Following its record high on March 28, the S&P 500 index has experienced a setback, dipping below the 5,150-point mark on April 12. The price of Bitcoin (BTC) has similarly taken a downturn during this period. As both the stock market and cryptocurrencies have exhibited similar trends, it is worth exploring whether the reasons behind the stock market correction might also impact digital currencies.
The decrease of 2.9% in the S&P 500 index from its record high of 5,333 might seem small, but it signifies that the U.S. stock market index has fallen below 5,120 for the first time in a month. Due to persistent inflation, investors have become uncertain about the Federal Reserve’s capacity to reduce interest rates significantly by the end of 2024.
Rising inflation and tighter U.S. Federal Reserve monetary policy are the drivers
On April 12, some large American banks like JPMorgan and Wells Fargo announced a 4% decrease in their quarterly earnings from interest. This decline signifies the gap between what these banks make from their investments and what they pay out to depositors. Smaller banks experienced similar struggles in 2023 according to Yahoo Finance’s reports.
JPMorgan’s Chief Financial Officer, Jeremy Barnum, pointed out that clients are moving away from regular savings accounts towards higher-earning options such as certificates of deposit (CDs). This trend is a significant factor in JPMorgan’s stock dropping by 5.7% on April 12, despite the company reporting an impressive 6% rise in annual net profits for the first quarter compared to the previous year. Furthermore, JPMorgan’s CEO, Jamie Dimon, addressed the potential dangers of escalating geopolitical conflicts and the possibility of further interest rate hikes by the Federal Reserve.
The main cause of today’s stock market decline is ongoing inflation, leading the central bank to keep interest rates elevated and decrease liquidity. This situation may appear advantageous for Bitcoin because it functions as a limited resource, like gold. Gold reached a new record high of $2,431 on April 12, but this achievement did not raise red flags by itself.
On April 10, the yield on the US 5-year Treasury note reached a five-month high, indicating that investors were unhappy with yields below 4.5% given the anticipated inflation. This development has two significant consequences: initially, the government will have higher borrowing costs when renewing its debt; secondly, businesses may be less inclined to hire or expand because of more enticing fixed-income options.
When gold prices go up and investors look for better returns in U.S. Treasurys, it suggests that they’re not feeling very confident about the economies. In this scenario, promoting Bitcoin as an investment option becomes difficult, even if there are inflation concerns. Since only a small group of market players see Bitcoin as a safe bet, the idea that it could thrive during a stock market dip is more of a gamble than a certainty.
The global economy could falter if China’s economic growth fades
An additional cause for worry beyond tightened Federal Reserve policies and decreasing faith in the American economy is China’s real estate sector troubles and disappointing export data. China’s exports dropped by 7.5% year-over-year in March, a larger decline than the anticipated 2.3%, according to Yahoo Finance. Analysts express concern over excess capacity in certain Chinese industries and predict a slow recovery due to the ongoing property sector crisis.
On April 10, Fitch lowered China’s sovereign credit rating to a negative outlook due to its intentions to sell $138 billion worth of long-term bonds to boost economic development. According to Bloomberg’s report from March 28, Chinese banks disclosed bad loan ratios reaching up to 5% at the end of 2023. Some major real estate companies such as Evergrande and Country Garden have more recently filed for bankruptcy.
China’s actions add a large dose of uncertainty to international financial markets. However, it is not clear how this will impact Bitcoin prices specifically. While it might be hopeful to assume investors would boost their cryptocurrency investments if the S&P 500 keeps dropping, such an expectation may be overly optimistic.
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2024-04-12 23:40