Tuesday's Markets Update (August 15, 2023)

16 Aug 2023 by rate3

On Tuesday, the Nasdaq fell on better-than-expected retail sales, concerns about China's slowdown, and Fitch's hints of a rating downgrade for major banks. Despite a sudden drop in the NY Manufacturing and Housing Market Index, traders ignored looming recession worries and bet on the Fed continuing to tighten monetary policy. Bitcoin remained bearishly hovering above 29K. In other news, Jacobi Asset Management launched a "first Bitcoin ETF in Europe" gimmick, and crypto miners announced a new lobbying group in DC.

Details

Retail sales in the US rose 0.7% in July, beating expectations and marking a fourth consecutive increase. Sales were boosted by Amazon's Prime Day and strong spending in other categories, such as food services and clothing. However, sales fell at furniture stores and electronics retailers. Excluding autos, gas, building materials and food services, retail sales surged 1%.

Comments

Despite all efforts by the Boomer-infected Fed to kill the demand side of the economy, consumers are demonstrating extraordinary stubbornness, which infuriates the elders-in-charge who expect total obedience. When they say "drop your consumption level," all we have the right to do is ask "how low?" That is how they think, and the fact that consumers do not obey only means more repressions (aka rate hikes) ahead.

Manufacturing activity in New York state declined in August, as the NY Empire State Manufacturing Index sank to -19, below market forecasts of -1.

Comment

The latest economic data suggests that the economy may be starting to crackle, but economic participants have not yet seemed to believe it. Labor market indicators point to relatively steady employment levels, but a shorter average workweek. This suggests that companies are reluctant to lay off workers, but there are simply fewer and fewer jobs available. How long can this last? The current outlook is for six months, and it is possible that the economy could start to deteriorate within that period.

Here are some additional statistical data that support this view:

The unemployment rate has remained relatively low in recent months, but the number of job openings has fallen sharply.
The average workweek has declined by 0.2 hours per week since the beginning of the year.
Manufacturing output has declined for three consecutive months.
It is important to note that the economy is still growing, but it is growing at a slower pace than in recent years. If the trend of declining employment and job openings continues, it is possible that the economy could enter a recession in the next six months.

The NAHB Housing Market Index unexpectedly fell to 50 in August, down from 56 in July. This was the lowest reading since June 2022 and well below expectations. The decline was driven by a drop in buyer traffic and expectations for future sales.

Comment

No matter how many times economic professionals, including absolute majority of non-partisan economists, repeat that a major overhaul of the real estate legislation is urgently required to allow a massive program of construction of much cheaper and technologically advanced housing units all across the country, the Boomer-heavy bureaucratic political cohort completely ignores it because of their own entrenched economic interests.

Boomers own almost all of the real estate in the country, and its ridiculous overpricing, coupled with tremendous barriers to new construction, is simply too profitable for them to let that be changed any time soon. Meanwhile, more and more hard-working families are finding themselves in an absolutely dire situation, with both galloping mortgage rates and an accelerating price of housing. What can go wrong, right?

Crypto

Jacobi Asset Management, a London-based digital asset management firm, claimed that it launched the first Bitcoin ETF in Europe on Euronext Amsterdam on August 15 as Bitcoin ETF has yet been approved for trading in the U.S.
Comment

That is a marketing gimmick.

The European Union prohibits the use of ETFs for single assets like Bitcoin or gold. This is because ETFs are regulated as collective investment schemes, and EU regulations require that collective investment schemes invest in a diversified portfolio of assets.

Guernsey, where the product is registered, is not a member of the EU, so it is not subject to these regulations. However, there are Bitcoin ETPs (Exchange Traded Products) that have been available in the EU for several years. These ETPs are structured as debt securities, and they mirror Bitcoin's performance.

In other words, ETFs are not allowed to invest in a single asset like Bitcoin because they are considered to be too risky. However, ETPs are allowed to invest in Bitcoin because they are structured as debt securities, which are considered to be less risky.

The terms ETF and ETP are often used interchangeably, but there is a technical difference between the two in the EU. An ETF is a type of ETP, but not all ETPs are ETFs.

An ETF is a fund that tracks an underlying index, such as the S&P 500 or the FTSE 100. ETFs are traded on exchanges just like stocks, and they can be bought and sold throughout the day. ETFs are typically very liquid, meaning that they can be bought and sold easily without affecting the price too much.

An ETP is a broader term that encompasses all exchange-traded products, including ETFs, ETCs (exchange-traded commodities), and ETNs (exchange-traded notes). ETCs track the price of a commodity, such as gold or oil, and ETNs track the performance of an underlying index, but they are not backed by any assets. This means that if the issuer of an ETN defaults, investors could lose all of their money.

In the EU, ETFs are regulated under the UCITS (Undertakings for Collective Investment in Transferable Securities) Directive. This directive sets out a number of requirements for ETFs, such as diversification requirements and liquidity standards. ETPs that are not UCITS compliant are not subject to the same requirements, which can make them more risky for investors.

In general, ETFs are considered to be a more conservative investment than ETPs. This is because ETFs are backed by assets and they are regulated under UCITS. However, ETFs may not be as suitable for investors who are looking for exposure to a specific commodity or index. In these cases, an ETP may be a better option.

Crypto miners are forming a new lobbying group called the Digital Energy Council to advocate for their interests in the United States. The group will focus on policies that promote responsible and sustainable energy development, grid resilience, and national security.
Comment

That's all nice, and it is understood that it is a gesture of self-defense. The White House is calling for a punitive 30% excise tax on mining operations for the "harms they impose on society." However, this group does not have any first-rate names from our space backing them up on medias. Additionally, overall political support for crypto is now based on a strong antipathy of one side of the aisle to another, rather than on reasons. Nonetheless, this is better than nothing.

Macroeconomics

The cost of shipping goods worldwide rose on Tuesday (~1130), with the Baltic Exchange's main sea freight index reaching its highest level in seven weeks. The capesize index, which tracks vessels that transport iron ore and coal, rose 1.7%, while the panamax index, which tracks ships that carry coal or grain, rose 3.4%. The supramax index also rose 3.6%.

Overall, the index has remained in a narrow corridor since June, indicating an absence of notable economic growth around the world.

Comment

The Baltic Dry Index (BDI) is a shipping index that tracks the cost of shipping dry bulk commodities, such as iron ore, coal, and grain. The index is calculated based on the average freight rates of a basket of ships (23 different shipping routes).

Why did the Baltic Exchange Dry Index reach its maximum of around 12,000 during the mortgage debt crisis of 2007-2009, even though this had nothing to do with the costs of shipments, but only increased to around 6,000 during the 2020 worldwide lockdowns and major supply chain disruptions?

There are a few reasons:

The global economy was growing rapidly at the time. This led to increased demand for dry bulk commodities, which in turn drove up shipping rates.
There was a shortage of ships available to transport goods. This was due to a number of factors, including the global economic boom and the closure of some shipyards.
Speculators were betting on the price of shipping rates to continue to rise. This artificially inflated the market and led to even higher prices.
In contrast, the BDI only reached a peak of around 6,000 in 2020. This was despite the fact that the lockdowns caused major disruptions to global supply chains and led to a surge in demand for shipping services.

There are a few reasons for this discrepancy.

The global economy was not growing as rapidly in 2020 as it was in 2007-2009. This led to a decrease in demand for dry bulk commodities, which in turn drove down shipping rates.
There was an increase in the number of ships available to transport goods. This was due to the fact that some shipyards reopened and new ships were delivered.
Speculators were less active in the market in 2020. This was due to the uncertainty caused by the pandemic.
In addition, the lockdowns also led to some temporary measures that reduced the need for shipping, such as the closure of factories and the reduction in travel. These measures also contributed to the lower BDI in 2020.

Overall, the BDI is a complex, very volatile index that is influenced by a number of factors.