ALTERNATIVE MARKETS UPDATE – MID JUNE 2024

The macroeconomic situation in the US and Europe is evolving differently. The US has reacted more quickly to inflation, which has led to a faster decline in inflation than in Europe. Inflation in the US already reached 4% in May 2023, when it was still 8% in the EU and over 10% in the UK. Since then, US inflation has remained stable and has not fallen further. Inflation in the EU fell below 4% in October 2023. In contrast to the US, inflation in the EU continues to fall, slowly approaching 2% as of April 2024. In the UK, the development is even faster, with inflation falling well below 4% in February 2024 and the lowest of the three in April 2024.
These developments have led to very different outlooks for the expected rate cuts. At the beginning of the year, the Fed was expected to be the first to cut, with around 5-6 rate cuts estimated. With sticky inflation, markets are now pricing in 0-1 rate cuts for the remainder of 2024. The European Central Bank followed Switzerland's lead and cut rates by 25bps to 4.25% at its June meeting. How this process will continue remains relatively unknown. While further cuts are certainly expected in 2024, the number of cuts remains largely uncertain. The ECB is expected to review the June cut at its next meeting in order to provide more insight into where it is headed. The UK is also making positive headlines with inflation moving towards 2%, which has been rare in recent years with Brexit issues and the recent re-election. The Bank of England is widely expected to start cutting interest rates at its upcoming meeting. Figure 1 provides more details on the development of inflation and interest rates in recent years.

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RESEARCH PERSPECTIVE VOL. 229 June 2024 Alternative Markets Update The macroeconomic situation in the US and Europe is evolving differently. The US has reacted more quickly to inflation, which has led to a faster decline in inflation than in Europe. Inflation in the US already reached 4% in May 2023, when it was still 8% in the EU and over 10% in the UK. Since then, US inflation has remained stable and has not fallen further. Inflation in the EU fell below 4% in October 2023. In contrast to the US, inflation in the EU continues to fall, slowly approaching 2% as of April 2024. In the UK, the development is even faster, with inflation falling well below 4% in February 2024 and the lowest of the three in April 2024. These developments have led to very different outlooks for the expected rate cuts. At the beginning of the year, the Fed was expected to be the first to cut, with around 5-6 rate cuts estimated. With sticky inflation, markets are now pricing in 0-1 rate cuts for the remainder of 2024. The European Central Bank followed Switzerland's lead and cut rates by 25bps to 4.25% at its June meeting. How this process will continue remains relatively unknown. While further cuts are certainly expected in 2024, the number of cuts remains largely uncertain. The ECB is expected to review the June cut at its next meeting in order to provide more insight into where it is headed. The UK is also making positive headlines with inflation moving towards 2%, which has been rare in recent years with Brexit issues and the recent re-election. The Bank of England is widely expected to start cutting interest rates at its upcoming meeting. Figure 1 provides more details on the development of inflation and interest rates in recent years. Figure 1: Inflation Rate & Interest Rate in the US, EU, and the UK from January 2022 to June 2024, Source: US Bureau of Labor Statistics, Federal Reserve, Eurostat, European National Bank, Office for National Statistics, Bank of England & TradingEconomics, June 2024 Commodities are one of the best performing assets in 2024. Gold has been in the spotlight since Covid-19. With increased economic uncertainty and the added uncertainties of recent wars around the world, the asset has only become more relevant as a safe haven asset. The asset saw its most recent breakout in March 2024, when gold rose from around $2,000 per ounce to almost $2,500. While the asset has lost some of its gains, gold remains at $2,333 with further upside potential as demand shows no sign of slowing. Throughout this period, silver has traded relatively low compared to its historical levels. When gold began to rally in March 2024, silver made up for its underperformance over the period and performed similarly to gold. In contrast to gold, silver has lost a little more ground in recent weeks. In addition to similar properties to gold, silver has risen due to increased industrial demand, supply shortages and a weakening US dollar. Copper's recent performance is similar to that of silver, although it is not seen as a traditional hedge in times of elevated uncertainty. Copper's gains have largely been driven by a mismatch between supply and demand. Copper is a key component in electric vehicles and renewable energy. Supply is also constrained by recent mine closures and declining ore grades. Figure 2 shows the indexed performance of gold, silver and copper since 2023. Figure 2: Gold, Silver and Copper Princes Since January 2023, Sources: WisdomTree ETFs & Yahoo Finance, June 2024 Oil and natural gas are other commodities that are not in the media spotlight at the moment, as the notoriously volatile commodity is showing very little volatility despite geopolitical tensions and potential supply chain issues. Nevertheless, these energy commodities are unlikely to remain stable as the US elections take place later in 2024, particularly in the US. Depending on who wins the election, energy commodities are likely to rise or fall significantly. If the Republicans win, oil and gas prices are likely to rise with increased economic activity in the US, such as a focus on bringing industrial and manufacturing companies back to the US to produce. In the longer term, this is likely to fade over time as investment in extracting these resources increases. In the event of a Democratic victory, demand for oil and gas is likely to decline as the focus on renewable energy increases and incentives for such energy resources are strengthened. Figure 3 shows the relatively stable price of oil and natural gas since January 2023, especially considering the volatility oil experienced during Covid-19 and the early Russia-Ukraine period, when oil went from negative prices to almost $140 per barrel. Figure 3: WTI Crude Oil, Brent Crude Oil and Henry Hub Natural Gas Prices from January 2023 to June 2024, Sources: Federal Reserve Economic Data, U.S. Energy Information Administration, June 2024 The cryptocurrency market has been relatively quiet in recent weeks since the approval of spot Ether ETFs, albeit with a slight downtrend. Cryptocurrencies started to gain significant traction towards the end of 2023, when talks about the approval of spot bitcoin ETFs became more widespread. The decision was frequently delayed, but the perception shifted gradually towards a positive outcome. As a result, when the ETFs were approved, there was relatively little market movement. Cryptocurrencies then experienced another strong spike in March 2024, ahead of Bitcoin's halving. Traditionally, crypto markets rally ahead of the halving, followed by a slight decline and then another strong rally. In this cycle, the decline was relatively limited as the first Spot Ether ETFs were also approved a month later in May 2024. Initially, the consensus was that these ETFs would not be approved. However, a few days before the decision, the regulator released a statement that was widely perceived as an indication of a high likelihood that Ether ETFs would be approved, which caused the main spike ahead of the official approval. Since then, cryptocurrencies have moved slightly lower. However, if the previous cycles around the halving continue, the strongest bull run is yet to come, especially for cryptocurrencies other than Bitcoin. Figure 4 shows the price performance of Bitcoin and Ethereum since 2023. Figure 4: Price Development of Bitcoin and Ethereum Since January 2023, Source: CoinMarketCap, June 2024 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). 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