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The Market Corner: the month in review

By Filippo Lecchini, PhillipCapital

Federal Reserve

The January meeting brought no change, as expected. The FED Funds Futures were implying less than 15% probability of a move and nothing is expected to change until June when a hike is given a 51% chance.

There are several reasons why waiting might be the best strategy right now: Q4 2016 growth was slower, unemployment in January inched just a bit higher because of previously discouraged people coming back to search so there’s still capacity to absorb, and uncertainty on the new administration policies.

In normal times, that was not the case during the financial crisis, the FED likes to counterbalance other economic forces and since at this time there is little clarity on what fiscal policy, trade policy and regulation are going to be, acting too soon might cause monetary policy to be ineffective.


After making headlines in 2014 when Mt. Gox, the biggest exchange then, was hacked and eventually filed for bankruptcy, Bitcoin has hit new highs lately and started getting media attention again.

There is a technology aspect, like gold, only a finite amount can be mined. In this case “mining” has everything to do with programming; Bitcoin is a digital currency. Political ideas are built into it as well: Bitcoin reflects the belief that people should be able to transact without intermediaries, borders and currency controls. There are also problems: the biggest one is whether Governments can allow it, which is equivalent to surrendering some of their monetary authority. More practical issues revolve around safely storing and being able to use Bitcoin.

The topic is fascinating and yet very complex. It would be wrong to think that it is just another extravagant idea that most of us can safely ignore. The blockchain, the universal ledger behind Bitcoin transactions, is already being considered as a solution applicable to other situations where it would be beneficial to eliminate intermediaries and replace them with a peer to peer agreement. For example, music could be sold directly by musicians in digital format cutting off the distributors.

One interesting situation seemingly developed in China in the last few months: while data to prove anything is hard to get, the conjecture revolves around the negative correlation between Bitcoin and the Yuan Renmimbi. China lately has stepped up its effort in preventing capital outflows and supporting the Yuan. As Chinese people are unable to buy foreign currency on the FX market they have an alternative: selling the Yuan to buy Bitcoin is a way to move money outside the country without government control. Then Bitcoin can be sold abroad to buy USD and that’s why the spread between Chinese exchanges and foreign exchanges is not an arbitrage opportunity. That would require free circulation.

In the US there are several Bitcoin companies and exchanges, but even traditional institutions started to pay attention. CME for example launched a Bitcoin Real Time Index (BRTI) in November 2016.

Only time will tell if Bitcoin or other so called crypto currencies are here to stay, but the technology behind them seems well on the way to change a lot of transactions as we know them.

Looking ahead:

It is all about the new administration: at the time of writing confirmations are still ongoing and the new President of the United States has only spent a few weeks in Office. While the general ideas are well known, when it comes to implementation the devil is in the details.


RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. The information contained herein is provided to you for information only and believed to be drawn from reliable sources but cannot be guaranteed; Phillip Capital Inc. assumes no responsibility for errors or omissions. The views and opinions expressed in this letter are those of the author and do not reflect the views of Phillip Capital Inc. or its staff.