Understanding the Effects of Rising Interest Rates on Investments
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Chapter 1: Weekly Financial Overview
This week in financial markets saw a downturn across the three major U.S. stock indexes. The S&P 500 ended its three-week winning streak, which had marked its best performance since 2020. The yield on the benchmark 10-year Treasury note increased for the sixth consecutive day, reaching 2.71%, the highest level in over three years. Meanwhile, the two-year yield climbed to 2.51%, marking its largest five-week gain since May 1987. U.S. equity markets displayed mixed results, but overall, they fell this week due to concerns that the Federal Reserve's aggressive inflation control measures might trigger an economic slowdown. Financial stocks buoyed the Dow, which ended the week slightly lower, while the Nasdaq dropped by 3.9% and the S&P 500 decreased by 1.3%.
As a backdrop, the U.S. Dollar Index (DXY) hit a new 23-month peak last week, spurred by comments from FOMC's Brainard regarding the appropriateness of addressing Quantitative Tightening in May. This sentiment quickly influenced stock movements, leading to a pullback. Speculation is growing that these assertive policy adjustments could push the U.S. economy into a recession. The DXY briefly surpassed the psychological threshold of 100.00 before concluding the week at 99.83. Market expectations indicate that the Fed may implement nine additional rate hikes this year, totaling ten increases in 2022. With the acceleration of quantitative easing rollback, bullish sentiment in the DXY is likely to persist.
In the cryptocurrency realm, following the initial dip mirroring U.S. stock performance, Bitcoin and Ethereum are attempting to recover some of their losses, currently trading at approximately $43,000 and $3,300, respectively. Although both cryptocurrencies have broken through the support of their short-term bullish channels, this movement appears to be more of a consolidation beneath a temporary peak rather than a sign of a new bearish trend. Ethereum seems poised to resume its bullish trajectory, while Bitcoin will require confirmation above the critical level of $44,200. The total market capitalization hovers around $2 trillion, with Bitcoin dominance at 41.0%.
Chapter 2: Federal Reserve Rate Changes and Their Implications
Recently, the U.S. Federal Reserve raised interest rates for the first time in over three years, with the target rate now set between 0.25% and 0.50%. This target range is crucial as it influences the rates at which banks lend to each other overnight. The Fed anticipates that rates will continue to rise significantly over the coming years.
An informative infographic from New York Life Investments illustrates how rising interest rates can affect both the economy and individual investment portfolios.
As we transition to other key statistics, let's take a look at the weekly and year-to-date numbers across various markets and assets.
Section 2.1: Trends in Smart Contract Platforms
Since the beginning of 2022, Total Value Locked (TVL) across leading smart contract platforms has seen a decline, closely reflecting the price fluctuations of their respective native assets. Notably, Fantom and Terra are the only ecosystems that have shown growth in TVL over the past 90 days. Terra's TVL increase of 49% can be attributed to the significant rise in LUNA's price and the continued expansion of the UST supply.
Section 2.2: Rising Debt Concerns
Low interest rates have contributed to increased debt ratios in DSSI countries, reversing some of the declines observed in the early 2000s. The economic shocks from COVID-19 and the ongoing war in Ukraine have exacerbated these debt challenges, particularly for low-income nations. Approximately 60% of DSSI countries are at high risk of debt distress, with several having already requested debt restructuring.
Section 2.3: Wealth Disparity Among Billionaires
Elon Musk has overtaken Jeff Bezos as the wealthiest individual globally, with a net worth of $219 billion compared to Bezos's $171 billion. The disparity in wealth is striking, as the average American would need to work three million years at the median salary to reach Musk's fortune. This wealth gap is even more pronounced in nations with lower average incomes.
Section 2.4: Market Dynamics and Stablecoin Trends
Recent data suggests a slight uptick in stablecoin whale transactions, indicating that large investors may be positioning themselves for potential buying opportunities. Historically, increased demand for stablecoins often precedes significant rises in cryptocurrency prices.
Section 2.5: Global Banking Resilience
Results from the Global Bank Stress Test indicate that while banks show resilience, there remains a need for vigilant monitoring, especially in emerging markets that are susceptible to vulnerabilities.
Section 2.6: Accumulation of Bitcoin
The trend of Bitcoin accumulation continues, with significant holdings now in addresses that have shown no history of spending. Over the past four months, the balance in these accumulation addresses has increased by 217,000 BTC, indicating a robust growth rate.
Section 2.7: The Rise of NFTs and Collectibles
2021 was notable for its NFT boom, but traditional collectibles also saw hefty investments. This section reviews the largest auction sales of the year across various categories.
Section 2.8: Global Cryptocurrency Interest
The global fascination with cryptocurrencies like Bitcoin and Ethereum is on the rise, particularly in countries such as India and South Korea, where the percentage of crypto investors has doubled from 2019 to 2021.
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