Markets Weekly podcast – 18 March 2024
What could key regulatory changes mean for cryptocurrencies?
18 March 2024
As Bitcoin falls from its recent market high, Nikola Vasiljevic, our Head of Quantitative Strategy, considers the outlook for digital currencies over the short and medium term.
Topics include the potential implications of recent regulatory changes in the US and UK, the possible role of digital assets in portfolio diversification, and the boom-bust cycle within the crypto space.
Meanwhile, podcast host Henk Potts explores UK growth prospects and US inflation, and previews this week’s crucial interest rate meetings in the US, UK and Japan.
You can also stream this podcast on the following channels:
-
Henk Potts (HP): Hello, it’s Monday, 18th March, and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week, I’ll be joined by guests to discuss both risks and opportunities for investors.
Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We’ll then consider the outlook for cryptocurrencies and the role they should or shouldn’t play within a balanced portfolio. Finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Now, signs of slowing economic activity and sticky inflation indicators rattled investors at the end of last week. As we know, risk sentiment had been boosted by the prospect of aggressive rate cuts later in the year, but traders are carefully monitoring for any signs that could delay the start of the cutting cycle.
US stocks came under pressure on Friday. Ten-year treasury bonds registered their worst weekly performance of the year. The S&P 500 was down, it was down four tenths of 1% over the course of the week, although we should remember it’s still up an impressive 7% year to date.
Equities in Europe maintained their upward trajectory, with stocks registering their eighth consecutive week of gains. That’s the longest winning streak that we’ve seen since 2018. The STOXX 600 was up four tenths of 1% over the course of the week, up 5.5% this quarter.
In bond markets, treasury yields hit their highest levels of the month. The 10-year yield rose 21.5 basis points over the course of the week, that’s its biggest advance in five months, and finished the week at 4.31%.
After the recent surge in cryptos and precious metals, we saw a retreat from record-breaking levels. Bitcoin fell back from an all time high of $73,798. We should remember when you look at the top 100 crypto tokens, they’ve risen by round about 60% year to date, and that’s been leading to concerns that a fresh bubble has been developing. Of course, we’ll pick up on that very shortly.
The price of gold suffered its first weekly loss in four weeks. It was off eight tenths of 1% over the course of the week as treasury yields rose and ETF investors reduced their position. If you look at the total gold held by ETFs, it’s fallen by round about 4.4% this year, down to 81.8 million ounces. That’s the lowest level since September 2019. Gold is still up 4.3% year to date, and has been supported by increased buying from central banks and in China.
Moving on to the macro where the focus last week was on the UK GDP and labour data, as well as the latest US inflation print, which are all-important ahead of this week’s interest rate meetings at the Federal Reserve and the Bank of England.
Now, the UK economy returned to growth in January. GDP rose two tenths of 1%. That follows the mild contraction that we saw in the second half of last year. Growth was driven by positive demand for services as consumers took advantage of the January sales, construction was particularly robust as the sector benefits from lower rates, a stable housing market, and better weather conditions. Meanwhile, industrial production was weaker as supply chain disruption from the Red Sea weighed on manufacturing.
Separate data also showed the UK labour market is now finally starting to moderate. The unemployment rate picked up to 3.9%, average earnings eased back to 6.1%. In fact, that measure’s now declined for five consecutive months with a notable weakness in the private sector. The redundancy rate rose for a third straight month to its highest level since 2021, and there are real signs that companies are indeed slowing down their pace of hiring. If you look at vacancies, they fell to just over 900,000. That compares to a peak of 1.3 million back in 2022.
We would expect UK unemployment to continue to rise. We have it peaking at 4.5% in the fourth quarter, which would still be actually relatively low by historic standards, particularly during a period of weak economic activity. But, overall, the UK economy still looks pretty lacklustre. We’re projecting anaemic levels of economic activity during the course of this year, with growth of just one tenth of 1%.
Now, the Bank of England are expected to keep rates on hold at 5.25% for a fifth consecutive meeting on Thursday and maintain their current cautious guidance. However, recent economic data projections have supported the case for future cuts. Inflation has been moderating. We expect this week’s February inflation print to ease to 3.5% from the 4% that we saw in January, and be back below the 2% target as the year progresses.
The MPC, we think, will be laser-focused on the incoming data particularly the inflation prints, the labour report and, of course, that first-quarter GDP number. We think this will pave the way for a pivot to an easing stance by the May meeting with the first cut coming in June. In fact, we project the bank rate will finish the year at 4%.
Moving on the US where inflation reaccelerated in February, the annual rate ticking up one tenth of 1% to 2.2%, although that was a touch softer than expected as food prices surprised to the downside. Conversely, core inflation was a little stronger month on month driven by goods extended beyond used cars, producer prices also rising, up six tenths of 1% month on month in February due to higher goods prices.
In terms of the outlook for US inflation, we do sese CPI moderating as the year progresses with CPI printing at 2.8% at the end of this year, 2.4% in the fourth quarter of 2025 but, overall, a sticky print adds to the risk of fewer rate cuts during the course of this year. At this week’s Fed meeting we expect rates to remain unchanged and the communication to reiterate that greater confidence that inflation is moving back to the target level is needed before it would be appropriate to reduce the target range.
Given the recent upward revision to growth inflation, the summary of economic projections is expected to show two 25 basis-point cuts in 2024, and four quarter point reductions in 2025. We still project, however, the rate cutting cycle will start in June with three 25 basis-point reductions this year, and four in 2025 taking the Fed Funds rate down to 3.5% to 3.75% by the end of 2025, but the path of policy, as we’ve said many times before, still remains very much data dependent.
So, that was the global economy and financial markets last week. With Bitcoin registering record highs over the past couple of weeks, clients are once again asking if they should have exposure in that cryptocurrency space. So, here to answer that question is Nikola Vasiljevic, Head of Quantitative Strategy for Barclays Private Bank.
Nikola, great to have you with us today. Recently, US regulators approved spot Bitcoin ETFs. Some commentators suggested this will result in greater institutional participation and provide extra protection for investors. So, what does this regulatory change really mean for the asset class and for investors?
Nikola Vasiljevic (NV): Morning, Henk. It’s a great to pleasure to be here and join you on the podcast this morning. Well, indeed, if we look back at 2023, we witnessed a strong comeback of the largest cryptocurrencies, signalling the end of a prolonged downturn, which is colloquially known in investment circles as the ‘crypto winter’. And, just recently, Bitcoin, the flagship currency, shattered records by surging to an all-time high, reaching the astounding $70,000 mark.
One of the factors, certainly that supported the positive crypto momentum lately is the approval of 11 spot Bitcoin exchange traded funds, ETFs, by the US Securities and Exchange Commission, the SEC, at the beginning of this year, precisely on 10th January 2024.
So, spot Bitcoin ETFs offer investors a direct exposure to Bitcoin’s price movement and they do so in a relatively convenient and accessible way for investors through traditional brokerage accounts. By holding Bitcoin in digital wallets, these ETFs closely track Bitcoin’s market performance offering an alternative to self custody via digital wallets. This means that they’re supposed to provide a bit more safe and more convenient avenue for a wider spectrum of investors to engage with Bitcoin in contrast with the risks and complexities associated with direct cryptocurrency acquisitions or futures contracts re-entered investments which are currently available alternatives.
So, the approval of spot Bitcoin ETFs is seen by many investors as a pivotal moment, as you said, and is anticipated to fundamentally alter their cryptocurrency investment dynamics, streamlining and enhancing the security of Bitcoin investments and, potentially, attracting a broader investor base including those inclined towards traditional investment avenues at this time.
So, the last thing I would like to mention here, actually, is that if we look at developments on their side of the Atlantic, we actually have some fresh news from last week since the UK financial regulator, the Financial Conduct Authority, or the FCA, permitted professional investors, and this is the key word, professional investors, to engage in crypto exchange traded notes issued by recognised investment exchanges. Therefore, due to ongoing restrictions barring retail investor participations, this can be interpreted as a partial victory for broader crypto adoption.
HP: OK. So, they’re some of the developments that we’ve been seeing across the asset class over the course of the past few weeks and months, but how do you see the role of cryptocurrencies within a portfolio? Should they be considered as good diversifiers, or is this very much a myth?
NV: Yes, it’s a good question. So, as I mentioned the SEC’s approval of spot Bitcoin ETFs generally marks a positive milestone for cryptocurrency adoption but at the same time the SEC Chairman Gary Gensler made several cautionary remarks that highlight concerns regarding Bitcoin’s speculative and volatile nature emphasising that approval does not constitute an endorsement.
And this is very important because, also, from a quantitative strategy perspective, I can only echo those concerns. When we look at the world of cryptocurrencies and analyse historical data, it’s impossible to ignore the rollercoaster of booms and busts that have characterised these markets over the last decade or so. The volatile swings, coupled with unprecedented depth of price drawdowns, have left many investors time and again reeling from substantial losses.
So, to answer your question, Henk, let’s think about the basics first and try to understand how cryptocurrencies are related to traditional assets. That might help us understand, actually, what is their role in a portfolio. So, as a reminder to ourselves and our listeners, the term cryptocurrency itself may suggest that these assets function as traditional currencies. Yet, due to their inherent volatility, they often fail to fulfil the essential role of money such as serving as a stable store of value or a reliable unit of account.
And, while cryptocurrencies may be accepted as a means of payment here and there, the lack of stability and widespread acceptance limits their utility as true currencies, leading many to categorise them more as simply crypto assets, broadly speaking. Then other thesis that was put forward over time is that cryptocurrencies can be considered as a potential hedge against inflation, like precious metals, due to shared traits such as scarcity and transactability.
However, drawing a direct parallel between the two assets proves challenging and the historical data is not supportive of this claim either. Moreover, cryptocurrencies do not generate income for investors, implying that individuals invested in these high risk assets will not receive any coupons or dividends. And, as we can see, the deeper we delve into these fundamentals, it becomes increasingly intricate and nearly impossible to categorise cryptocurrencies within the realm of traditional asset classes.
So, what are they, and how should we think about them in a portfolio context? Well, when considering including crypto assets in a multi-asset portfolio, analysing their correlations with global equities and bonds is crucial, and that’s the first step in the process.
Crypto assets tend to align with risk on assets, showing moderate correlations with equities on average, but these correlations intensify during market downturns which, unfortunately, suggest that they may not serve as effective portfolio diversifiers, but rather compete with equity like assets for a place in portfolio. And, additionally, unlike global equities, which experience maximum drawdowns of up to 35% with relatively shorter recovery periods, cryptocurrencies have encountered significant drawdowns of around 80% to 90%, sometimes even 99% since 2014, depending on the cryptocurrency obviously, often taking up to three full years to recover.
Therefore, the only thing that we could say is that if cryptocurrencies aren’t utilised for diversifying a portfolio, they might be considered as a small speculative position, that could potentially avoid investors with substantial returns. Let’s just remember 2023, so the previous year, when Bitcoin posted a return of around 150%, as you said. However, correlated speculative assets typically lack a place in a well-diversified portfolio due to their clearly unfavourable characteristics during portfolio downturns.
And allow me to finally just summarise and attempt to provide an illustrative analogy. If we examine the spectrum of risk tolerance among traditional investors in the UK, ranging from those highly averse to risk who primarily invest in safer bonds to those comfortable with volatility and drawdown that typically have high exposure to equities, we can try to visualise this as a geographical distribution.
For example, imagine that the risk-averse investors are located in Glasgow while the risk-loving ones reside in London. Now, consider investors who opt to allocate 10% to 15% of their portfolio to crypto assets, or even more let’s say. Metaphorically speaking, therefore, they would find themselves positioned not in between Glasgow and London but in the middle of the Mediterranean Sea. This analogy is deliberate, clearly. Just as the Mediterranean Sea sun can be enticing, a prolonged exposure in the open sea can be perilous, especially when the weather takes a turn for the worse.
HP: Well, thank you, Nikola, for that comprehensive view of where we are in terms of cryptocurrencies and putting it into some further context for us. Let’s try and think a little bit about the future as well. What is your outlook for cryptocurrencies and, perhaps more broadly, for the technology that’s associated with digital assets?
NV: Certainly. I think we need to look at the big picture to fully appreciate the magnitude of the potential economic impact and to understand the associated risks. So, clearly Blockchain technology offers numerous advantages across various industries, including improved security, transparency, efficiency, and cost-saving if carefully and correctly applied. As a result, it has the potential to revolutionise many aspects of how we conduct business and interact with the digital information.
So, for instance, Blockchain technology holds promise in financial services for facilitating more cost-effective transactions and implementing smart contracts, which is quite an attractive proposition for many investors. Additionally, tokenisation offers potential for enhancing liquidity in traditionally illiquid markets like real estate and private equity.
Next, in supply chain management, Blockchain can provide a secure and immutable ledger of transactions and product flows. And one can imagine comparable or analogous applications in healthcare, identity management and even digital voting. Nevertheless, I must stress once more that, despite the allure of these applications, it appears that there is still a long journey ahead before we attain greater clarity regarding the tangible potential of Blockchain technology.
Cybersecurity and privacy concerns, energy consumption and associated carbon footprints, then regulatory uncertainty and systemic risk are the examples that come to my mind and for these reasons, we have to carefully evaluate the pros and cons of Blockchain technology and cryptocurrencies in particular.
HP: Well, thank you, Nikola, for your insight today. It’s certainly an area of financial markets that creates great debate and emotion amongst investors, so it’s fantastic you’ve provided some context around the key factors that buyers should be considering.
Let’s move on to the week ahead where the focus will be on the Bank of Japan where a crucial meeting is set to be held. The expectation is the central bank will bring to a close its prolonged period of ultra easy policy after a survey indicated that Japanese companies plan to deliver the strongest rise in wages since the 1990s during the course of this year. We expect a broad range of measures, including the exiting of its negative interest rate policy, the ending of yield curve control, and a stopping of ETF purchase.
With that, I’d like to thank you once again for joining us. I hope you’ve found this update interesting. We will, of course, be back next week with our next instalment but, for now, may I wish you every success in the trading week ahead.
Previous editions of Markets Weekly
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
This communication:
- Has been prepared by Barclays Private Bank and is provided for information purposes only
- Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
- All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
- Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
- Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation. Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
- Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
- Has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.
You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.