Welcome to BRC’s Breakdown.

Last Man Standing. That’s how two assets felt this week – the Indian benchmark equities index and ETH. For different reasons of course. One for resilience, and the other for innovation.

First, let’s see how the markets fared this week:

Here’s a preview of what we’ll cover:

• Macro: US Markets Wake Up From A Long Weekend

• Around The World: China’s Short-Term V-Shaped Recovery

• Crypto: Ethereum’s Two Main Catalysts – Niches and Narratives

• AI: So long Videos, Hello Sora

Macro: US Markets Wake Up From A Long Weekend

US markets had a long weekend due to President’s Day. Right before the holidays, however, the US Stock markets (S&P 500) moved close to it’s all-time high, having moved up by ~22% from their recent lows in October 2023. Tech stocks (and Nasdaq) have been weak in recent days.

US Bond yields continue to move up as the economy shows signs of reaccelerating. Year-to-date, US 10-year bond yields have increased by a whopping 41.5 bp (0.415%) to a high of 4.28%. This has dragged bond yields in most other countries higher - with India being a notable exception where 10-year yields have declined 0.077% this year. In other words, while US and most other developed market bond prices have dropped, Indian government bond prices have increased.

A big driver of higher US yields has been higher than expected inflation data. Headline US CPI figure came in at 3.1% year over year, above expectations for 2.9% but, notably, still lower than December’s 3.4%. Core inflation (excluding food and energy) remained high at 3.9% year over year, above expectations for 3.7% and in line with December’s reading.

Markets are now expecting interest rate cuts to start in June 2024 (a month ago, the expectation was for interest rate cuts to start in March 2024. As per the CME Watch tool, interest rate markets are pricing in just 0.1% chance of no US interest rate cut. While expectations of rate cuts have declined over the last month (bottom panel), they are still a long way away from pricing in the risk of no cuts. If growth stays strong and inflation does not decrease, chances of rate cuts getting postponed can increase & shock a lot of investors globally.

The week ahead has limited economic data releases. Geopolitical risks continue to bubble in the background and will attract attention in a short week.

Around The World: China’s Short-Term V-Shaped Recovery

China Back After New Year Holidays.

Crypto markets continue to rally with Bitcoin ETF demand continuing.

Alts outperforming within crypto in recent days (Bitcoin dominance decreased from 54% to below 52%)

Ethereum’s Two Main Catalysts – Niches and Narratives

Ethereum’s native crypto ETH is up by nearly 3% in the week, while Bitcoin and the rest lag behind. The reason behind this is – activity and variable supply.

The L1 blockchain’s activity this week was far more pronounced on two fronts – NFTs and Gaming. For the first time in over a year, this past week saw daily trading volume on Ethereum NFTs was over $30 million.

In addition to this, Pixel, a new native token of Pixel, a web3 blockchain game by the same name rose to a market cap of half a billion. The token – PIXEL – saw more trading volume than popular L1 native tokens like – AVAX (of Avalanche), DOGE (of Dogecoin), and ADA (of Cardano).

Renewed activity on these fronts – gaming, and NFTs – were hallmarks of the previous bull run. According to a report by Amberdata’s director of derivatives, ETH looks “more favorable” than other large-cap cryptocurrencies.

To add to this, a coin’s supply is a big topic of discussion given the halving later this year. The report also highlighted the decrease in the supply of Ethereum following its 2022 transition from proof-of-work to proof-of-stake

AI: So long Videos, Hello Sora

OpenAI has unveiled "Sora", a groundbreaking AI model capable of generating realistic and imaginative video scenes from simple text descriptions. This marks a significant leap in the field of video generation, pushing the boundaries of what's possible with artificial intelligence.

Sora stands out for its ability to produce high-resolution videos up to a minute long, maintaining visual quality and adhering to the user's prompt. Whether it's a bustling cityscape, a whimsical animation, or a scientific simulation, Sora can bring it to life with impressive detail and fluidity.

OpenAI emphasizes that Sora is still under development, with access currently limited to select researchers and creative professionals. This controlled release allows for a thorough evaluation of potential risks and biases while gathering valuable feedback to further refine the model's capabilities.

The potential applications of Sora are vast, spanning fields like entertainment, education, scientific visualization, and even product design. With its ability to bring ideas to life with unprecedented ease, Sora promises to be a game-changer in the way we create and interact with visual content. However, ethical considerations and potential misuse remain crucial aspects to address as this technology continues to evolve.

The price of Worldcoin, a cryptocurrency token by Sam Altman, has soared following the release of OpenAI’s latest AI tool, Sora, after a bullish week for crypto and as hype grows for artificial intelligence.

Interesting Reads

Data or Wall Street’s Sentiments?

The US economy shows signs of strength like robust job growth, but also vulnerability given still high inflation and cooling housing market. Experts are cautious on the odds of a soft landing as the Fed tries to tame prices without triggering a recession. Read it here.

Nifty50’s valuations: Too High or Not At All?

With the Nifty50 touching new highs every day, questions are asked. Questions on valuations. But some experts don’t take the view of higher valuations being bad, given how robust the growth was on the earnings front. Read it here.