Oil Prices Drive Inflation But Crypto Unaffected

Welcome to BRC’s Breakdown.

We’ve got a whole new look, content, and feel.

The goal in the next few minutes is – to give you a snapshot of the macroeconomic market, the aftereffects right here in India, and of course, what’s happening in the world of digital assets and artificial intelligence (AI).

But first, how did the markets fare:

Here’s a preview of what we’ll cover:

• Inflation: Inflation Worries For Oil and Housing

• Volatile: Bitcoin Is More Volatile Than Ever

• Design: Altman Teams Up With Former Apple Exec

• Bonds: What’s a better investment than Bitcoin

MACRO: Higher Inflation – Oil And Housing Affected

Oil prices continue to rise, adding to worries about inflation. The US seems to have depleted most of its Strategic Petroleum Reserve even as Russia & Saudi Arabia continue to limit supply.

This is concerning when looking at US inflation, because two of the biggest constituents for US inflation are:

• Oil prices

• Housing prices

Hence, if oil prices stay high – US inflation will remain at high levels for a longer period of time.

US interest rates have continued to increase after last week’s Federal Reserve meeting. Investors are coming to the view that rates will be high for a longer period of time. It was previously expected that rates will be cut in mid-2024, closer to the US presidential elections.

On the other hand, 10-year yields are now at their highest level since mid-2007. As a result, borrowing costs are increasing globally. For example – currently, the average cost of a home loan in the US is over 7%. In 2021, it was less than 3%. So, for a person taking the same size home loan now, versus two years ago, the monthly payment has more than doubled.

The US dollar continues to gain strength versus most global currencies and is now at its strongest point since November last year. As a result, US imports will feel more expensive. Global investors tend to measure their returns in US dollars and a strong US dollar means returns from non-US dollar-denominated assets (for instance – Indian bonds and equities, London real estate, etc.) will look even weaker.

MARKET: Higher Bond Yields, Lower Equities in US

US Equities are ending the September quarter on a weak footing, well off their recent highs made in early August. Despite the decline over the last few weeks, S&P 500 is up over 12% for the year. US bonds, though, have had a tough year (yet again - after negative returns in 2021 & 2022) with the market overall (represented by the Bloomberg US Aggregate Index), down over 1% for the year.

The high level of US bond yields is slowly affecting other bond & currency markets globally. Higher US yields have been one factor pushing Indian 10-year government bond yields higher by 10 bps (0.1%) for the quarter. This increase in Indian bond yields occurred even though JP Morgan announced that Indian bonds will be eligible for their widely followed bond index which will increase demands from foreign investors for Indian bonds.

Higher demand should result in lower yields.

It is important to note that year-to-date, yields have declined by 10 basis points, making the Indian bond market one of the better-performing markets globally.

Earnings season for the third quarter will start soon. Poor results could result in a sharp decline in stock prices - especially for large technology companies. Most of the US stock market returns have come from the Enormous 8, led by Nvidia. The market is expecting these stocks to deliver solid earnings and any hint of weakness in demand/delivery could result in prices dropping sharply.

So far in 2023, Indian stocks have underperformed US stocks even without considering the effect of the rupee. Nifty 50, made of the 50 largest stocks by market cap, is up 8.5% YTD (vs 12% for S&P 500). Small caps, i.e. stocks of smaller Indian companies, have had a spectacular year so far, up 28.6%. Most PMSs have a larger allocation towards smaller companies - so you should expect decent returns from those schemes.

Gold prices in India have risen 5% so far this year. So, in summary, regardless of which asset in India you invested this year, your performance has been positive.

Digital Assets – Bitcoin More Volatile Than ETH

Bitcoin, the world’s largest cryptocurrency, is in for shaky times. Even more so than the second-largest crypto in the market, ETH, the native coin of the Ethereum blockchain. For context, BTC and ETH account for nearly 60% of the total crypto market capitalization currently.

The “shaky” nature here is quantified by BTC and ETH’s implied volatility. This is a measure of the expected volatility of the respective coins based on the pricing of options contracts.

Deribit, the world’s largest crypto options exchange, measures this on a 30-day time frame. If Bitcoin’s implied volatility is higher than ETH’s implied volatility then:

• Bitcoin will rise higher in bullish times, or

• Bitcoin will fall lower in bearish times

Bitcoin’s implied volatility has been higher than Ethereum’s implied volatility for nearly a month now.

One indication of this mismatch between Bitcoin and Ethereum is the former’s move into a more macro lens. Bitcoin, since COVID-19, has been a more macroeconomic asset, reacting to scenarios such as – fiscal policy updates, banking crashes, and even wars. However, as mentioned earlier, rising macro uncertainty, strong bond yields, and even a stronger dollar all result in a, relatively, weaker Bitcoin.

Tech and AI – iPhone’s Design Meets Worldcoin

If there’s one thing AI can definitely improve about itself is – design. And the person to improve this might just be the person responsible for the design of the most sold consumer product in the world – the iPhone.

Jony Ive, the former chief design officer of Apple, a man handpicked by Steve Jobs to design the iPhone is exploring a new AI opportunity. And the person he might be working with is OpenAI CEO – Sam Altman.

The project, which is under wraps, is likely some form of “hardware for the AI age” given Ive’s expertise with Apple and Altman’s goal of AI accompanying hardware. Altman previously sported Orb’s like the ones below around the world. These were called World Coin orbs, where people could scan their retinas for WORLD coin tokens.

Top Headlines Of The Week

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• FTX sues FTX co-founder’s parents right before FTX co-founder’s trial

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