Welcome back to another edition of Mintos Insight, where we aim to provide our investors with the latest data and analysis to empower their investment decisions.
In this edition, we delve into the market dynamics of Q3 2023, exploring the intricate interplay between major asset classes and shedding light on the unfolding economic narrative following the significant shakeup in the banking sector earlier in 2023.
As a quick reminder, our last update in Q1 2023 recounted the collapse of Silicon Valley Bank, an event that sent shockwaves through financial institutions worldwide.
Traditional asset classes
In 2023, the stock market defied earlier concerns about a potential correction, with the S&P 500 showing a year-to-date gain of 11.8% as of mid-October.1 However, there are mixed signals in the market, prompting notable financial analysts to express a pessimistic view of the stock market’s future.
Expected market loss
Analysts suggest a significant decline in the S&P 500 is possible. John Hussman, a well-known hedge fund manager, has a track record of making significant market predictions, including accurately foreseeing the collapse of the dot-com bubble and the 2008 global financial crisis.
His projections, such as a potential drop of around 63%, continue to be a topic of discussion among investors and market analysts. This adds credibility to his forecasts. Such a decline would take the market back to levels last seen in 2013, erasing years of gains.2,3
Potential abrupt downturn
While not predicting an immediate crash, analysts warn that when the market correction does occur, it may be abrupt. This caution stems from concerns that investors have become complacent due to prolonged periods of strong returns and may not be adequately prepared for a significant downturn.
The recent performance of the S&P 500 index exhibits significant gains, which highlights analysts’ concerns over potential market complacency. For instance, as per a forecast, the S&P 500 is projected to close the year 2023 up by about 17% from the end of 2022, reaching a level of approximately 4 496. 4
One of the most prominent signs pointing to an economic downturn is the decline in overall economic activity. The Leading Economic Index (LEI), which closely tracks turns in U.S. business cycles, has now fallen for a staggering 15 consecutive months. This streak of decreases hasn’t been witnessed since the lead-up to the 2008 recession. This is a historical parallel.
- The LEI, which anticipates future economic activities, experienced a decline of 0.7% in June, following a decrease of 0.6% in May, indicating a deceleration in economic activity. The contraction in the LEI is also accelerating, with a 4.2% fall over the last six months, compared to a 3.8% fall between June and December 2022.5
This decline can be attributed to several factors, including a weakening consumer outlook and an increase in unemployment claims. These indicators are signals, suggesting that consumers may be pulling back on spending, and the job market may be showing signs of strain.
Challenges in the European market
The STOXX Europe 600 index, a key benchmark for European equities, recently experienced a short-term setback, shedding 3.78% over five consecutive trading days leading up to 23 October 2023. This decline was notably triggered by a 1.4% drop in one day in October, hitting a new seven-month low, driven by rising bond yields.6
Despite short-term challenges, there are signs of hope in the European market. Goldman Sachs projects a 3% earnings growth for companies within the STOXX Europe 600 Index in 2023. This projection highlights the underlying strength in the European market.7
In recent times, the bond markets in Germany and Italy, two key Eurozone economies, have been experiencing significant fluctuations in their 10-year government bond yields. These changes are closely tied to various economic indicators and central bank policies.
Germany’s 10-year government bond yields have been rising, reaching a high of approximately 2.9% in October. This upward trend was primarily driven by investor expectations that central banks might maintain elevated interest rates for an extended period. The optimism was fueled by economic data in the Eurozone that exceeded initial projections.8
Similarly, Italy’s 10-year government bond yields also surged, reaching an 11-year high of 5% on 4 October 2023. This significant increase was largely influenced by robust retail sales figures in the United States, which reinforced expectations of sustained higher interest rates.9,10
- Strong retail sales figures in the United States can signal a robust domestic consumption environment, which, in turn, suggests a healthy U.S. economy. This economic strength may lead to expectations that the U.S. Federal Reserve will continue to raise interest rates to prevent inflation. These expectations can attract global investors seeking higher returns to U.S. financial assets, which can drive up U.S. Treasury yields.
- As U.S. Treasury yields rise, they become more attractive to investors compared to bonds in other countries, including Italy. Consequently, international investors may reallocate their capital from Italian bonds to U.S. Treasuries, resulting in increased selling pressure on Italian bonds. This increased selling pressure can cause Italian bond prices to fall and their yields to surge, as investors demand higher yields to compensate for the perceived risk and opportunity cost of holding Italian bonds compared to U.S. Treasury bonds. Hence, the robust U.S. retail sales figures indirectly contribute to the movement in Italy’s bond yields. This happens through the interconnected global financial markets and interest rate expectations.
Alternative asset classes
As of October 2023, the cryptocurrency landscape has witnessed significant developments. Bitcoin recently surged past $35 000, its highest price since May 2022, driven by a bullish trend in October and growing optimism surrounding the potential approval of a Bitcoin Exchange Traded Fund (ETF).11
Emerging reports suggest that the U.S. Securities and Exchange Commission (SEC) might refrain from appealing a previous decision where it was deemed incorrect to reject a Bitcoin ETF application from Grayscale Investments. This development has spurred enthusiasm within the cryptocurrency sector, as a Bitcoin ETF would enable a broader spectrum of investors to gain exposure to Bitcoin without engaging in direct trading.
Apart from the anticipation surrounding a Bitcoin ETF, escalating geopolitical tensions have further driven demand for assets perceived as ‘safe havens’. Ongoing conflicts and overarching market concerns have led investors to seek assets like Bitcoin, often referred to as digital gold, as a hedge against prevailing uncertainty.12
Investments on Mintos
Progress continues on the recovery front. As of 1 October 2023, a total of €12 million in war-affected loans have been repaid by Russian lending companies. Our persistent negotiations with the remaining company are inching towards a constructive resolution.
The annualized average net return on Mintos is currently at 9% as of the end of Q3, with the average interest rate remaining stable at around 12.5%.
Expansion of asset classes on Mintos
On 17 October, our first high-yield Fractional Bonds offer went live on Mintos! This new addition opens up the world of corporate bonds to our investors, making it accessible and easy for anyone to diversify their portfolio with bonds.
Historically, bonds, especially high-yield bonds, have been out of reach for retail investors without substantial capital. On Mintos, investors can invest in high-yield bonds with as little as €50, with no fees for investing.
Find out more about Fractional Bonds on Mintos.
Mintos Activity: October 2023
The month of October has shown promising growth on Mintos. Total investments saw a significant increase to €97 million, and interest earned by investors climbed to €4.2 million. This upward trend was primarily driven by stable investments, as explained Peteris Mikelsons, Head of Partnerships.
The average interest rate for October stood at 12.5%, translating to an annualized average net return of 9% (YTD 7.4%). The cumulative interest earned by investors on Mintos has now reached €254.8 million, and the total assets under administration are now €606.7 million.
Mikelsons added, “The availability of Notes for investment in EUR has risen to €81 million, marking a slight decrease from the previous month’s, but still reflecting a stable investment environment.”
Key Takeaways for Mintos Investors:
- Caution in traditional asset classes
The analysis highlights caution in traditional asset classes, particularly the stock market. Despite a year-to-date gain in the S&P 500, concerns about a potential significant decline persist. Investors should be mindful of mixed signals in the market and the possibility of abrupt downturns, especially given the prolonged period of strong returns.
- Interconnected global bond market
The fluctuations in Germany’s and Italy’s government bond yields underscore the interconnectedness of global financial markets. Rising U.S. Treasury yields, driven by strong U.S. retail sales figures, indirectly impact bond yields in other countries. Understanding these global interconnections and interest rate expectations is crucial for assessing bond market dynamics.
- Cryptocurrency as a safe haven
The role of cryptocurrencies as safe-haven assets amid geopolitical tensions and market concerns is growing. Bitcoin’s resurgence and the anticipation of a Bitcoin ETF approval showcase its appeal as a hedge against uncertainty. Investors should consider the evolving landscape of alternative assets like cryptocurrencies when diversifying their portfolios.
This is a marketing communication and in no way should be viewed as investment research, advice, or recommendation to invest. There is no guarantee of recovering the invested amount. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.
1 S&P Dow Jones Indices (Accessed October 2023)
2 Hussman. (2023, October). When the Bough Breaks. Hussman Funds. https://www.hussmanfunds.com/comment/mc231013/
3 Mohamed, T. (2023, October 17). The S&P 500 is in a historic bubble and could crash by 63%, markets guru John Hussman warns. Markets Insider. https://markets.businessinsider.com/news/stocks/stock-market-outlook-hussman-bubble-crash-fed-rates-grantham-recession-2023-10
4 Valetkevitch, C. (2023, August 23). S&P 500 to end 2023 up 17% but little gains seen between now and year end: Reuters poll. Reuters. https://www.reuters.com/markets/us/sp-500-end-2023-up-17-little-gains-seen-between-now-year-end-2023-08-23/#:~:text=The%20benchmark%20S%26P%20500%20index,median%20forecast%20of%2041
5 US Leading Indicators. (n.d.). The Conference Board. https://www.conference-board.org/topics/us-leading-indicators
6 Khandekar, A. (2023, October 26). European shares slump 1% ahead of ECB verdict, dismal earnings weigh. Reuters. https://www.reuters.com/markets/europe/european-shares-slump-ahead-ecb-verdict-dismal-earnings-weigh-2023-10-26/
7 Goldman Sachs lifts Europe Inc’s 2023 profit growth forecast to 3%. (2023, October 17). Reuters. https://www.reuters.com/markets/europe/goldman-sachs-lifts-europe-incs-2023-profit-growth-forecast-3-2023-10-17/#:~:text=Oct%2017%20(Reuters)%20%2D%20Goldman,back%20of%20higher%20oil%20prices.
8 Journal, W. S. (n.d.). TMBMKDE-10Y | Germany 10 Year Government Bond Historical Prices – WSJ. Germany 10 Year Government Bond. https://www.wsj.com/market-data/quotes/bond/BX/TMBMKDE-10Y/historical-prices
9 Journal, W. S. (n.d.). TMBMKIT-10Y | Italy 10 Year Government Bond Price & News – WSJ. Italy 10 Year Government Bond. https://www.wsj.com/market-data/quotes/bond/BX/TMBMKIT-10Y
10 Mutikani, L. (2023, October 17). Strong retail sales, factory output point to robust US growth in third quarter. Reuters. https://www.reuters.com/markets/us/us-retail-sales-beat-expectations-september-core-retail-sales-rise-solidly-2023-10-17/
11 Bitcoin USD (BTC-USD). (n.d.). Yahoo! Finance. https://finance.yahoo.com/quote/BTC-USD
12 Lang, H., & Ghosh, K. (2023, October 24). Bitcoin soars to 1-1/2-year high on ETF bets. Reuters. https://www.reuters.com/technology/bitcoin-rises-395-31187-2023-10-23/