Newsletter: November 2024 Edition
All the information in this letter is NOT to be considered financial advice; it is the author’s personal view and agreed views of others from their overviews of present markets. This content includes a summary of articles that I believe to be insightful and data that has been verified. The purpose is to provide content that is of interest and relevance to MarginCall.Club members.
Welcome to the November 2024 Edition of the MarginCall.Club FinTech Newsletter
This month, we’ll review the key financial events of October 2024 and explore how they might impact November and beyond. As always, our goal is to provide you with timely, relevant insights to help you navigate the market effectively.
Financial Market Highlights – October 2024
1. Stock Market:
- Dow Jones Industrial Average (DJIA): As of October 31, 2024, the DJIA closed at 42,725.53, marking a modest 0.5% gain for the month amid ongoing volatility.
- S&P 500: The S&P 500 finished October at 5,753.42, with a slight increase of 0.3% from September.
- Nasdaq Composite: The Nasdaq Composite closed at 18,485.32 on October 31, representing a 2% monthly gain, fuelled by gains in tech stocks.
2. Economic Indicators:
- GDP Growth: U.S. Q3 2024 GDP growth came in at 2.6%, in line with the Q2 rate. Consumer spending remained strong but began showing signs of cooling, particularly in discretionary sectors.
- Inflation: The Consumer Price Index (CPI) increased 3.3% year over year in October, showing a slight decline from 3.4% in September. Core inflation remained stable at 2.9%.
- Employment: The U.S. unemployment rate ticked up to 3.6% in October, as tech and construction sectors experienced some slowdown. Wage growth remained relatively stagnant.
- Interest Rates: The Federal Reserve kept the federal funds rate steady at 5.25%, indicating that a potential rate cut might happen by early 2025 if inflation continues to trend lower.
3. Cryptocurrency Update: (Rates change from exchange to exchange so prices given are ><)
- Bitcoin (BTC): BTC closed October at >$70,800<, up from $64,585 in September, buoyed by continued institutional interest. This gain of about >$5,700< signals resilience in Bitcoin’s price despite broader market challenges.
- Ethereum (ETH): ETH reached $2,825, as advancements in Ethereum 2.0 continue to attract investor interest, but the BTC ETH value continues to get hammered.
- Regulatory Developments: The SEC continued to enhance regulations around decentralized exchanges, which may benefit large players by providing more regulatory clarity but could pressure smaller operators.
- DeFi and NFTs: Decentralized finance (DeFi) platforms maintained growth, while NFTs saw an uptick, particularly in real estate tokenization.
4. Geopolitical and Macro Economic Factors:
- Geopolitical Tensions: U.S. China trade relations and conflict in Eastern Europe remain significant, creating market volatility.
- Energy Prices: Crude oil prices held around $84 per barrel as supply concerns lingered, driven by geopolitical tensions and OPEC’s production controls.
Key Events to Watch in November 2024
1. U.S. Presidential Election Impact
With the U.S. presidential election in early November, markets are sensitive to potential shifts in fiscal and monetary policy. The outcome will shape investor sentiment, particularly regarding budget allocations, regulatory policy, and the Federal Reserve’s approach to inflation management. A clear result could provide some stability, while a contested outcome could introduce volatility.
2. UK Budget Impact on Markets
The recent UK budget, which emphasized fiscal discipline while increasing spending on green energy and technology, has implications for markets which I talk about latter in this letter. The focus on reducing debt without compromising growth could impact the pound and influence global risk sentiment, as investors weigh the UK’s capacity for economic resilience. The budget could indirectly benefit Bitcoin and other digital assets if investors view them as alternatives during uncertain fiscal periods.
3. Federal Reserve Guidance
The Federal Reserve will meet again in November, and any hints of a shift in interest rate policy could impact markets significantly. If the Fed signals readiness for a rate cut in early 2025, markets might rally. However, any hint of continued tightening could weigh heavily on both equities and crypto.
Market Sentiment and Investment Insights
1. Cryptocurrency Market
October saw cautious optimism in the crypto market, with Bitcoin maintaining strength despite a challenging macroeconomic landscape. Predictions still suggest a target of $115,000 by year end, supported by growing institutional adoption and increased demand for alternative assets amid fiscal uncertainty.
2. Key Market Threats November 2024
- Economic Data: Weak GDP or high inflation data could lead to market corrections.
- Federal Reserve Policy: A shift toward a more hawkish stance could negatively impact both equities and digital assets.
- Geopolitical Concerns: Continued instability in trade relations or regional conflicts could create a risk off environment, benefiting safe haven assets.
Q: the yield freak out going on and also why swap spreads are blowing out? Is it a lack of liquidity impetus to offset the issuance? An election view? Both or more!
A: The recent spike in Treasury yields and widening swap spreads are complex, driven by a blend of fundamental and technical forces rather than a single, clear cut cause. Here are the main drivers and dynamics likely at play in the current “yield freak out” and swap spread blowout:
1. Supply Surge and Its Impact on Yields
Treasury Issuance Spike: The U.S. government is issuing substantial debt to finance its growing deficit, which is putting pressure on yields. In particular, recent auctions of Treasury notes and bonds have had to offer higher yields to attract buyers, as the sheer volume of supply exceeds immediate demand. This supply/demand imbalance is a key factor in pushing yields higher.
Diminishing Central Bank Support: While the Federal Reserve was a major buyer of Treasuries during the pandemic, it has scaled back significantly under its quantitative tightening (QT) program. This leaves the market with less of a liquidity buffer, as the Fed is no longer absorbing excess supply, meaning private investors need to step in, often demanding higher yields for doing so.
2. Swap Spread Dynamics and Illiquidity
Widening Swap Spreads: Swap spreads the difference between swap rates and Treasury yields, are blowing out partly because of declining liquidity and the reduced balance sheet capacity of dealers. High yield volatility makes Treasuries riskier to hold, which tightens liquidity and raises transaction costs.
Hedging Costs: With higher rates and more volatility in fixed income, hedging Treasury positions through swaps has become more expensive, pushing swap spreads wider. Banks and other financial institutions may be unwilling to take on more interest rate risk, leading to greater risk premiums in the swap market.
3. Market Positioning and Volatility Impact
Positioning in Long Treasuries: Over the past few years, there has been a concentration of large players (pension funds, insurance companies) positioned long on duration due to expectations of long term low rates. Rising yields, however, have forced some of these institutions to adjust or liquidate positions, leading to further upward pressure on yields.
Higher Volatility, Higher Spreads: The uncertainty around the Federal Reserve’s future rate hikes and potential persistence of inflation has led to higher volatility in rates markets. Higher volatility generally widens swap spreads, as market participants demand higher risk premiums for interest rate swaps.
4. Election Risk and Fiscal Uncertainty
Political and Fiscal Risks: The upcoming U.S. election adds a layer of political risk to markets. Concerns about fiscal responsibility and potential changes in fiscal policy postelection could be influencing the rise in long term yields as market participants’ price in various scenarios. Furthermore, if the election results lead to fiscal stimulus or increased spending, the Treasury will need to issue more debt, adding to the supply overhang.
Risk Premium Adjustment: The market may be pricing in a higher risk premium due to political uncertainty, as fiscal policy shifts (or even potential stalemates) could significantly affect the U.S. debt outlook. This risk premium is contributing to upward pressure on yields and wider swap spreads.
5. Liquidity Constraints Across Markets
Decreased Liquidity in Both Treasury and Swap Markets: High interest rate volatility and reduced dealer balance sheets (affected by post2008 regulations) mean there’s less willingness to provide liquidity in both Treasuries and swaps. This exacerbates price swings and makes it harder for large buyers and sellers to transact without moving the market significantly, further amplifying the price and yield volatility.
Hedge Fund and Speculative Positioning: Hedge funds, especially those running basis trades or other fixed income arbitrage strategies, face increased margin calls and may have to unwind positions rapidly, leading to more market dislocations and wider spreads.
In Summary
While the primary driver of the yield increase is the sheer volume of Treasury issuance coupled with diminished demand, other factors—such as liquidity constraints, election risks, and hedging costs—are exacerbating the impact. This creates a feedback loop, where rising yields reduce liquidity further, pushing spreads wider and causing more volatility. The swap spread widening, therefore, can be seen as a response to both rising Treasury yields and a premium on liquidity risk, with swap spreads acting as a proxy for the increasing cost of hedging and funding in an uncertain environment.
Potential Resolution Paths
Fed Intervention: If volatility continues unchecked, the Fed may need to consider addressing Treasury market liquidity concerns. Although direct intervention is unlikely in the near term, communication to calm markets or even adjustments to the QT pace could help stabilize conditions.
Investor Rebalancing: Once yields reach levels attractive enough for long term investors, we might see some stabilization as these buyers absorb the new issuance.
This situation is complex, and the solution may require a coordinated response or gradual stabilization as yields hit levels that entice sufficient private demand to offset issuance.
Final Thoughts
As we move into November, the U.S. election outcome, UK budget effects, and ongoing Fed guidance will be key themes for market participants. The crypto market continues to demonstrate resilience, with Bitcoin gaining traction as both an inflation hedge and a safe haven asset amid global uncertainties.
Stay tuned for more updates, and remember that well informed decisions are the best foundation for strong financial outcomes.
Regards,
James
