The UK’s economy continues to be under high pressure. While high inflation affects all countries, Truss’s historical tax cut and its outlined budget sent markets crashing. In particular government bonds alongside the British Pound experienced an alarming development, such that the BoE had to intervene and stabilize the economy. This had a brief stabilization effect, as the support was for a limited amount of time, as shown in Figure 1. This short support is largely due to the fact that it goes against the plan of central banks globally which try to reduce their balance sheets following the substantial interventions during Covid-19. This financial emergency led to Truss’s resignation from her position as prime minister. Her initial rival Sunak took over the office soon after and faces a tough situation ahead. Following this turmoil, markets have somewhat calmed down with Sunak’s appointment as PM and his experience in former financial positions. Meanwhile, other countries are still committed to raising interest rates. For the Fed, it is widely expected that rates will be raised by another 75bps in early November reaching 4%. With this following hike, officials say that further hikes are to be expected, although the magnitude might slow down. Further hikes are increasingly likely as the inflation rate is not really cooling down, and remains at 8.2%, down from 8.3% in the prior month. The relatively stable decline in equities is also unlikely to stop any time soon. Not only is there a constantly looming threat of a recession, but the equity market also tends to be correlated to central bank assets, as shown in Figure 2. This relationship is intuitive, as more assets or capital in the market are deployed. Furthermore, during Covid-19, much of the injected capital flew directly into stocks. With the back scaling of available capital, it is withdrawn from more risky capital, which is frequently stemming from equities. Although cryptocurrencies took a huge hit in early 2022, since July 2022, their performance is positive unlike bonds, stocks, or gold. This is a relieving sign for the industry, as cryptocurrencies tend to be strongly correlated with other asset classes at the beginning of a drawdown, but is the first asset class to recover from it. In this state, the asset class usually regains its attractive property of being non-correlated to other asset classes. Another highly intriguing development is taking place with Web3 applications. Web3 applications essentially fulfill the same role as technology companies leveraging the internet. However, unlike these technology companies, Web3 platforms are built decentral and are not maintained by a single entity. The current state of the Web3 industry strongly resembles these technology companies during the dot-com bubble. Figure 4 highlights a few key similarities. Venture investing in these types of companies also has not taken a large hit, compared to most other asset classes. This is in particular notable, as traditional venture investing took a substantial hit in 2022. Figure 5 shows the consistent decline in venture investments since Q4 2021.
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