TheBRRR’s Thoughts

GM. Global equities are proving hesitant to start the year as new narratives take shape. Global economic leaders have converged in Davos for the World Economic Forum this week, and some of the speeches are both revealing and tangibly moving markets.

The main stories moving markets out of Davos are:

1) Chinese economic weakness
2) US Fed backpedaling on rate cut expectations

We’re covering these topics in-depth today, but first a quick update on the crypto markets:

The bitcoin ETFs have now traded for 4 days and bitcoin is down 15% since they opened.

The reasons for the sell off?

1) the FTX bankruptcy estate is selling remaining bitcoin into the news
2) Speculators exiting GBTC as the discount to NAV has closed

The rest of the crypto market has held up well despite the relentless bitcoin selling with ETH down less (10%) and Solana unchanged.

I suspect the selling will be short-lived and we’ll have more normal trading conditions by the end of the month.

Macro News

Chinese Official Gives Hawkish Speech At Davos

WHAT HAPPENED:

• Deflationary Streak: Chinese Premier Li Qiang, at the World Economic Forum, indicated Beijing’s reluctance to use massive stimulus measures despite facing the worst deflation since the Asian Financial Crisis.

• Economic Performance: China achieved its growth target of approximately 5% in 2023, but faced severe deflation and a significant drop in home prices, highlighting the property crisis.

• Policy Stance: Li emphasized avoiding short-term growth strategies that accrue long-term risks, a shift from previous debt-fueled growth policies, particularly in real estate.

WHY IT MATTERS:

• Investor Reaction: Following Li's remarks and economic data release, Chinese stocks fell sharply, with the Hang Seng China Enterprises Index experiencing its worst day since October 2022.

• Global Concerns: There's increasing skepticism from global investors regarding Beijing’s economic strategy, impacting investment sentiment towards what was once a vital market.

• Stimulus Strategy: With the Chinese government contemplating limited sovereign debt issuance, the focus is on how Beijing will balance stimulating the economy without exacerbating fiscal risks.

• Economic Transition: Despite growth in sectors like electric vehicles and solar panels, these industries haven't offset the downturn in property investment, highlighting the challenge of transitioning China's economic drivers.

ADDITIONAL INSIGHTS:

• Property Sector Woes: Real estate investment fell by 9.6% last year, with housing starts dropping 20.9%, indicating continued pressure on the sector.

• Monetary Policy: The People’s Bank of China’s cautious approach, including not cutting a key policy rate, contrasts with the aggressive measures some anticipated.

• Fiscal Policy Outlook: Analysts expect stronger fiscal policies in the coming months, though the magnitude and efficacy of these policies remain uncertain.
  
  Bloomberg 

Federal Reserve News

Fed Governor Dampens Rate Cut Hype

WHAT HAPPENED:

• Fed Governor Waller's Remarks: In a speech, Chris Waller, a member of the Federal Reserve Board of Governors, indicated a cautious approach to lowering interest rates, diverging from market expectations.

• Economic Data Influence: Waller highlighted the unexpected strength in the December jobs report and retail sales, suggesting a gradual approach to rate cuts.

• Market Reaction: Waller's comments led to a reduction in expectations for rate cuts in 2024, affecting the equity and bond markets. March rate-cut odds decreased, and overall 2024 rate-cut expectations fell.

WHY IT MATTERS:

• Investor Sentiment: The market had been anticipating more aggressive rate cuts from the Fed, but Waller's cautious stance led to a reassessment of these expectations.

• Policy Implications: The Federal Reserve's approach reflects a focus on data-dependent decisions and a reluctance to act hastily in adjusting monetary policy.

• Economic Outlook: Retail sales data and jobs reports indicate stronger economic conditions than expected, influencing the Fed's approach and market expectations.

• Financial Stability Risks: There is growing concern over financial stability as the Federal Reserve's quantitative tightening nears its expected end. The market is expressing concerns that the risk outlook could deteriorate quickly, leading to potential changes in the anticipation of rate cuts.

ADDITIONAL INSIGHTS:

• Quantitative Tightening and Financial Stability: As the Fed's quantitative tightening (QT) approaches Waller's projected endpoint, banks are likely to maintain higher reserve buffers, raising concerns about reserves becoming scarce.

• Rate Cut Timelines: While a March rate cut seems less likely, the market is now adjusting its focus towards potential cuts in subsequent months, like May, affecting fed funds futures spreads.
  

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The BRRR is meant for informational purposes only. It is not investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.