With relatively quiet central banks over the past weeks in terms of interest rate decisions and inflation slowly coming down, financial markets have calmed down with the exception of the impact following the war between Israel and Hamas. The start of the war has reignited interest in gold as a safe haven asset. While gold has been trading close to its historical high throughout the past years, the recent events led to another record high of $2,074 per ounce. After the initial shock from the war, gold declined again slightly, but has since regained most of its value, as the US dollar is getting weaker. Despite high interest rates and positive real rates, gold remains attractive. It is widely assumed that inflation will remain elevated for quite a while. Yet, positive real rates will do so too given that it takes a lot of interest rate cuts by central banks, which will take time. In the medium-term future, gold will not lose its attractivity, due to an elevated crisis risk and the general instability around the world. Since 2022, gold’s price has increased by more than 10%, as shown in Figure 1. While gold remained stable during these times, oil has behaved much more volatile. Compared to the beginning of 2022 WTI crude oil is now down around 5%, despite being up more than 50% in June 2022. Oil strongly soared when the war between Russia and Ukraine started and maintained an upward trend until the summer of 2022. Then, it started to gradually fall to more normal levels. 2023 was characterized by supply cuts to prevent the price from crashing. Further cuts in the summer of 2023 resulted in consistently raising prices for the first time since the war started. The latest war further led to price increases, which stopped the initial downward trajectory, but it was only a brief reaction. Currently, oil prices are still on the decline with the current supply, as industrial demand is slowed. The postponed OPEC+ meeting also contributed to the latest declines.
ALTERNATIVE MARKETS UPDATE – MID NOVEMBER 2023 & Macro and political outlook november 2023 by marco eagle
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.
With the next meeting of the Fed just ahead, interest rates are drawing a lot of attention, especially with the recent upward tick in longer-term maturities. The US inflation has come down significantly since May 2023 and has hovered around 3% - 4.1% with 3.7% currently. The aggressive hikes in the past have pushed the federal fund rate up to 5.25% on the lower end, which is now substantially higher than the inflation rate. Figure 1 shows the development of both since 1994 and the recent shift. The US core PCE as an alternative measure of inflation (excluding food and energy) has also reached 3.7% for the first time since May 2021 and is an arguably more important factor for the Fed in the determination of their rate. With this positive development, it is unlikely that another hike is necessary in their November meeting. This notion is strongly supported by market participants, who see the chance for a rate increase at a probability of close to zero.
Bonds have experienced substantial volatility since Covid-19. Back in March 2020, the 30-year US treasury yields fell below 1% for the first time in its history. With the high interventions from the central banks, bond yields have risen steadily, albeit mostly at the lower end. However, the longer end also began to increase and has passed the 5% mark for the first time since 2007, as shown in Figure 1. Nonetheless, this still has not shifted the yield curve back to a normal state, as the 3-month treasury bill is still yielding more at 5.63%. This development also caused the longest and steepest bear market in the bond ecosystem. Measured by the Bloomberg US Aggregate Bond Index, the bear market is now in its 38th month and has resulted in losses exceeding 17% in this time period. In conjunction with rising interest rates, mortgage rates also skyrocketed. 30-year fixed mortgage rates increased from 2.65% in 2020 to more than 7% currently, as shown in Figure 2. The last time, mortgage rates were at such levels was during the dot-com bubble. This has led to a substantial impact on the real estate market. With housing becoming that expensive, many people can no longer afford houses. Consequentially, in the US, mortgage applications have fallen to the lowest levels since 1995. Similarly, construction of apartment buildings also collapsed by more than 40%, which corresponds to the steepest fall since 2010. While financing costs are a significant contributor to this decline, it is also negatively affected by a relatively high vacancy rate and a decline in rent level, due to excess supply.
Rising oil prices have been in the news frequently over the past weeks. Back in July 2023, WTI crude oil was below $70 per barrel and has temporarily claimed above $95 per barrel as of the end of September 2023. Price levels have now reached heights last seen almost a year ago, as shown in Figure 1. The latest surge in price was likely caused by continuously declining reserves, which also reached a low point in more than a year. Previously oil prices have been mostly rising, due to production cuts by OPEC+, which was a response to the decline in oil prices the year before. The latest spike was further strengthened by further voluntary cuts by Saudi Arabia and Russia, which are likely to be maintained until the end of the year. Price estimations on oil prices towards the end of 2023 hover around $95 to slightly above $100 per barrel.
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.