Stock Rally Halts on Fed’s Hawkish Tone

Wall Street finished the week in the red after Fed Chair Jerome Powell’s two-day congressional testimony. In a nutshell, he stuck to his previous comments that clearly indicated that more rate hikes are likely this year as the fight against inflation “has a long way to go.” A growing number of traders now see the Fed hiking its key benchmark rates by 25 basis points in July.

The top 3 U.S. stock market indexes posted strong gains last week after the Fed paused its prolonged rate-hiking cycle. They were partly offset by the losses suffered over the week, with market sentiment hit by Powell prolonging the central bank’s aggressive monetary tightening stance.

The S&P 500 fell 1.39%, the Dow Jones Industrial Average lost 1.67%, and the Nasdaq dropped 1.44%. European stocks were hit even harder. The MSCI EMU lost 3.05%. The FTSE shed 2.37%. The Bank of England surprised markets with a 50 basis-point rate hike on Thursday, its thirteenth consecutive increase to tame persistent inflation.

Asian shares sank sharply. The Nikkei 225 index snapped a ten-week winning streak (down 2.74%). Japan reported its core inflation rate was higher than expected in May, adding to expectations the central bank might adjust its policy to reflect upward price pressures.

In China, the Shanghai Composite fell 2.30% for the week while the Hang Seng plunged 5.74%. Several global investment banks cut their 2023 GDP growth forecasts after May economic data missed forecasts. Markets also took little support from high-level talks between U.S. and Chinese ministers, as both sides acknowledged minimal advancements in alleviating the strained tensions that continue to plague the world's two largest economies.

Losses in China spilled over into other APAC markets, with India’s Nifty 50 down 0.85%, while South Korea’s KOSPI and Australia’s S&P/ASX 200 posted declines of 2.12% and 2.10% respectively.

10 out of 11 S&P sectors in the red

Almost all the S&P 500 sectors ended the week in negative territory. The health care sector managed to close above the flat line with a modest gain of 0.24%. The consumer discretionary sector also outperformed the broad market with a negligible loss (-0.02%), helped by Amazon stocks (AMZN), up 3.06%. Yet, the Federal Trade Commission on Wednesday sued the company for violating consumer protection laws. The lawsuit alleges Amazon’s website knowingly “duped” millions of consumers into enrolling in Prime and then made it difficult for them to cancel.

Rate-sensitive sectors were among the worst performers of the week. As an illustration, real estate, a sector particularly vulnerable to monetary policy tightening, was the main detractor to the S&P 500 performance with a loss of 4.03%. The prospect of rising U.S. rates and the associated impact on U.S. economic activity also weighed heavily on the energy sector, down 3.45%, as the WTI crude oil price dropped by 3.65% to $69.16 a barrel (closing price before the abortive weekend mutiny by Russian mercenaries of the Wagner Group).

Will the SEC approve the BlackRock Bitcoin ETF?

BlackRock has boldly presented its proposal for a Bitcoin ETF to the Securities and Exchange Commission, defying the series of rejections faced by similar offerings in the past. The commission has consistently refused such proposals due to concerns regarding the unregulated nature of the cryptocurrency market and the potential for fraudulent activities. In contrast, it has granted approval for Bitcoin futures ETFs which utilize futures contracts instead of direct investments in Bitcoin. U.S. investors can also access exposure to Bitcoin through the Grayscale Bitcoin Trust (GBTC), an older investment vehicle with $19 billion in assets. However, GBTC is structured as a closed-end fund rather than an ETF. As a result, its market price can significantly deviate from the underlying Bitcoin holdings' actual value. Grayscale Investment LLC's attempts to convert GBTC into an ETF were rejected by the SEC, citing concerns over anti-fraud measures and investor protection standards.

Considering these rejections and the SEC’s recent legal action against Coinbase, the proposed custodian for BlackRock's Bitcoin ETF, one might question BlackRock's optimism regarding approval. However, BlackRock has introduced enhanced oversight measures pertaining to cryptocurrencies, potentially bolstering its case for SEC endorsement. Of particular significance is the inclusion of a surveillance-sharing agreement, viewed as a pivotal element that could tilt the decision towards approval. This agreement would enable monitoring and reporting of potential market manipulation, an issue previously raised by the SEC. Moreover, speculation has emerged that BlackRock's filing could mediate the SEC's lawsuit against Coinbase, possibly leading to a more favourable outcome for the proposed ETF. Against this backdrop, prevailing sentiment suggests an increased probability of approval for BlackRock's Bitcoin ETF. It’s also worth noting that other investment managers have recently joined the spot Bitcoin ETF party. Invesco and WisdomTree made their new filings nearly a week after BlackRock’s move and Fidelity Investments revealed plans to file for spot Bitcoin ETFs.

These events explain why Bitcoin breached the $30,500 level for the first time in thirteen months, up 17% over the week, hence a year-to-date gain of 85%.

Check out the latest flows intro Crypto ETFs through the weekly updated league tables available here.