Market Commentary

Does it Float? | Market Analysis for the Busy Investor

September 20, 2022
BoE photo

CEO and Co-Founder Ivan Zhang tackles the top market observations for the week. Follow us on Twitter and Instagram to stay up to date in real-time.

The biggest economic report every month is the Non-Farm Payrolls (NFP), and this month was no exception. Here’s a fun side reading that talks a bit about why this report is oddly named “Non-Farm.”

Non-Farm Payrolls Up Big

TL;DR: Friday’s Payroll numbers came in twice as big as expectations. Full steam ahead.

The 528,000 new jobs dwarfed the 258,000 that were expected by the market. Furthermore, unemployment ticked down to 3.5%. 

Predictably, the good news is bad news because the report makes it more difficult for the Fed to find excuses to taper their rate hikes.

Luckily, equities climbed back throughout the rest of Friday, with the Dow eking out a slight gain. 

From a market sentiment standpoint, this looks like a battle is raging between the two camps: on one side, those who believe fundamental economic indicators should drive long-term valuations vs. those who believe monetary policy drives short-term stock performance.

For context, studies have been done about stock returns during rate hikes vs. eases, and there is no discernible effect in the long run. 

Part of the difficulty of these analyses is that there are not that many data points even if you look back 100 years, so it’s very noisy. 

But for long-term investors, it does mean that you can keep focusing on fundamentals, and incrementally, this is a strong report allaying fears of a much deeper recession.

Biggest Bank of England Hike in 27 Years

TL;DR: On Thursday, the BoE hiked rates 50 bps to 1.75%, while UK’s CPI inflation stands at 9.6%.

For those feeling very uneasy about the Fed’s hikes, it’s important to put this into perspective because the Bank of England just accelerated its pace of hikes in light of the astronomical inflation numbers.

According to its own forecasts, inflation is expected to peak at 13% later this year. While it's difficult to calculate the effects of rate hikes on inflation very accurately, what levels of rates do you think would be appropriate to curb inflation?

Well, looking at the interest rate futures markets, it seems that the terminal rate is…3%?! 

Perhaps sophisticated participants know something I don’t, or they simply don’t believe the BoE’s commitment to hiking is strong. 

But between 3% and 13%, there seems to be a lot of room for error. Please hold while I load up my futures trading account.

Crypto Tug-o-War by the CFTC

TL;DR: New U.S. regulations designate Bitcoin and Ethereum as commodities, setting the stage for the CFTC to become the de facto crypto regulator. The crypto market approves.

For those that have been in crypto for a while, debating whether a token/project/chain is a security or not is as entertaining as Letterman’s “Will It Float?”. 

Except you throw it in the water (SEC), and instead of being able to observe its floatiness simply, this SEC water is impenetrable. Nothing has ever come out of that water other than Bitcoin, and it’s so viscous that even if it does float (not a security), it could take years of lawsuits for the water to clear itself.

Under this premise, the new regulation seeks to clearly spell out the floatiness of Ethereum, i.e., that it’s not a security but rather a digital commodity. 

It further spells out the obligations of exchanges that trade digital commodities and establishes rules and surveillance mechanisms to minimize market manipulation and ensure consumer protections.

Along with the Lummis-Gillibrand proposal, recent regulations have been fairly sensible and are overall pro digital assets. It seems that legislators are warming up to the fact that this is an area where the U.S. could take a distinctive leadership role despite its currently much less crypto-friendly stance relative to many other countries.

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