ETH Touches $3k and a Banking Behemoth's $35.5bn Birth
Digital Asset Market: Ether reached $3,000 for the first time since April 2022. Its price has risen over 1.6% in the past 24 hours and 12% in the past week, outperforming other cryptocurrencies. Bitcoin also saw a 2% increase and is nearing $53,000. The broader cryptocurrency market has been performing well in 2024, with ETH's rally possibly continuing towards $3,500 as traders anticipate the potential approval of spot-based ETH ETFs in the US. This could attract more institutional investors and contribute to ETH's rally.
Macro Economics: China is currently facing a $7 trillion downturn in its economy, with a significant drop in stock market values, high levels of debt, a collapsed real estate sector, and internal economic pressures. President Xi Jinping is being briefed on measures to stabilize the market, as the government attempts to restore investor confidence and prevent further damage to the economy. The real estate crisis, exemplified by the downfall of China Evergrande, has highlighted broader vulnerabilities within the sector, and has had widespread implications for the Chinese economy. In response, the government is pledging to boost domestic demand and enact more stimulus measures, but doubts remain about the effectiveness of these initiatives. There is also a growing disconnect between official optimism and the realities faced by businesses and consumers, highlighting the need for more transparent and effective policy communication. Xi's centralized control over economic policy has led to criticism of slow decision-making and policy communication, as well as concerns about the legal environment for foreign businesses. China is now seeking new drivers of economic growth, particularly in high-tech industries, as it aims to shift away from traditional growth engines. This critical juncture for China's economy has implications for global markets and industries reliant on Chinese growth, as the world watches closely to see how the country navigates these challenges.
Equities: Capital One has announced plans to acquire credit card issuer Discover Financial Services in a $35.3 billion all-stock deal. This would create the sixth-largest US bank by assets and would allow Capital One to compete with rivals like JPMorgan and Citi. Discover also has a global payments business, adding value to the acquisition. The timing of the deal coincides with planned US bank merger regulations, adding to the scrutiny the deal will likely face. The merger is expected to close in late 2024 or early 2025, with Discover shareholders receiving a 26% premium for their shares. The acquisition is expected to expand Capital One's credit card offerings, deposit base, and overall competitive position. The two companies have not specified what will happen to Discover's brand. The deal is significant for the financial sector and could have major implications for future merger activity.
The Conference Board's Leading Economic Index (LEI) has signaled a recession ahead for the US economy for months, but it has not yet materialized. The January LEI is expected to show a decline. The negative reading is due to weakness in the manufacturing sector, high-interest rates, and poor consumer confidence. The Federal Reserve will release minutes of its January meeting on Wednesday, and it is expected that the economy may not receive as many rate cuts as previously expected. Concerns about the economy being too hot have also risen. The minutes may provide more insight into the Fed's plans for rate cuts and slowing balance sheet reduction. The week will also feature a report on existing home sales, which may have been impacted by bad weather in some areas.
The Fed and US Treasury: Bad commercial real estate loans have become a growing issue for the top US banks, as the amount of delinquent debt has surpassed their reserves. With a spike in late payments for properties such as offices and shopping centers, the average loss reserves for JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley have decreased significantly. In addition, regulators including Federal Reserve Bank, are expressing concerns about the risks posed by commercial real estate loans, as delinquent debt for the wider US banking sector nearly tripled in 2023 to reach $24.3bn.
Geopolitical: The White House is set to announce new sanctions against Russia on Friday in response to their war in Ukraine and the death of opposition figure Alexey Navalny. The National Security Council spokesperson also called for Congress to pass a national security supplemental bill to support Ukraine. President Biden had previously mentioned placing additional sanctions against Russia over Navalny's death in a Russian prison. While the call for a ceasefire in Gaza has picked up significantly from US and EU, the same level of consensus has not been reached for the Ukraine conflict, which has been ongoing for almost two years.
View from our desk
Last week, the cryptocurrency market, particularly Bitcoin and Ethereum, demonstrated remarkable strength, a trend that is anticipated to continue unabated in the foreseeable future. The impending Bitcoin halving next month, coupled with its limited supply, positions Bitcoin, rather than Ethereum, as a formidable force in the digital currency space. Standard Chartered's prediction of Bitcoin reaching $100,000 by year-end appears increasingly plausible within this context. This bullish outlook for Bitcoin is underpinned by fundamental supply dynamics and heightened market anticipation, suggesting that the path to significant valuation increases is not just speculative but grounded in tangible market mechanics.
The U.S. financial markets are currently navigating through a critical phase, primarily due to the burgeoning issue of underperforming commercial real estate loans on U.S. banks' balance sheets. The necessity for these loans to be repriced (marked to market) stands out as a pivotal challenge. Although rising equity valuations have so far helped forestall a broader credit downturn, the Federal Reserve finds itself in a complex situation. With this being an election year, there's an inherent pressure to bolster the stock market to prevent a credit crisis. Consequently, there's a compelling case for lowering interest rates to support not only the stock market but also commercial loans and new construction projects. However, the persistent inflation and ongoing conflict in Ukraine add layers of complexity to this scenario, making the prospect of three rate cuts within the year seem increasingly unlikely.
The interplay between the need to stimulate the economy through rate cuts and the imperative to manage inflation presents a significant policy dilemma for the Federal Reserve, especially in an election year. The geopolitical situation, particularly the war in Ukraine, further complicates the inflation outlook, tying economic policy decisions to broader political and global dynamics. As the market grapples with these multifaceted challenges (and our $34 Trillion debt burden), expectations for aggressive rate cuts may need to be tempered. Investors and market observers alike must navigate this uncertain landscape with a nuanced understanding of the factors at play, recognizing that the Federal Reserve's policy decisions will be critical in shaping the trajectory of both the financial markets and the broader economy.
Happy Trading!
The 1Konto Team
About 1Konto
1Konto excels in digital asset and FX markets, offering advanced trading technology with 24/7 access and deep liquidity. Clients benefit from precision pricing, robust platform features, and zero slippage, ensuring an efficient, secure, and high-quality trading experience.
Reach out today for a consultation on our tailored solutions for best price liquidity and services in digital and FX.
Not Financial Advice Disclaimer