As the year draws to a close, many are wondering if Q4 can provide any insights into what will happen next year in the global economy and more importantly in the cryptospace.
Ruslan Lienkha, Chief of Markets at YouHodler gave us his take and insights into Q4 and even beyond.
C’est la vie…
Ruslan Lienkha, Chief of Markets at YouHodler
What’s happening in the global economy?
From a global perspective, economic growth is still weak. The tightening monetary policy has become more visible and impactful in developed economies, and China has not yet completely recovered from the COVID period and is struggling to foster its economy.
How is the interest rate discussion affecting economic growth?
We can see interest rates as the cost of money in an economy. Obviously, a higher cost means less money in the system; thus, a less monetized and dynamic economy. However, while higher rates help to control inflation, they could also be much more destructive for the economy.
How has the Fed’s interest rate cycle affected inflation?
Higher rates help cool down the economy. When people have less money, consumer demand decreases and as a result, inflation slows down. Clearly, we are at the end of the Fed’s fastest rate hike cycle in decades. Although inflation remains elevated, it is gradually improving over the past months in 2023.
Note that the Fed has not yet resolved the problem of a strong labor market, but we expect some changes by the end of the year. Also, consumer spending is high because of accumulated household savings during the pandemic, but this will likely fade in Q4.
Any thoughts on the housing market?
There is some stress in the housing market, but not critical at the moment. One of the most negative factors is the downgrade of the US in Fitch ratings, which was caused by the debt ceiling issues, the banking crises, and mounting problems in commercial real estate itself.
How has the debt drama affected economic growth?
Debt drama impacted the US credit rating, so formally investing in the US market is riskier now than it was one year ago. It does not affect the global economy directly. Still, it adds pressure on the financial market and contributes to the process of deglobalization, which is one of the reasons for the global economy slowing.
What are your predictions based on the debt issues?
Regarding the US government debt, I do not believe there is any real default risk as the US can print more dollars to pay its debt.
Political tension creates more psychological stress in markets than a real problem. Talking about corporate debt, the situation will get worse with time. Many companies have not felt the pain of high rates yet because many of them still use loans with roughly 0% interest – these were initiated during the COVID and economic stimulus period.
What is the effect of the banking crisis on economic growth?
The banking crisis has not had serious implications on economic growth, thanks to the Fed’s help. At the same time, a well-working financial system is crucial for economic growth. If the situation goes out of control, it will cause an amplified deep crisis in the economy.
Do you think there’s a bubble in the American housing market?
There are some problems in the American housing market, but I would not call it a bubble. We may see price correction; however, a dramatic drop is possible if the Fed loses its path to a soft landing.
Do you think the American economy can withstand the current shocks in the global economy?
At the moment, the American economy is doing quite well in keeping a balance between recession prevention and inflation control. So there is a big chance to withstand if new negative factors do not appear in the global economy.
What global geopolitical factors will determine the probability of the emergence of a recession?
A main risk factor to watch is in China. As the second-largest economy in the world, it has a strong impact on the global economy, which affects financial and commodity markets.
How severe will a recession be if one occurs?
It is not possible to say anything for sure at the moment due to the lack of input data. Actually, any scenario is possible depending on the trajectory of the crisis.
What’s happening with the corporate sector?
At the moment, we don’t see many concerns in the corporate sector, and a bigger percentage of analysts have shifted from leaning toward an upcoming recession to a “softish landing.” But as I mentioned, many companies still use cheap loans, so I think problems will mount over time. Enterprises that have already been facing high rates to roll over their loans have to start a cost-optimization process.
Will Wall Street cause another recession?
Wall Street is an important part of the system, but the economy is much bigger. The Street could accelerate or exacerbate some problems but could not be a problem itself – only the Fed’s actions can drive the economy into recession.
How will Wall Street’s activities affect the global economy?
Politicians and their decisions affect the global economy much more than financial institutions. I am not sure if Wall Street can directly impact the global economy.
How interconnected are global markets at the moment?
It looks like the big cycle of globalization had finished before the COVID period, and now we are in the opposite process of deglobalization, with protectionism showing up in policies. Global markets are still pretty connected but not as much as a few years ago. Undoubtedly, this is one of the reasons for the current weak growth of the global economy.
What’s happening with the economy across the pond in Europe and the U.K.?
In Europe, some countries are already officially in recession, with decreased production and housing and rental crises. So the question is whether this mild recession is going to get worse or end quickly with minimum damage to the economy.
Do you have any rate expectations from the European Central Bank (ECB) and Bank of England (BoE)?
The main goal of the restrictive policy is to cool down the economy and decrease consumer demand. The production has dropped, and the economy has slowed down in Europe; thus, there is no need for further hikes at the moment. From my viewpoint, the ECB is going to maintain the current rates until 2024. Also, we may see the same behavior of the UK’s central bank.
What’s going on with China?
With the ongoing slowdown of its economy, we clearly see some mounting problems in the banking and real estate sectors.
What role will China play economically?
China will remain the world’s second-largest economy in the near future and will be comparable with the US and Europe’s “weight” on the global stage. The internal economic dynamic of the country will affect the global economy in many ways. For example, through international trading and commodity prices.
How will crypto define Q4’s performance?
Positive internal factors in the crypto world will lead to capital inflow, such as broader adoption, growing institutional interest, more jurisdictions with transparent regulation, and better technologies.
As of now, the SEC has fewer arguments to reject spot ETFs, so we expect the first approval of spot BTC ETFs will happen in Q4 or at the beginning of 2024. At the same time, this inflow will be restrained in Q4 because of uncertainties in the global economy. So long-term investors still have time to form long positions until mid-2024
Financial markets will have a stronger impact on crypto due to the gradual, further integration of crypto into the financial ecosystem. It means that the crypto market can move independently only during low volatility in TradFi – otherwise, digital assets will correlate with traditional assets such as tech stocks. In the case of stock index tranquility, BTC price will increase by the end of the year to the zone of $35k-40k. In the negative scenario of a market crash, we can experience a drop to the 20k zone.
In mid-2024, if the Fed starts to cut rates, that moment will be a kind of momentum for risky assets and, particularly, cryptocurrencies.
What role will regulatory efforts play?
As mentioned above, the approval of spot ETFs will impact the overall crypto market and likely result in capital inflows.