Tuesday's Markets Update (August 8, 2023)

09 Aug 2023 by rate3

On Tuesday, Moody's cut the ratings of several banks, causing major banking stock turmoils across the globe, especially in the EU, as the Nasdaq remained unchanged. Meanwhile, small business owners' optimism is up, while consumers' is down, pointing to a potential economic weakness ahead coupled with rising consumer indebtedness. On the crypto side, BTC surged on PayPal's launch of a stablecoin as the Fed announced a crypto-firm onboarding program.

Details:

Moody's downgraded credit ratings of 10 small to mid-sized US banks and warned it may downgrade major lenders. The rating agency cited declining profitability and asset quality, particularly in commercial real estate portfolios, as reasons for the downgrades.

The rating agency said that "many banks' Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital." Moody's also warned that "a mild recession looms and asset quality looks set to decline," particularly in some banks' commercial real estate portfolios.

Comment

Obviously, not everyone in the world is buying into the Fed's fantasies that everything is perfect in the economy. The Fed has been raising interest rates in an effort to combat inflation, but this is leading to slow economic growth and then straight forward to a recession. The Moody's downgrades suggest that these concerns are not unfounded, at all.

As a result, the political divide over the economy is likely to get worse in the months ahead. The Fed will need to tread carefully if it wants to avoid further alienating businesses and consumers.

NFIB Small Business Optimism Index increased to 91.9 for a third consecutive month in July 2023, but owners remain concerned about inflation and hiring. At the same time, American economic optimism (The IBD/TIPP Economic Optimism Index) hit a 12-month low of 40.3 in August 2023, as consumers remain concerned about inflation, also, and the pace of wage growth.

Comment

The difference in optimism between small business owners and consumers is likely due to the fact that small business owners are more focused on the immediate future, while consumers are more focused on the long-term. Small business owners are seeing strong sales and profits right now, so they are optimistic about the short-term outlook. However, consumers are worried about the long-term impact of inflation and the threat of a recession. Besides, one is for July, the other for August, so it might be just a catching-up issue.

It is possible that small business optimism will start to decline in the coming months, as the economic outlook worsens.

US consumer debt rose to a new record of $17.06 trillion in Q2 2023, up $16 billion from the previous quarter. Credit card balances increased by $45 billion, or 4.6%, to $1.03 trillion. Mortgage debt remained relatively stable at $12.01 trillion. New mortgage originations increased to $393 billion, up from $324 billion in the previous quarter. Student loan balances declined by $35 billion to $1.57 trillion. Credit card delinquencies are at an 11-year high.

Comment

The increase in credit card balances suggests that Americans are using credit cards to finance everyday expenses. This could lead to issues down the road if consumers are unable to repay their debts. it is accompanied, by the increase in credit card delinquencies, showing that more people are struggling to make their credit card payments.

On the other hand, the decline in student loan balances might be attributed to that less loans are originated as people take less of those faced by increased rates. The decline in mortgage suggests that the housing market is cooling off. However, the increase in new mortgage originations shows that some people are still taking on new debt to buy homes.

Overall, those numbers demonstrate that the surprising resilience of the economy can be also attributed to continuing consumer spending exuberance, supported by increasing wages (although at a slower rate).

Crypto

The Fed announced a new supervisory program for financial institutions that engage in crypto-related activities. The program will focus on crypto, blockchain technology, and non-bank technology partnerships. State member banks must obtain written approval from the Fed before issuing, holding, or transacting with dollar tokens.
Comment

The Fed's decision to launch a new supervisory program instead of a full ban on cryptocurrencies is a positive development for the industry, of course. It shows that the Fed is willing to acknowledge the potential benefits of cryptocurrencies, and it is not trying to shut down the industry altogether.

This positive news may explain why the crypto market is up, while stocks are down mostly. Investors may be viewing the Fed's decision as a sign that cryptocurrencies are here to stay, and they are betting that the industry will continue to grow in the future.

On the other hand, it creates unnecessary red tape and bureaucracy, which will make it more difficult for businesses to operate in the space. This will likely lead to higher costs for businesses and consumers, and it could stifle innovation.

The Fed's program is also shrouded in the rhetoric of "consumer protection," but this is a smokescreen. The real goal of the program is to give the Fed control over the cryptocurrency industry. The Fed is worried about the potential for cryptocurrencies to disrupt the traditional financial system, and it wants to be able to regulate them in order to protect its own interests.

The Fed's program is a clear example of government overreach. It is an attempt by the government to stifle innovation and competition in the financial sector. The program is also likely to be inefficient and corrupt. Bureaucrats are not experts in the cryptocurrency industry, and they are likely to make decisions that are not in the best interests of consumers.

PayPal is set to launch its own stablecoin—a digital currency linked to the US dollar. With over 375 million users, this has the potential to boost company's purchasing dynamics.
Comment

PayPal's move to launch its own stablecoin is a significant development in the world of digital finance. It signals PayPal's commitment to the space and its willingness to take on the risks and challenges of developing a new form of currency.

The crypto markets have reacted over-positively to the news. However, big corporations have a history of attracting the attention of politicians. We all know what it leads too, don't we?

There is also the risk that PayPal's stablecoin could distract customers from truly decentralized forms of payments. Decentralized payments are based on blockchain technology and do not rely on a central authority like PayPal. This makes them more secure and resistant to censorship. However, they are also more complex and difficult to use.

Currencies

Brazil: The Brazilian Real weakened against the US Dollar (4.9 per USD) as markets digested minutes from the Brazilian Central Bank's meeting, which showed that the bank was less hawkish than expected. The Real is still up 8% against the Dollar this year, thanks to strong commodity exports and a dovish central bank.

Comment:

The Brazilian Real was falling all throughout the 1990s to the US Dollar (from below 1.0 to around 4), but then reversed drastically in September 2002 and then strengthened during the next 10 years (until July 2011) from 4 to around 1.5. Then, again, the Real started to weaken compared to the US Dollar, reaching around 5.8 in 2020. Then again, it reversed on Fed aggressive money printing and got lower to 4.9 in August 2023.

There are a number of factors that contributed to the Brazilian Real's decline in the 1990s. One factor was the country's high inflation rate. Inflation in Brazil reached a high of 5,910% in 1990, and it remained high throughout the decade. This high inflation rate made the Real less attractive to investors, and it led to a decline in its value.

Another factor that contributed to the Real's decline was the country's large budget deficit. The Brazilian government was running a large budget deficit in the 1990s, and this put pressure on the value of the Real. To finance its budget deficit, the Brazilian government was forced to borrow money from foreign investors. This borrowing put upward pressure on interest rates in Brazil, which made it more expensive for businesses to borrow money and invest. This, in turn, led to slower economic growth, which further weakened the value of the Real.

The Brazilian Real began to strengthen in September 2002 for a number of reasons. One reason was the election of Luiz Inácio Lula da Silva as president. Lula promised to reduce inflation and to improve the economy, and his election led to an increase in investor confidence in Brazil. This, in turn, led to a stronger Real.

Another reason for the Real's strengthening was the rise in commodity prices. Brazil is a major exporter of commodities, and the rise in commodity prices in the early 2000s led to a surge in export earnings for Brazil. This surge in export earnings helped to strengthen the Real.

The Real began to weaken again in 2011 when the global economy was still recovering from the aftermath of the 2008 financial crisis. Slow growth and uncertainty in major economies, including the United States and Europe, led investors to seek safer assets, such as the US Dollar. This increased demand for the Dollar put downward pressure on many emerging market currencies, including the Brazilian Real.

The Real's decline reversed only in August 2020 due to the Fed's aggressive money printing. The Fed began to print money in an effort to stimulate the US economy, and this led to a decline in the value of the US Dollar. The decline in the US Dollar made the Real more attractive to investors, and it led to a strengthening of the Real.

Macroeconomics

Russian budget deficit widened to a record 2.817 trillion rubles in the first 7 months of 2023 from a surplus of 557 billion rubles a year ago. Revenues fell 7.9% to 14.5 trillion rubles, oil and gas revenues plunged 41.4% to 4.2 trillion rubles, while expenses soared 14% to 17.3 trillion rubles. The government is forced to raise borrowing and tap rainy-day fund to cover the deficit.

Comment

The sanctions and a slowing Chinese economy have caused a decline in oil and gas revenues, which are a major source of government income. The war is a major drain on the budget, of course. The government is also providing subsidies to businesses and individuals to offset the impact of the sanctions. The widening budget deficit and the rise in government spending are unsustainable in the long term. The government will need to find ways to reduce its spending or increase its revenues.