The month of November has been quite successful for equities and bonds alike. With the stabilizing macroeconomic landscape, markets have adjusted to the current state with high rates and moderate to high, but decreasing, inflation. In the past month, there were promising signs that no more hikes are necessary to combat inflation. A notable percentage of market participants is even optimistic about rate cuts soon. While US inflation has gone down substantially already in summer, European countries are following and are on their way to similar levels as the US. Unsurprisingly, this led to a more positive view on longer-term rates. This was evident in falling yields for longer-term bonds. US and UK 10-year bonds’ yield decreased by around 10% since October, while German 10-year bonds decreased by almost 25%. Figure 1 summarizes the development of 10-year yields from October in the previously mentioned countries.
The conflict between Israel and the Hamas is in full force and it seems unlikely that the situation will be resolved soon. While the conflict started with an attack from Hamas on civilians in Israel, the focus has fully shifted towards Gaza with group, air, and sea retaliation by the Israel military. Israel is strongly focusing on Gaza, as it is seen as the center of the Hamas. The conflict in Gaza is widely seen as a precarious situation, as Israel is completely blocking entry or exit even for vital goods, such as food, water, and medical supplies. While Israel was supported initially by most Western countries (especially due to the many hostages taken), support is continuing to fade, due to the humanitarian crisis it caused in Gaza. Despite the decreasing support, Israel seems determined to not only free all hostages, but also disabling the military and governmental capabilities of the Hamas. Unsurprisingly, the conflict also affected financial markets significantly. While initial price shocks mostly normalized since early October 2023, oil markets could experience further volatility. Additionally, given the already pressured economies, investors move more capital into safe-haven assets, in particular US-Dollar and gold.
The cryptocurrency markets have been relatively quiet this year. Aside from the surge at the beginning of the year, cryptocurrencies have remained relatively flat since then. The total market capitalization of the industry started slightly below $1tn at the beginning of 2023 and has remained at around $1.2tn since March 2023. The relatively low volatility of the industry also signals a certain level of cautiousness of investors, as the market environment is not great for the industry. In particular recession concerns are holding the industry back, as cryptocurrencies are notorious for sharp declines. Options data on cryptocurrencies also supports a more defensive notion of investors, as implied volatility is close to a record low. The lower degree of risk appetite is also visible in the Bitcoin (BTC) and Ethereum (ETH) dominance. This measure quantifies the total market capital of BTC and ETH respective to the total cryptocurrency market capitalization. Their dominance has been on the rise since Q3 2022 and shows fewer investments in riskier and emerging projects. Similarly, during these times stablecoin gained more importance in the space due to their stability compared to other coins. Figure 1 shows the total market capitalization of cryptocurrencies and the dominance of BTC, ETH, and USDT. Historically, these times are the most important ones for the space, as it drives innovation. With no frenzy, emerging companies are not in a rush to cash out which allows them more time to develop their projects.
The current economy remains under pressure and recession talks mostly vary based on their expected impact and when they occur. In the US, interest rates remain high at 5.25% with moderate inflation at 3.2%. While inflation seems to normalize, it rose compared to June 2023, which led to another hawkish view of the Fed and further rate hikes are not unlikely. The yield curve inversion of 2Y-10Y yields is especially worrying, as the inversion has persisted for about a year now and economists expected an elevated likelihood of a small to medium recession. In Europe, the situation is more tense, as present headwinds, such as energy and the war in Ukraine, do not seem to evaporate quickly. As a consequence, inflation is coming down more slowly than in the US. In the EU, inflation remains at 6.1% and 6.8% in the UK with interest rates at 4.25% for the EU and 5.25% in the UK. Figure 1 summarizes the development of interest rates and inflation in the US, the EU, and the UK. In Europe, the economic growth is concerning, as the estimated GDP growth in the EU is only 0.6% in Q2 2023. In the UK, the situation is more dire, as the economy has remained close to flat since Q2 2022.
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