rate cuts, are causing concern among investors and leading to a shift in attention towards international stocks. The tightening of regulations on the crypto industry by the SEC is also causing some banks to distance themselves from the industry. While the US remains an attractive market, these changes have caused the country to lose some favor with investors, indicating a potential shift in the longstanding trust in the US market.