Market watch #1. 03/17/2020
Cryptocurrencies have been argued to be uncorrelated with the most traditional financial instruments.
(The link to the research paper may be found here:
Bouri, E., Molnár, P., Azzi, G., Roubaud, D., & Hagfors, L. I. (2017). On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier? Finance Research Letters, 20, 192–198. https://doi.org/10.1016/j.frl.2016.09.025)
However, it is obviously reactive to change in human behavior due to the announced health emergency. The current situation in the markets is also heated up by the expectations of the economic recession. To get more idea about what is going to happen in the next couple of month let’s look at the financial regulatory measures that are taken.
The main task of the Fed is to make credit flow in the economy.
To attain this the Fed resurrected most of its aggressive, unconventional and extraordinary policies and announced them in a single weekend.
- First, interest rates were cut by 1.5 percentage points, to a range of 0 to 0.25. This was made so that banks can borrow money from the Fed at increasingly favorable rates and reissue the credits for business at lower rates.
The Fed reopened so-called swap lines with leading global central banks, ensuring the flow of dollars can continue overseas despite a freeze-up in certain money markets.
- Second, the Fed announced new installment of $700 billion in planned purchases of bonds this Sunday (at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed debt). This measure is called quantitative easing (QE). More about this instrument can be find here:
- The Fed encouraged banks to use its discount window.
- The Fed also eliminated a requirement that banks stash a certain level of reserves — essentially customer deposits — at the Fed.
- The Fed opens swap lines to other world banks to help to keep dollar funding flowing globally.
This list has exhausted perhaps the most powerful recession-fighting tools. Nevertheless, the Fed claims to stand ready to use asset purchases and liquidity tools further.
How this all should reflect on the cryptocurrency market?
So far, majority of cryptocurrencies have experienced significant price drop.
Investors are selling risky assets to defend their equity portfolios. Fiat currencies seem to be the most liquid and reliable option. However, no-one dares to tell the future. Watch this conversation to get more market insight: https://youtu.be/A9BWIGyFSnk.
At this time it is important to watch the global markets, what big institutions and policymakers are doing, and make up your own educated guesses.
And, of course, follow recommendations to keep the health intact. Physical, mental, and financial.
Thanks for reading. Give it a clap and comment if you like/dislike/have more to add to the topic, please.)
My LinkedIn where I post on the most recent findings in technology and economics research: https://www.linkedin.com/in/maria-petryk-86abb077/