Weekly Markets Update - 23.10.18

MARKET PERFORMANCE SUMMARY:

Between 09 Oct ’23 and 15 Oct ’23 the TOTAL CRYPTO MARKET including BTC declined -3.00%, reference Figure 1, underperforming major traditional indices which had a mixed week.

The S&P500 rose +0.45% and NASDAQ fell -0.17% (see Figure 1). Earnings beats from large banks were offset by weakness in mega cap stocks. Citigroup, Wells Fargo, and JPMorgan Chase kicked off the third quarter earnings cycle on a positive note – getting a boost from higher interest rates – while tech giants Tesla, Nvidia, Apple, Alphabet, Microsoft and Amazon lost between 1% and 3%. Escalation in the Middle East also benefited defence stocks but the geopolitical uncertainty and subsequent +7.70% surge in BRENT CRUDE (see Figure 1) has dampened investor sentiment – complicating inflation’s perceived downward trajectory. September’s CPI exceeded expectations by rising 0.4% M-o-M, while core inflation matched forecasts at 0.3% - giving Fed reason to hold rates higher for longer. However, the dovish tone in the Fed’s September policy meeting minutes released during the week eased investor negativity. Even among historically hawkish policymakers, the sentiment was that there was less need to tighten policy further given the recent surge in yields. However, yields across the board declined during the week as demand for safe-haven assets increased following events in the Middle East. Still, as at 13 Oct ’23, federal funds futures were pricing in only a 5.7% chance of a rate hike at the next Fed meeting in November – dropping 21.4% from a week prior.

The DAX and CAC 40 dropped a further -0.28% and -0.88% from the end of last week, respectively (see Figure 1), following the release of the ECB September meeting minutes and downward revision growth for the region’s largest economy. Policymakers expressed concern following a narrow decision to pause rates – worrying that markets may interpret the move as the central bank relenting, which would drive a resurgence in inflation. However, other members favoured a pause regardless of inflation’s trajectory toward the policy target and the bloc’s economic struggles. In particular, Germany's economy is projected to shrink 0.4% in Q3 as the global economic slowdown, money tightening and energy prices slow its expected recovery, according to the economy ministry’s monthly report. Meanwhile, Britain’s economy continued its modest recovery–driving the FTSE’s +1.37% gain for week. While U.K’s construction lagged like that of Germany, its stronger services sector saw the economy grow 0.2% M-o-M in August ’23 - as expected, and up from a revised 0.6% contraction in July ’23.

The SHANGHAI composite dropped -0.74% ?(see Figure 1) during China’s first trading week since the Golden Week holiday. Much of the negative sentiment was driven by persistent deflationary pressures indicative of sluggish demand in the world’s second largest economy. Consumer prices were flat in September ‘23 Y-o-Y, falling short of a forecasted rise of 0.2% and down from a 0.1% rise a month prior. Food prices also fell at the steepest pace in 19 months, but the drop in producer prices, exports and imports eased to the lowest points in months – suggesting that stimulus interventions are taking shape. The NIKKEI jumped +4.11% (see Figure 1) as Yen weakness propped up export-driven stocks. Expectation that U.S. rates will remain higher for longer pushed the Japanese currency closer to the 150 mark against the U.S. Dollar, which could trigger government intervention. The IMF revised up its forecast for Japan’s growth in 2023 to 2% from 1.4% previously – citing the BoJ’s accommodative monetary policy and boosts in auto exports among the reasons for the revision. Easing bets that the Fed would hike rates in November ’23 (see above) also boosted investor sentiment during the week.

The JSE ALL SHARE rose +1.76% ?(see Figure 1), ?driven primarily by a strong rally early in the week following dovish comments from the Fed (see above). Following said comments, the Rand firmed up to ZAR 19 against the U.S. Dollar. However, negativity later in the week dampened earlier sentiment. Internationally, the US CPI report pointed to an environment of higher rates for longer and data from China was mixed. On the domestic front, SACCI Business Confidence ticked down and mining production shrunk more than expected driven by continued weakness in energy and logistics. Local investors look forward to the CPI data in the following week.

Within this context, BTC and ETH slumped -3.05% and -4.67% respectively (see Figure 1). The significant drops in crypto were driven by the CPI report and concerns over the escalating conflict in the Middle East. The CPI data coupled with the minutes from the Fed underscore the expectation that restrictive policy will persist for an extended period. On the one hand the impact of the escalating conflict in the Middle East is likely to confound the inflation narrative by increasing oil prices, and to dampen the performance of digital assets but on the other the Bitcoin as Digital Gold narrative is quietly gaining momentum, and is closely linked to the SEC ap[roving a Bitcoin Spot ETF. ??US Google search data indicates those searching for ‘Bitcoin’ are highly interested in topics related to a spot ETF approval. BlackRock (NYSE: BLK) CEO Larry Fink, who previously endorsed the view of BTC as a hedge against broader uncertainty, responded that the rally is an example of ‘pent up interest in crypto.’ Fink, who uses the term ‘crypto’ and ‘bitcoin’ interchangeably, goes on to mention that clients around the world have expressed ‘the need for crypto.’ Fink concludes that in light of global upheaval, “there are more people running into a flight to quality, whether it's in treasuries, gold or crypto.” According to Fink, “crypto will play that type of role’ in regards to a ‘flight to quality.” Coinbase's Chief Legal Officer, Paul Grewal, has urged the US Congress to promptly enact sensible cryptocurrency legislation in light of escalation – stressing the need “for the crypto industry to thrive in nations upholding the rule of law rather than being forced into regions with lesser regard for human rights and public safety”. Positive news did arrive in this regard, however, as ?SEC did not appeal the recent court ruling – paving the way for Grayscale to convert its BTC trust into an ETF.

INSAAPH CAPITAL’S TAKEAWAY:

Escalation in the Middle East dominated the news cycle – increasing the demand for government bonds. Historically, geopolitical shocks tend to be short-lived as markets gravitate toward the more sustainable drivers for returns. In a study by Edward Jones, 10 prominent historical episodes of military conflicts/attacks were examined for their impact on the S&P500 over the subsequent 12 months. The impact on returns usually proves temporary, as equities were found to be higher in most cases six months and one year later. Therefore, investor focus should remain on rates. The recent surge in bond yields has tightened financial conditions and played a role in the Fed’s more dovish tone. The discussion has largely moved away from whether hiking should persist, to how long policy should be held at the current restrictive rates. Even though the CPI data came in hotter-than-expected, it is unlikely to alter the policymakers’ positions as revealed in the September FOMC meeting minutes.?

Key Point: Historically, geopolitical shocks tend to be short-lived as markets gravitate toward the more sustainable drivers for returns. Therefore, investor focus should remain on rates. The recent surge in bond yields has tightened financial conditions and played a role in the Fed’s more dovish tone. The discussion has largely moved away from whether hiking should persist, to how long policy should be held at the current restrictive rates. Even though the CPI data came in hotter-than-expected, it is unlikely to alter the policymakers’ positions as revealed in the September FOMC meeting minutes.

CONSILIENCE PERFORMANCE SUMMARY:

As at 15 Oct ‘23 CONSILIENCE’s price return since its inception was -1.88%, reference Figure 2. CONSILIENCE recorded a gain of -2.99% for the week, marginally outperforming Bitcoin (BTC) by +0.06%. Since CONSILIENCE’s inception, CONSILIENCE’s outperformance of Bitcoin (BTC) increased to +36.81% and to +46.11% against Ethereum (ETH).

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Ox (ZRX), Maker (MKR), and Tron (TX) were the best performing crypto assets in CONSILIENCE’s portfolio, with ZRX and MKR recording the highest cumulative gains for the week of +4.76%, +2.02% respectively, ?whereas TRX traded flat, reference Figure 3.?

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CONSILIENCE - TOP ASSETS PERFORMANCE SUMMARY:

?Tron (TX), Wrapped BTC (WBTC), and Bitcoin (BTC) were the best performing top cryptoassets by market capitalisation (Top Assets) in CONSILIENCE’s portfolio with TRX trading flat and WBTC and BTC recording the lowest cumulative losses for the week of ?-3.05% and -3.05% respectively, reference Figure 4.

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CONSILIENCE - TOP DEFI ASSETS? PERFORMANCE SUMMARY:

Per above, Ox (ZRX), Maker (MKR) , and AAVE (AAVE) were the best performing top DeFi assets by market capitalisation (Top DeFi Assets) in CONSILIENCE’s portfolio with ZRX and MKR recording the highest cumulative gains for the week? of +4.76%, 2.02% and lowest cumulative loss of -3.03% respectively, reference Figure 5.

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Top DeFi Assets outperformed Top Assets last week.

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