In this week’s report
After a rapid selloff in government bonds around the world, the first bailout-worthy events have appeared, this time it’s one of the world's biggest financial managers, namely, BlackRock.
In the early hours of the 28th of September, we saw the first central bank capitulation after this year’s amplified volatility. The Bank of England (BOE) began its purchase of UK government bonds buying up to 1 billion pounds worth.
“You had financial stress everywhere. The yields were rising and the dollar was rising. It was sort of feeding on itself. We needed something or someone to stop the financial stress and financial panic that was happening. The BoE stepped in there,” said Erik Nelson, macro strategist at Wells Fargo.
“The easing of the financial stress has helped sterling and other currencies rally against the dollar” (Nelson).
But the relief for sterling may be temporary as the UK still has to deal with macro trends such as high inflation.
But why did the BoE really have to step in to protect the UK government bond market? Falling prices (rising yields) had created a doom loop for pension managers.
Not just any pension manager, BlackRock.
Here’s the summary from a Bloomberg report on the BoE bailout:
“‘The BOE intervention was required to prevent a vicious cycle becoming even more dangerous for pension funds forced to sell their gilt exposures,’ Calum Mackenzie, an investment partner at Aon, said after the BoE intervention. ‘The market’s swift and significant reaction underlined the big risk faced by pension funds who have had or who could have had their liability hedges reduced.’”
The affected firms included BlackRock Inc., Legal & General Group Plc, and Schroders Plc.
So essentially, the central bank stepped in largely to halt a market-breaking downward spiral. This is nothing good to hear for the global economy.
The DXY is a trade-weighted benchmark against all of its currency pairs. This represents its weakness or strength relative to the currencies of all other countries (Chart can be seen at end of Newsletter (Fig. 2).
It currently sits at the highest level that it has been since 2002.
Meanwhile, other currencies such as the GBP are at 37-year lows, nearing parity with the dollar.
The Euro also fell down to 97.5c per dollar, below its parity level, which hasn't happened in more than two decades.
The BOJ intervened in the weakness of the Yen, which hasn't been done since 1998.
The reasons that people are flocking to the Dollar are numerous. The reasons can be primarily reduced to the following two reasons.
First, there are the interest rates. Since the US FED has been pumping interest rates significantly in comparison to the other currencies, investors will gain more interest if they loan their USD out to customers than a loan in other currencies.
Therefore, although fewer loans are being taken, being able to lend money with a high-interest rate is beneficial to hedge against the current inflation for investors/lenders.
The second reason is that the dollar is the world reserve currency. With the current maco-economic uncertainty, many people think the dollar is the safe house for their money.
So those are the reasons for the strength, but what are the risks of dollar strength?
The dollar is the world's most used currency for trade. This means that if the dollar rises in value in relation to other currencies, all imports become more expensive.
For example, oil and energy trades are usually settled in dollars, this means that if the dollar is strong, oil and energy are that much more expensive for non-US countries. In the current energy crisis economy, that certainly isn’t a good thing.
In the latest news on the U.S. Securities and Exchange Commission (SEC) and Us company Ripple’s court case, Ripple has obtained a positive ruling from a U.S. District Court Judge in Manhattan who overruled the regulator’s attempts to withhold documents from the fintech.
The SEC’s case against Ripple is based on its claim that its native XRP token should be considered a security.
Ripple is fighting the case with the argument that XRP cannot be considered a security, as there is no investment contract that grants rights to investors, which is one of the requirements to be considered a security.
In a speech by William Hinman, the former Director of the SEC’s Division of Corporation Finance, he stated that Ethereum was “not a security because putting aside its 'fundraising', it had become 'sufficiently decentralized’” (securities are centralized entities).
The market has had a positive reaction to this announcement. XRP’s price increased by roughly 11.21% over a 24-hour period since this news came out on 29 Sep.
This can have a larger positive effect on the crypto market, if XRP can lay the ground for not being considered a security it will take a lot of regulatory pressure off of the crypto industry.
Bitcoin is holding up relatively well against the stock market.
Historically Q4 has been Bitcoin's best performance by far, with an average quarterly return of +103.9%.
October and November have been its best performing months across time, with average returns of 24% and 58% respectively.
The Bitcoin community often talks about "Pumptober" does this seasonality actually matter in the current markets? Let's see.
Meanwhile, in the stock market, we are seeing continued weakness.
Bitcoin saw its bottom on the 21st of September (Fig.1), while QQQ dropped 5.5% more since its 21 September drop (Fig,3).
A comparison between stocks (blue lines) and Bitcoin (orange lines) can be seen in Figure 4.
The scariest part is that the stock market is down while the DXY is down.
For context, the stock market usually moves inverse to the dollar index (DXY) but is currently not reacting to DXY's weakness, surely a negative sign for stocks.
On the 28th of September DXY saw its temporary drop (Fig.2) but as seen on the QQQ chart (Fig.3) QQQ only saw a small rally which turned into a hard dump shortly after.
Caution should be the word of the week, but a rally is certainly overdue, which can be seen in the attempts Bitcoin has been putting in.