Should we worry about higher interest rates?

Thoughts of the Day

The week before Bitcoin experienced a significant correction from nearly $74,000 to below $61,000 because of weakened investor sentiment and total outflows of $880million from US BTC ETFs. However, last week saw inflows of $860 million with just 4 trading days. The buying is likely to continue as more retail and institutional investors become more familiar with BTC as an investment option. New highs are inevitable in the weeks ahead.

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Day Ahead

The US JOLTS Job Openings is expected to show a decline of jobs openings from 8.863 million to 8.79 million in Feb.

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What Happened Yesterday

Market Movements as of New York Close 01 Apr 2024

The RBA meeting minutes showed that board members did not consider raising rates in the most recent RBA meeting. Members also noted that it was difficult to either rule in or out future changes in cash rate and it will still take some time before the board could be confident inflation is returning to target. Market reaction to the minutes was muted.

The ISM Manufacturing PMI in the US rose to 50.3 (vs 48.4 expected) in March 2023, improving from February’s 47.8. This increase signalled the manufacturing sector’s first growth in over 16 months. The sector saw an upswing in demand, evidenced by the rise in the new orders Index to 51.4 and the steady new export orders Index at 51.6, though backlogs still slightly declined at 46.3. Price increases persisted, reaching 55.8 due to fluctuating commodity prices.

The US Treasury Yield curve inversion remained at 0.39% as the US 2-year bond yield and  10-year yield rose +0.13% to 4.72% and 4.33% respectively due to the strong US Manufacturing PMI.

The US stock futures opened higher from last Thursday and then moved sideways through the Asian and early London trading sessions before falling as the New York session approached. Hence, when the New York session began, the S&P 500 futures was down -0.05% from the day’s open (but still +0.14% higher from the close on Thursday).

The US stock market opened higher from last Thursday. It then started to fall following the release of the stronger than expected Manufacturing PMI and stayed at lower levels through the rest of the New York session. The S&P 500 was down -0.20% (high: +0.18%, low: -0.48%), the Dow Jones slipped -0.60% lower (high: +0.02%, low: -0.79%) while the Nasdaq managed to eke a slight gain of +0.21% (high: +0.75%, low: -0.24%).

The crypto market experienced slight weakness on the day due to higher US yields. Bitcoin was down -2.30% while Ether was down -3.87%.
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Headlines & Market Impact

Japan ready to take action vs excessive yen volatility, says finance minister

Notable Snippet: Japanese Finance Minister Shunichi Suzuki said on Tuesday that authorities were ready to take appropriate action against excessive currency market volatility, without ruling out any options.

“We are carefully watching daily market moves,” Suzuki told a news conference after a regular cabinet meeting, when asked about the yen’s continued declines.

“We are watching currency moves with a strong sense of urgency,” he said.

The yen has been on a downtrend despite the Bank of Japan’s decision on March 19 to end eight years of negative interest rates, and hit a 34-year low against the dollar at 151.975 last week. It stood at 151.655 in Asia on Tuesday.

With the BOJ’s policy rate still stuck around zero, expectations the gap between U.S. and Japanese interest rates will remain wide are giving traders an excuse to keep selling the yen, analysts said.

Suzuki said monetary policy was only among many factors that affect currency moves, such as each country’s current account balance, price developments, geo-political risks, market sentiment and speculative moves.

“It’s important for currency rates to move stably reflecting fundamentals. Excessive volatility is undesirable,” he said.

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Gold prices hit another record high after fresh U.S. data spurs Fed cut expectations

Notable Snippet: Gold prices scaled to another record high Monday, propelled by U.S. interest rate cut expectations and the metal’s appeal as a safe haven asset.

Spot gold added 0.3% to trade at $2,240.04 per ounce. U.S. gold futures rose 0.8% to settle at $2,257.10 per ounce. The metal hit a high of $2,286.4.

“I think it’s a really exciting moment for gold,” said Joseph Cavatoni, market strategist at the World Gold Council, told CNBC on Monday. “What’s really driving it is, I think, many market speculators really getting that confidence and comfort [in] the Fed cuts,” he said.

Gold prices tend to share an inverse relationship with interest rates. As interest rates fall, gold becomes more appealing compared with fixed income assets such as bonds, which would yield weaker returns in a low interest rate environment. 

Bullion prices were also driven higher by overseas demand, according to Caesar Bryan, portfolio manager at investment management company Gabelli Funds.

“In China, private investors have been attracted to gold because the real estate sector has done poorly,” Bryan said, adding that China’s general economy has remained weak and its stock market and currency have not been performing well.

The gold rally so far has been fueled by robust purchases from the world’s central banks in a bid to diversify reserve portfolios due to geopolitical risks, domestic inflation and the U.S. dollar’s weakness, said Cavatoni from the World Gold Council.

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Citadel’s Griffin expects US economic landscape to be challenging, more favourable for fixed income

Notable Snippet: Citadel’s hedge fund billionaire Kenneth Griffin told investors he expects the medium-term economic landscape will remain challenging, but more favourable for fixed-income markets in the U.S., as inflation eases, according to a letter seen by Reuters.

“Economic growth is likely to be modest, staying below potential in the upcoming quarters, with the (U.S.) central bank persisting in its fight against inflationary pressures,” he wrote, adding that consumers will continue to experience real income growth.

Griffin, who controls the $59 billion hedge fund Citadel Advisors and the market maker Citadel Securities, reiterated in the letter his concerns about the U.S. fiscal situation, saying it cannot be overlooked.

“It is irresponsible for the U.S. government to incur a deficit of 6.4% when unemployment is hovering around 3.75%,” he added.

The U.S federal budget deficit grew by 13% in February from a year earlier on interest costs and tax refunds. For the first five months of the fiscal year, the deficit rose by $106 billion, or 15%, to $828 billion, as interest costs on the national debt rose.

Last year, the hedge fund posted a 15.3% gain for its flagship Wellington fund, outperforming multi-strategy competitors.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord