Ignoring Risk, Investors Still Buying US Junk Debt With Weak Protections

Forex

Bond

Summary:

The bond’s covenants would allow the company to potentially move valuable assets to a different entity later and raise even more money, putting the investors in the bond at a disadvantage, the research firm, Covenant Review, wrote in a review seen by Reuters.

When U.S. based construction material supplier Wilsonart issued a junk bond to raise $500 million to fund an acquisition this summer, a research firm warned potential investors that the terms of the deal offered them weak protections.

The warning came against the backdrop of growing worries in credit markets after an increasing number of companies have used similar weaknesses to borrow more against the same assets, in a practice euphemistically called a liability management exercise.

That has favored some creditors over others, a result that’s come to be known as creditor-on-creditor violence. Things have become so bad this year that some creditors have been banding together to fight back.

So, what did investors do in the case of the Wilsonart offering after the warning? They lapped it up.

Wilsonart did not respond immediately to a request for comment.

Wilsonart’s ability to raise the money highlights a paradoxical trend in U.S. credit markets: while investors are suffering the consequences of weak covenants, they are letting a vast majority of companies sell them new paper with the same flaws without significant pushback, credit market bankers, lawyers and investors said.

The reason, these market sources said, is lack of enough supply of junk-rated bonds and the need to lock in higher yields before the Fed begins to cut interest rates as well as diverging interests between the biggest creditors and small investors.

"Investors have a tough choice to make: Do I sit in cash and not buy a bond or loan because of looser documentation and thereby risk hitting my return hurdles," said Peter Toal, global head of fixed income syndicate at Barclays. Toal said the lack of supply was in part because most of the borrowing now has been to refinance old debt.

Several bankers and analysts estimated 90% of high-yield bonds and loans that are coming to the market now are being sold with weak investor protections despite growing concern that stressed companies were taking advantage of them to raise fresh funds to repay maturing debt or simply remain solvent.

More than 90% of the Morningstar LSTA Leveraged Loan Index is now "covenant-lite" or lacking maintenance covenants, a metric that has increased sharply since the financial crisis of 2008, a Barclays research report shows.

Liability management exercises (LMEs) come in many forms, but the most common tactic is for the company to transfer valuable assets into a subsidiary. That subsidiary then raises debt in a side deal from some old and new investors. The cash is then forwarded back to the parent as an intercompany loan.

The side deal gives the new creditors a priority claim on the company’s assets in case of a bankruptcy, pushing existing investors down the line, increasing their potential losses in the event of default.

High-yield bonds and loans bought by investors make their way into funds that are then sold to retail and large institutional investors who, as a result of weaker covenant protections and covert LMEs, may end up facing losses or underperformance of their investments.

DISTRESSED EXCHANGES

So far in 2024, 28 companies have completed a distressed exchange, totaling $35 billion, the second-largest total on record, according to JPMorgan. Their numbers are expected to only grow.

Moody’s has said some 13.5% or $400 billion of the more than $3 trillion junk-debt rated by it is at a high risk of default over the next 12 months, with a bulk structured with little or no guardrails to prevent liability management exercises.

Investors are being forced to consider ways to improve their claims on a company’s assets. Many creditors have been entering into cooperation agreements, or private legal pacts, to increase their ability to negotiate and keep rivals from signing side deals without their knowledge, bankers and lawyers said.

Steven Oh, global head of credit and fixed income at asset management firm Pinebridge Investments, said investors were caught in a "classic prisoner's dilemma."

“Do the side trade with the company and enhance your own interests or align with others and prevent someone else from doing a deal with the company," Oh said.

In some cases, investors are also pushing back on the documentation, refusing to buy new debt unless the borrower agrees to include clauses that stop it from short-changing existing creditors. Moody’s noted in April that Thryv and two other borrowers faced such pushback.

Nevertheless, the market sources said such pushback was still rare. It was again on display in early September, when Clayton, Dubilier & Rice (CD&R) through Fiesta Purchaser marketed a $400 million junk-rated bond.

Covenant Review again issued a market alert urging investors to reject the legal provisions included in it as it would take the company’s ability to issue debt through a subsidiary to a “nonsensical extreme.”

A few days later it pointed out the same flaw in a new $700 million bond by Focus Financial Partners but after both bonds were subsequently upsized and priced on September 9 and 10, it noted the language may have been changed.

CD&R declined to comment and Focus Financial did not respond to a request for comment.

Scott Josefsberg, Covenant Review’s head of high-yield research, said the changes showed if investors are willing to push back hard, covenant protection can be improved but it was a long road ahead to a major overhaul.

"A vast majority of bonds and loans have no guardrails against LMEs, and they are easily sold," Josefsberg said.

Source: Theedgemarkets

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Warren Takunda

Economic

The dollar ceded some of its overnight gains on Wednesday while Asian stocks struggled as traders weighed the odds of a super-sized Federal Reserve interest rate cut later in the day.

The U.S. currency dropped back sharply against the yen, handing back about half of its rally from Tuesday, when unexpectedly robust U.S. retail sales data was taken as weakening the case for aggressive Fed easing.

However, short-term U.S. bond yields ticked slightly higher.

The chances of the Fed kicking off its easing cycle with a super-sized cut of 50 basis points (bps) oscillated in Asia, retreating to 63% early in the day from 67% around the same time on Tuesday, before stabilising around 65%, according to LSEG data.

Japan's Nikkei stock average climbed as much as 1.3% early on in reaction to overnight weakness in the yen, but pared those gains to just 0.23% as of 0526 GMT as the currency rebounded.

China's blue chips slipped 0.18% after coming back online following a holiday-extended weekend, and Taiwan also returned from a day off to tumble 1%. Australia's benchmark sagged 0.1%.

MSCI's broadest index of Asia-Pacific shares outside Japanslid 0.27%.

Hong Kong and South Korea were among major markets closed for holidays.

Wall Street finished nearly unchanged on Tuesday, failing to sustain early momentum that pushed the S&P 500 and Dow to record intraday highs. S&P 500 futures pointed 0.06% higher on Wednesday.

Pan-European STOXX 50 futures were weaker though, down 0.19%.

"The (U.S.) price action conveys the significant inflection point markets confront," said Kyle Rodda, senior financial market analyst at Capital.com.

"If the Fed nails it at this meeting, the bull market could charge on. If it doesn't, then it could signal a high water mark in this cycle."

The dollar dropped 0.67% to 141.365 yen , although that followed a 1.26% surge overnight.

The euro added 0.05% to $1.1119. Sterling was steady at $1.3158.

At the same time, two-year U.S. Treasury yields rose slightly to stand at 3.5962%, extending Tuesday's advance.

Commonwealth Bank of Australia analyst Kristina Clifton expects a quarter-point rate reduction from the Fed, "because history shows that the FOMC needs a good reason to start their cutting cycle with more than a 25 bps cut."

But in the event of a more aggressive easing, the dollar's reaction could vary dramatically, she said.

"A 50 bps cut that scares markets about U.S. economic prospects could increase the USD because it is a safe haven currency," Clifton said. "However, a 50 bps cut that eases concerns about U.S. economic prospects could undermine the USD."

Meanwhile, gold struggled to find its feet on Wednesday, slipping 0.1% to $2,567 per ounce after retreating from an all-time high in the previous session.

Crude oil also pulled back after gaining about $1 a barrel on Wednesday amid escalating tensions around the Middle East.

Militant group Hezbollah vowed retaliation against Israel after pagers detonated across Lebanon on Tuesday, killing at least eight people and wounding nearly 3,000 others.

Meanwhile, the UN's Libya mission said factions did not reach a final agreement in talks aimed at resolving the central bank crisis, which has slashed oil output and exports.

U.S. crude futures declined 49 cents to $70.70 in the latest session, and Brent crude futures lost 47 cents to $73.23.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

WELLS FARGO

Economic

Why Is Accurately Predicting Monetary Policy Pivots Important?

Part three of the series presented four-quarters-out probabilities of the three growth scenarios of soft-landing, stagflation and recession. This installment develops a framework to employ those probabilities to predict monetary policy decisions. We follow two different paths to gauge the usefulness of our toolkit. The first method predicts monetary policy pivots, and the second approach forecasts the near-term level of the fed funds rate (a topic we’ll cover in the next installment).

We believe accurately predicting the timing of a policy pivot compliments the generation of the future potential path of the fed funds rate. By predicting the timing of a policy pivot, decision makers could anticipate the potential duration of the current stance, at least in theory. The prediction for the fed funds rate would shed light on how many rate cuts (a relevant discussion for the current cycle) are appropriate in the near future.

In our view, accurately predicting periods of monetary policy pivots is vital, as a rate cut that comes too late or too soon (a widely discussed topic in the present cycle) would be harmful to the economy and damage the FOMC’s reputation. Members of the FOMC have repeatedly acknowledged that their goal is to avoid a mistimed rate cut, whether it be too soon or too late. Some analysts suggested the March 2022 rate hike was too late, as the FOMC misjudged higher inflation as “transitory” and waited too long to act. By the same token, significant changes in the FOMC’s SEP (June 2023 vs. June 2024) made some analysts worry that the next policy pivot (which is expected to be a rate cut) may be mistimed as well.

A New Framework To Quantify Episodes of Monetary Policy Pivots

We develop a new framework to quantify episodes of monetary policy pivots and present a probit regression to predict the probability of a policy pivot during the next two quarters. At present, the FOMC regularly meets eight times a year, with four meetings in the first half and four in the second half. Thereby, we set a two-quarters-out forecast horizon to predict the chances of a policy pivot during the next four meetings. Given the volatile nature of the economy during the post-pandemic era, a one-year-out prediction for a policy pivot would suffer lower accuracy, as the rapidly changing nature of potential risks would dictate a faster response from the FOMC, all else equal.

We define a policy pivot as a change in the FOMC’s rate decision compared to the past few meetings. There are two key elements in our definition of a policy pivot. The first is that the FOMC has a different rate decision than the past few meetings. The second condition is that the FOMC keep the stance for the next few meetings, at least. There are three rate decisions that have been utilized by the FOMC, at least in the post-1990 era. The FOMC either (a) raises the target of the fed funds rate, (b) keeps the rate unchanged or (c) reduces the rate (Figure 1).

Historically, once the FOMC adopts a policy stance (a rate hiking stance, for example), it keeps that stance for at least several meetings. In the post-1990 era, the shortest duration of a policy stance was about six months, which occurred in 1995. The FOMC raised the fed funds rate to 6.00% from 5.50% in February 1995, and then kept that rate (a rate pause) until its June meeting. The FOMC reduced the rate by 25 bps in July 1995.

We use these conditions to identify periods of policy pivots. The last policy pivot date was in August 2023, as that was the first month after the fed funds rate peaked at 5.50% in July 2023. After 13 consecutive months, the fed funds rate is still at 5.50%. Essentially, August 2023 marks the end of the rate hike stance that started in March 2022. If the FOMC cuts rates in September 2024, then that would be the next policy pivot, as it would be the start of a rate-cut cycle (a policy normalization stance). Of course, this is assuming the FOMC will adopt a rate-cut stance for the near future.

Episodes of the Monetary Policy Pivot in the Post-1990 Era

Our framework estimated that there are 26 episodes of policy pivots in the post-1990 period (for detail see Table 1). We concentrated on the post-1990 era, where the FOMC’s communications about policy decisions are more transparent and shared with the public in a timely matter. One example of the FOMC’s communications can be seen in the fed funds rate series, as the post-1990 data are smoother, and policy stances (from rate cuts to policy pauses, for example) can be identified with a reasonable confidence. (Figure 1)

By our definition, there are four types of policy pivots: (1) pause-to-cut, which is the start of a rate-cut stance, (2) cut-to-pause, which is the end of a rate-cut stance, (3) pause-to-hike, which is the start of a rate-hike stance and (4) hike-to-pause, which is the end of a rate-hike stance. There are eight episodes of pause-to-cut, six of cut-to-pause, seven of pause-to-hike and five of hike-to-pause. Most policy pivots in the post-1990 era included a pause stance (11 pivots are either cut-to-pause or hike-to-pause), while eight took an easing/rate-cut stance and seven took a tightening/rate-hike stance. Our forecast horizon is only two quarters out, therefore the type of policy pivot would be known to a forecaster. Thus, we only concentrate on predicting the timing of a policy pivot.

A Probit Approach To Predict the Probability of Monetary Policy Pivots

The major benefit of identifying periods of policy pivots is that we can build a regression to generate the probability of a policy pivot in the near future. For example, we identifed 26 episodes of policy pivots in the 1990-2024:Q2 period, and then we created a dummy variable where a value of one represents a pivot occurring and zero is otherwise. Using the dummy variable, a probit regression is developed to predict the two-quarters-out probability of a policy pivot. Part III of the series presented four-quarters-out probabilities of the three growth scenarios of soft-landing, stagflation and recession. We employ those probabilities as predictors of the probit regression.

Figure 2 shows the two-quarter-out probability of a policy pivot, and the bars represent actual periods of policy pivots (based on our framework; see Table 1 for detail about those pivots). Using the average probability of 35% as a threshold (dotted line in Figure 2), the framework accurately predicted all episodes of policy pivots in the post-1990 era.

As seen in Figure 2, the probability of a policy pivot started trending upward in Q2-2021 and breached the threshold in Q3-2021. The framework suggested starting a rate hike cycle sooner than Q1-2022, with a possibility of a rate hike in 2021. Neither the FOMC nor the Blue Chip consensus provide an explicit probability of a policy pivot, but the FOMC’s SEP and the Blue Chip consensus did not predict a rate hike in 2021 (i.e., no policy pivot in 2021). However, both forecasts did predict rate hikes in 2022. In retrospect, our framework would have helped decision makers determine appropriate timing for the rate-hike cycle back in 2021-2022.

The policy pivot probability jumped in Q2-2023 (from 34% to 42%), and then peaked in Q3-2023, which is consistent with the most recent policy pivot of Q3-2023—a hike-to-pause pivot. Q4-2023 and Q1-2024 noted a declining trend (but still above the threshold line) which may have cautioned analysts that a policy pivot to rate cuts were potentially further away. The latest probability (Q2-2024) of 43% indicates that a rate cut cycle may start soon (within the next two quarters), which is consistent with financial markets participants’ expectations for the upcoming September FOMC meeting. Given the historical accuracy of our framework, we believe the toolkit would provide useful insights for decision makers, as it can be updated in real time to gauge the likely duration of the upcoming easing cycle.

A Policy Pivot Is Most Likely, but What About the Pace/Duration of the Easing Cycle?

In summary, the latest probability (Q2-2024) of 43% indicates that a rate cut cycle may start soon (within the next two quarters), which is consistent with both the FOMC and Blue Chip forecasts, as they are also predicting a policy pivot in 2024.

FOMC members provide their near-term (as well as long-run) fed funds rate forecast. The June 2024 SEP suggests one 25 bps rate cut in 2024 and four more cuts throughout 2025. The FOMC employs its fed funds forecast (along with their other forecasts) to signal its near-term policy stance. In the short run, significant changes in the forecast would send undesirable signals and raise questions about the accuracy of the fed funds forecast. Therefore, in our view, accurately predicting the near-term path of the fed funds rate is vital for effective policymaking as well as policy communication. The next installment of the series will present a new approach to predict the fed funds rate two-quarters-out (up to four FOMC meetings ahead).

Table 1

Source: Federal Reserve Board and Wells Fargo Economics

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Banque de France

Economic

The price of gold is mainly determined by fluctuations in demand

Gold is both a commodity and a financial asset whose price is determined by supply and demand: supply depends on the volume of production and recycling, while demand is contingent on the demand for physical gold (jewellery and technology) and financial gold, which is a function of investor appetite for gold over other assets.

Supply is mainly split between mining production (75% of supply in 2023, source: World Gold Council) and recycling (25%). Mining production is relatively constant from one year to the next, and the cost of producing an ounce of gold is estimated at USD 1,300, which is the de facto floor price for gold. The share of recycling is increasing (up 9% in 2023), boosted by rising prices, but remains modest. - Demand is mainly driven by the jewellery sector (49%), followed by central banks (23%), financial investors (21%) and the electronics sector (7%) – which relies on gold as a key input. China and India account for the bulk of jewellery demand (57%), with America and Europe playing a more marginal role (i.e. 21% combined).

Overall trends in these components of supply and demand have been relatively stable since 2018 (with the exception of 2020, due to the negative demand shock resulting from the pandemic). Supply is increasing slowly, mainly thanks to the build-up in gold recycling while the growth in demand is mainly attributable to emerging market central banks.

The price of gold is a function of US interest rates and inflation, as well as risk aversion

Gold is a non-yielding asset, unlike equities (dividends) and bonds (interest), and has no counterparty risk (i.e. there is no risk of issuer default when gold is physically held); its price is a function of several factors.

Bullish demand factors:

When geopolitical risks increase (as is currently the case with the war in Ukraine and tensions in the Middle East), and more generally when risk aversion increases in the financial markets, gold is much sought after.

Gold is generally seen as a hedge against inflation risk, although it is only an imperfect hedge in reality. While the correlation between the price of gold and inflation was sometimes positive from the mid-1970s through to the end of the 1980s, it was nil or even negative in the 1990s and 2000s, in a context of global disinflation. The correlation between the price of gold and the general level of prices is only really apparent over the long term (10-15 years). Nevertheless, in the short term, a resurgence of inflationary fears or of inflation itself generally triggers an increase in the price of gold.

The impact of these two factors is amplified by the increasing popularity of gold-backed financial products, such as certain exchange-traded funds (ETFs), which have made it easier for both retail and institutional investors to access gold. This consequently increased demand for physical gold (as these ETFs are backed by gold stocks), thereby driving up the price.

Purchases by emerging economy central banks, reflecting a form of diversification away from dollar-denominated assets, either for macroeconomic or geopolitical reasons (‘dedollarisation’).

Bearish demand factors:

Higher real interest rates increase the opportunity cost of gold, which yields no return. As a result, during Fed tightening cycles, gold tends to depreciate in value, although this trend has not been apparent recently (see Chart 2).

A stronger dollar, which makes gold more expensive for buyers whose reference currency is not the dollar. A strong dollar also reflects confidence in the US economy, making gold less attractive as a secure asset.

Generally speaking, risk appetite is negatively correlated with gold, as investors favour exposure to risky assets such as equities and corporate bonds over defensive assets like cash, government bonds and gold.

The increase in gold prices since 2021 appears to have been driven mainly by emerging market central bank buying

Between March and August 2024, gold broke its all-time record price in nominal terms every month, breaking the USD 2,500/ounce threshold in August. When adjusted for inflation, the gold price (see Chart 3) is close to the 1980 peak caused by the oil crisis inflationary shock, and the 2011 peak caused by the sovereign debt crisis in the euro area. It has already passed the peak caused by the 2020 pandemic-related shock.

During the recent period, a number of factors traditionally favourable to a fall in the price of gold have come together:

From 2022 on, the dollar strengthened as a result of the strong US recovery, which led to a sharp rise in inflation, forcing the Fed to act quickly to tighten its monetary policy.

The Fed's tightening cycle has helped drive up real interest rates, which have been back in positive territory since mid-2023, but had previously been negative since 2019 (see Chart 2).

While geopolitical risks have increased globally, risk aversion on the financial markets as measured by equity volatility is at a low point (with the exception of the volatility spike on 5 August 2024, which rapidly dissipated).

Global outflows in ETFs invested in gold were trending downward in 2023 and through to May 2024.

Despite this context, the price of gold has risen sharply, invalidating the traditionally strong correlation between the price of gold and ETF outflows, or with US real interest rates since the start of the war in Ukraine (see Chart 3). This jump appears to be justified by investors buying for non-financial reasons, motivated by geopolitical tensions.

According to World Gold Council data, emerging market central banks, led by Russia and China, have been the principal buyers on the gold market (see Chart 4). Financial sanctions (often using the dollar as an instrument) and the resurgence of geopolitical tensions may encourage some emerging market central banks to diversify their foreign exchange reserves into gold and away from dollar-denominated assets. Although the dollar remains the dominant currency, its share in central bank reserves has fallen to 59%, a 25-year low (IMF). Overall, demand for gold from central banks has doubled over the last two years (from 30 March 2021 to 30 March 2023) compared with previous years, which has had a major impact on the price.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Cryptocurrency

Bitcoin should regain $64,000 “very quickly” as the United States Federal Reserve lowers interest rates.

In its latest monthly update report on Sept. 17, quantitative Bitcoin and digital asset fund Capriole Investments said that BTC price action was at a key crossroads.

Capriole founder “would not be surprised” at $64K BTC price

Bitcoin stands to benefit exponentially from macroeconomic shifts into Q4, itself the market’s best quarter, Capriole Investments founder Charles Edwards says.

While barely moving in the past month, BTC/USD is now primed to resume classic bull market moves should the Fed drop interest rates at its Sept. 18 meeting.

“This marks the start of a new dovish Fed policy regime, the first significant change since late 2021, when the Fed notified of their hawkish regime shift and which saw rates rise from 0 to 5.5% in 18 short months,” the report stated.

“This Hawkish regime also coincided with Bitcoin’s collapse from $60K to $15K. We are now at the start of the exact opposite regime.”

Barring any “bearish surprises” from the Fed, BTC/USD thus has $64,000 in its sights, having preserved weekly support, as shown by data from Cointelegraph Markets Pro and TradingView.

“While ugly, and still in a trend of lower highs and lower lows (net “bearish”), weekly support is responding well at $58K today. A weekly close above $64K would end the 7 month sequence of lower highs and likely see us travel back to range high ($70K) with haste, and probably beyond. Nonetheless, the Technicals picture is mixed at best, and bearish at worst, until the range (and monthly resistance at $60K) is reclaimed,” Edwards continued.

“Based on the current response to the Weekly $58K level, and given the major Fed event tomorrow, I would not be surprised to see that level taken very quickly to the upside, provided no bearish surprises from Chairman Powell tomorrow.” Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_1

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_1

BTC/USD 1-week chart. Source: TradingView

Bitcoin onchain supply data too bearish

The report cast aside concerns over shifting BTC supply trends, arguing that new phenomena such as the US spot Bitcoin exchange-traded funds (ETFs) had skewed perspectives.

“2024 has seen massive capital re-distribution as a result of the ETF launch and Mt Gox. This capital movement has mischaracterized many on-chain metrics and told us a false narrative,” Edwards argued.

Going further still, the findings suggested that data covering supply ownership by time spent dormant — metrics which give rise to the popular “long-term holder” and “short-term holder” cohorts — are unreliable in 2024.

“In short, the last 6 months has seen on-chain metrics be massively ‘manipulated’ by huge supply re-classification, which on net did not see any significant organic long-term holder selling. This resulted in many on-chain metrics seeing extremely bearish readings comparable with prior cycle tops, as we discussed 2 months ago in Update 52,” the report read.

“This means that any on-chain metrics with ‘long-term holder’ data, or ‘supply last active more than XX months/years’ cannot be trusted in 2024. Yet these classifications form the basis of a significant portion of valuable on-chain metrics.” Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_2

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_2

BTC supply data (screenshot). Source: Capriole Investments

Edwards instead sees a bullish mid-term picture for BTC/USD.

“With Bitcoin trading within 2% of our last update, our view from Issue 53 that we are at a major pivot point remains,” he concluded.

He referenced the timing around Fed policy easing — Q4 is traditionally when Bitcoin puts in some of its best performance, while BTC/USD is also due to end its standard post-halving consolidation period.

“What lies ahead? Seasonally we have the best two quarters just 2 weeks away from us, which are also within the best 12-18 month window to be allocated to Bitcoin every 4 years, and at the start of a dovish Fed multi-year regime which will see growing liquidity injected into risk assets,” he wrote.

“We also have Gold paving consistent new all time highs since its break out a few months ago. You couldn’t ask for more favorable conditions for Bitcoin.” Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_3

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_3

BTC/USD quarterly returns (screenshot). Source: Capriole Investments

Source: Cointelegraph

Risk Warnings and Disclaimers

Add to Favorites

SAXO

Commodity

Gold’s record-breaking rally continues, with spot bullion now approaching USD 2,600 per troy ounce, reflecting a year-to-date gain of over 25%. This surge means a standard 400-troy-ounce gold bar (around 12.4 kilograms or 27.4 pounds), commonly traded internationally and used by central banks, now costs over USD 1 million, up from USD 725,000 last October. This increase followed heightened Middle East tensions after Hamas' attack on Israel and growing expectations of a shift in the US interest rate cycle from hikes to cuts, as well as continued central bank demand and speculative buying from hedge funds.

Since then, gold has surged nearly USD 800, with only minor corrections during this extended rally—showing strong underlying momentum, driven by FOMO (fear of missing out), which is rarely sustained for this long. As we’ve highlighted, gold’s rise—despite being a ‘dead’ asset that offers no returns beyond price appreciation minus its funding or opportunity costs relative to short-term bond yields—reflects a world in imbalance. Uncertainties are driving demand from investors, both institutional and individual, as well as central banks.

In our recent update, we noted the contributing factors to gold's rally: fiscal instability, safe-haven appeal, geopolitical tensions, de-dollarization, and anticipated Fed rate cuts. The first of several cuts is expected on 18 September, during the long-awaited FOMC meeting. While the size of the cut (either 25 or 50 basis points) may trigger short-term volatility, the fundamental drivers of gold's rally are unlikely to fade, signaling potential further gains in the coming months. As the opportunity cost of holding gold decreases, we may see increased demand for gold-backed ETFs from asset managers, especially in the West, who up until May had been net sellers since the FOMC began its aggressive rate hikes in 2022.

With Gold Reaching New Heights, Silver Shows Potential_1

What are the risks?

It’s important to remember that no asset, including gold, rises in a straight line. Price corrections are inevitable. One key risk is the buildup of speculative long positions. If gold traders anticipate higher prices and the metal falls below key support levels, this could trigger a wave of selling as positions are unwound, further pushing prices down. Additionally, any easing of geopolitical tensions could reduce gold’s appeal as a safe haven, encouraging investors to pursue riskier, higher-yielding assets. Lastly, central banks and investors may hesitate to buy at such elevated levels, fearing overvaluation, which could reduce demand and weigh on prices.

Silver follows gold – but faster

While gold’s new record high has captured most attention, silver has outperformed this month, delivering returns twice as large. Silver’s dual role as both a precious and industrial metal means its price is influenced by gold, industrial metals, and the dollar. After hitting a decade-high of USD 32.50 in May, silver experienced a deep correction alongside industrial metals due to concerns about Chinese demand. Between May and August, the gold-to-silver ratio widened from 73 ounces of silver per ounce of gold to 90 ounces.

However, a continued gold rally and a recovering industrial metals sector, supported by a weaker dollar, have brought the ratio back down to 84, with silver once again outperforming gold. Investors cautious about paying record-high prices for gold may see better value in silver, which remains well below its 2011 record of USD 50. For silver to attract more buyers, a break above the May high is needed. Momentum funds currently hold a relatively small speculative long position in silver, at 27k contracts, just above the five-year average, compared to gold’s much larger 227k net long position, which is double its five-year average. With Gold Reaching New Heights, Silver Shows Potential_2

With Gold Reaching New Heights, Silver Shows Potential_2

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Stocks

Asian shares were trading mixed Wednesday as markets focused on prospects for the U.S. Federal Reserve’s first cut to interest rates in more than four years.

The Bank of Japan and the Bank of England are also holding monetary policy meetings later this week. But neither central bank is expected to move on rates, although the language of what the officials say could be an indicator of later moves and still influence markets.

Japan’s Nikkei 225 gained 0.2% in afternoon trading to 36,269.04. Australia’s S&P/ASX 200 inched down nearly 0.1% to 8,134.40. South Korea’s Kospi added 0.1% to 8,134.40. Trading was closed in Hong Kong for a national holiday. The Shanghai Composite index edged 0.1% lower to 2,701.15.

The Fed’s announcement is scheduled for Wednesday, with the overwhelming expectation on Wall Street for a cut to the federal funds rate. The rate has been in a range of 5.25% to 5.50% for over a year.

Lower rates would help boost the slowing economy, as it has become increasingly more expensive to borrow money for everything from houses to cars to corporate debt.

The Fed has been keeping its main interest rate at a two-decade high in hopes of grinding down on the economy enough to stifle high inflation.

In Japan, the nation’s trade deficit totaled 695 billion yen, or $4.9 billion, down 26% from a year earlier, according to the Finance Ministry, recording a deficit for the second month straight.

Exports totaled 8.4 trillion yen ($59 billion), up 5.6% from the same month the previous year. Shipments to Asia rose while exports to the U.S. fell.

Imports totaled 9.1 trillion yen ($64 billion), up 2.3% from a year earlier. By region, imports from European nations, in categories such as pharmaceuticals, showed the strongest growth.

Both numbers fell short of forecasts for 10% growth in exports and and even higher increases for imports.

The Japanese yen has gained in value against the U.S. dollar in recent weeks, helping to boost the country’s purchasing power. The dollar had traded at levels over 150 yen earlier this year but in recent days has dipped.

The U.S. dollar slipped to 141.33 Japanese yen from 142.34 yen. The euro cost $1.1123, up from $1.1117.

On Tuesday, the S&P 500 edged up less than 0.1% to 5,634.58. It remains 0.6% below its all-time closing high set in July, and it briefly rose above that mark during the morning.

The Dow Jones Industrial Average slipped less than 0.1% to 41,606.18 from its own record set the day before, while the Nasdaq composite edged up by 35.93, or 0.2%, to 17,628.06.

Intel helped drive the market with a gain of 2.7% following a series of announcements, including an expansion of its partnership with Amazon Web Services to produce custom chips. Intel also detailed plans to build its foundry business.

But some reports released Tuesday on the U.S. economy were better than expected, including one on U.S. consumer spending. That’s likely a sign the American economy will not nose-dive into a recession.

A separate report said U.S. industrial production returned to growth in August and was stronger than economists expected.

In the bond market, the 10-year Treasury yield rose to 3.64% from 3.62% late Monday. The two-year yield, which more closely tracks expectations for the Fed’s actions, rose to 3.59% from 3.56%.

In energy dealings, benchmark U.S. crude declined 47 cents to $70.72 a barrel. Brent crude, the international standard, fell 51 cents to $73.19 a barrel.

Source: AP

Risk Warnings and Disclaimers

Add to Favorites

Daily News

Remarks of Officials

Central Bank

Forex

FastBull Events

FastBull Featured

Devin

Mohammad Omar

Recent Searches

Top Searches

Markets

News

Analysis

User

24/7

Economic Calendar

Education

Data

Ignoring Risk, Investors Still Buying US Junk Debt With Weak Protections

DISTRESSED EXCHANGES

Source: Theedgemarkets

Dollar Drops vs Yen, Asia Stocks Struggle as Fed Looms

Source: Reuters

Soft-landing, Or No Soft-landing, That Is The Question: Part IV

Why Is Accurately Predicting Monetary Policy Pivots Important?

A New Framework To Quantify Episodes of Monetary Policy Pivots

Episodes of the Monetary Policy Pivot in the Post-1990 Era

A Probit Approach To Predict the Probability of Monetary Policy Pivots

A Policy Pivot Is Most Likely, but What About the Pace/Duration of the Easing Cycle?

Source: Federal Reserve Board and Wells Fargo Economics

How Can We Account for the Increase in the Price of Gold?

The price of gold is mainly determined by fluctuations in demand

The price of gold is a function of US interest rates and inflation, as well as risk aversion

The increase in gold prices since 2021 appears to have been driven mainly by emerging market central bank buying

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research

Capriole founder “would not be surprised” at $64K BTC price

BTC/USD 1-week chart. Source: TradingView

Bitcoin onchain supply data too bearish

BTC supply data (screenshot). Source: Capriole Investments

BTC/USD quarterly returns (screenshot). Source: Capriole Investments

Source: Cointelegraph

With Gold Reaching New Heights, Silver Shows Potential

What are the risks?

Silver follows gold – but faster

Stock Market Today: Asia Shares Rise Moderately Ahead of Closely Watched Federal Reserve Meeting

Source: AP

Risk Disclosure