Daily Update May 15, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Cryptocurrencies in the Balance

There are two competing narratives when it comes to cryptocurrencies. The first narrative is that cryptocurrencies exist in opposition to fiat currencies. They can serve as a hedge against inflation created by loose monetary policy and are a safe asset in the event of market volatility. For this narrative to be true, cryptocurrencies should behave a lot like gold. They should increase in value as fiat currencies decline and in moments of market volatility, just as gold does. The other narrative around cryptocurrencies is that they are a speculative investment that swings wildly in valuation based on message board rumors. If the second narrative was true, we could expect cryptocurrency valuations to track the wider equity market. When investment dollars are plentiful and markets are on the upswing, cryptocurrency would flourish as investors put their money into riskier assets. But when money gets tight and markets decline, cryptocurrency prices would fall.

It may be too soon in the development of cryptocurrency markets to choose definitively between these two narratives. But a recent study from S&P Global provides early indications of a possible answer.

The early evidence for cryptocurrencies being an alternative and even a hedge against fiat currencies is weak. The study compared various market dynamics with the S&P Cryptocurrency Broad Digital Market Index (S&P BDMI), which reflects a broad investable universe of digital assets listed on open digital exchanges. When the S&P BDMI is compared to Treasury yields, two-year and 10-year break-even inflation expectations, or the Nominal Broad US Dollar Index, cryptocurrencies demonstrate none of the hedging characteristics of gold. 

In fact, comparing the S&P BDMI to these measures or the M2 money supply seems to indicate that cryptocurrencies most resemble speculative assets, flourishing when equity markets are hot, but rapidly losing value as monetary policy tightens and inflation expectations rise. In contrast, gold prices are highly correlated with inflation expectations: The more inflation people expect, the higher the value of gold.

Speculative assets tend to move with market sentiment. When people believe markets are going up, they are more willing to take on risk. When they are afraid of markets going down, they retreat into safe assets such as Treasurys or gold. Early indications hint that cryptocurrencies behave more like speculative assets. A comparison with measures of market sentiment such as the Cboe Volatility Index or the Financial Stress Index demonstrate that cryptocurrencies decline in value as fear increases. Cryptocurrencies don’t appear to be a haven when traditional markets are hitting the skids.

There are several possible arguments for why cryptocurrencies are not acting as a hedge against fiat currencies, inflation or market volatility. One reason is that cryptocurrency markets are simply immature. As investors learn to use decentralized assets “properly,” the assets will become the hedge they are intended to be. Another reason is that there is simply not enough data to compare cryptocurrencies with macroeconomic forces. The compounding effects of a pandemic, a war, geopolitical tensions, tightening monetary policy and a supply shock make it impossible to correctly account for cryptocurrency valuations. Finally, there is the theory that inflation just isn’t bad enough yet. There is some evidence that in emerging markets, with very high levels of inflation, cryptocurrencies are viewed as a better store of value than fiat currencies.

Today is Monday, May 15, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

Tighter Credit, Cooling Inflation So Far Fail To Derail Fed Rate Hikes

The Federal Reserve’s aggressive rate hike cycle may still have more room to run, even as inflation has cooled from 40-year peaks and banks significantly slow lending. Consumer prices rose 4.9% year over year in April, down from the 9% peak in the summer of 2022, the Bureau of Labor Statistics reported on May 10. Meanwhile, banks reported a smaller appetite for new consumer loans during the first quarter of 2023 than at any point in nearly three years.

—Read the article from S&P Global Market Intelligence

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Capital Markets

Private Equity Investments In Global Asset Management Surge In Q1

Private equity and venture capital firms announced $5.00 billion of investments across 43 transactions in the asset management sector worldwide this year through May 2, according to S&P Global Market Intelligence data. With a strong private equity interest in the sector, it is likely the 2023 full-year aggregates will match private equity investments in asset management in 2021 and 2022. During the first quarter, the asset management companies pulled in $4.89 billion across 30 deals. Clayton Dubilier & Rice LLC and Stone Point Capital LLC's $4.23 billion acquisition of an unknown majority stake in Focus Financial Partners Inc. was mainly responsible for the 84.5% quarter-over-quarter growth.

—Read the article from S&P Global Market Intelligence

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Global Trade

Listen: Wild West Or Emerging Market? Certified Natural Gas Gains Steam In The US

With investors, importers, and the public paying more attention to greenhouse gas emissions from fossil fuel production, US natural gas producers have increasingly turned to third-party certifiers to attest that they are responsible operators. Wyoming gas producer PureWest Energy has been on the forefront of the emerging certified gas market, having certified 100% of its production through Project Canary and as a founding member of the Differentiated Gas Coordinating Council. PureWest CEO Chris Valdez joins S&P Global Commodity Insights' Kelsey Hallahan to share his insights on the development of a certified gas market and the state of emissions transparency in the US gas industry. Afterward, SPGCI senior emissions analyst Emmanuel Corral and low carbon pricing analyst Hope Raymond share some key highlights from a new report on this emerging market.

—Listen and subscribe to Platts Future Energy, a podcast from S&P Global Commodity Insights

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Sustainability

Mississippi Hub Pitches Itself As A 'Strategic National Hydrogen Reserve'

The Mississippi Clean Hydrogen Hub has added its name to the growing list of publicly-known contenders vying to become one of the Department of Energy's clean hydrogen hubs, and its pitching storage as its primary selling point. On May 11, the leading partner of the Mississippi hub effort, Hy Stor Energy, belatedly announced that it had submitted an application to the DOE before of its April 7 deadline. It is the 22nd confirmed hub applicant, and the fifth in the Gulf Coast region. The process will ultimately award up to $1.25 billion to between six and 10 finalists.

—Read the article from S&P Global Commodity Insights

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Energy & Commodities

Turkish Elections Unlikely To Solve Ankara's Energy Dilemma

Turkey goes to the polls on May 14 in twin presidential and parliamentary elections. The country's control of the Bosphorus Strait -- a key chokepoint for global commodities -- and its role as a corridor for Kurdish oil supplies make Ankara an important geopolitical player in world markets despite its own lack of energy resources. Sitting president Recep Tayyip Erdogan and Kemal Kilicdaroglu are the front runners in a tight race, but whoever wins, their options to solve Turkey's risky dependence on imported energy, especially from Russia, will remain limited. And a key question will be how the country manages payments for imports and domestic supplies with a volatile currency and inflation above 40%.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Listen: Cloud Technology And Smart Grid Modernization With Amazon Web Services And Duke Energy

Last year, Duke Energy and Amazon Web Services announced they would be collaborating to build out cloud technologies to support Duke's Intelligent Grid Services. The technology is aimed at helping the utility anticipate energy demand and identify where and how it should update its power grid. The use of the cloud opens up a wealth of opportunities for data collection and analysis and is essential to Duke's efforts to transform the grid. For this episode, Energy Evolution spoke with Sarah Cooper, the general manager of AWS industry products, and Bonnie Titone, the senior vice president and CIO of Duke Energy, one of the nation's largest energy holding companies, serving 8.2 million customers in North Carolina, South Carolina, Florida, Indiana, Ohio and Kentucky. Duke has targeted a 50% carbon reduction from its electric generation by 2030 and net-zero carbon emissions by 2050.

—Listen and subscribe to Energy Evolution, a podcast from S&P Global Commodity Insights

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