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This episode was hosted by Noelle Acheson. “Markets Daily” is executive produced by Jared Schwartz and produced and edited by Eleanor Pahl. All original music by Doc Blust and Colin Mealey.
Audio Transcript: This transcript has not been edited and may contain errors.
It’s Friday, December 15th, 2023 and this is Markets Daily from CoinDesk. My name is Noelle Acheson, CoinDesk collaborator and author of the Crypto is Macro Now newsletter on Substack. On today’s show we’re talking about market moves, bitcoin ETFs, the economy and more. So you don’t miss an episode, be sure to follow the podcast on your platform of choice, and turn on notifications. And just a reminder, CoinDesk is a news source and does not provide investment advice.
Now, a markets roundup.
In crypto markets, prices are showing some weakness today.
According to CoinDesk Indices, at 9 a.m. Eastern time today, bitcoin was trading down two tenths of a percent over the past 24 hours, at 42,317 dollars. Ether was down nine tenths of a percent, trading at 2,250 dollars. Not everything is down, though. Solana and Avalanche are up 6.5%.
In macro matters, yesterday we got the latest retail sales data from the U.S. To set the stage, in October, retail sales contracted 0.2% month-on-month. Consensus forecasts were for another contraction in November, with growth of negative 0.1%.
Nope, what we got was positive growth of 0.3%. This fits in with the strong employment data we saw last week. It does not fit in with the Fed signalling that rate cuts could start soon.
If you’re confused, you’re not the only one.
Digging a bit deeper into the retail sales figures, an interesting picture emerges. The strongest growth was in spending in restaurants and bars, which is the only services segment in the data. This highlights that goods inflation is doing pretty well, but services inflation is still sticky. This may make the battle against inflation harder, but it is good for the economy, in that services account for roughly 70% of GDP.
I’ve spoken in previous episodes about the Atlanta Fed’s GDPNow model, which spits out a GDP growth expectation based on evolving economic data.
Well, yesterday it revised its prediction for the fourth quarter, from 1.2% up to 2.6%. Most economists are forecasting around 1% growth for Q4, but the Atlanta Fed’s model has a better track record than the forecasting experts, so read into that what you will. Now, 2.6% does not sound very recessionary. That’s good news. But it does make the Fed’s change in tone even more perplexing.
In stocks, the main indices were up between two and four tenths of a percent yesterday. The S&P 500 and Nasdaq look set to lock in a seventh straight week of gains, having climbed 2.5% so far. The Dow Jones is up around 2.8% on the week, on track for its ninth consecutive weekly gain. Futures are pointing to continued gains today.
In Europe, the FTSE 100 jumped 1.3% yesterday, but so far this morning is dropping about half a percent as comments from the Bank of England yesterday dampened hopes of rate cuts. The German DAX closed flat after a volatile day yesterday, and is still jumping around a bit this morning. The Eurostoxx 600 had a better day yesterday, jumping nine tenths of a percent, trading flat so far today.
In Asia, the Japanese Nikkei climbed almost nine tenths of a percent in trading today, as policymakers are pushing back on expectations of rate hikes. A Reuters poll published this morning shows that 80% of surveyed economists expect an unwinding of Japan’s easy monetary policy by the end of 2024, with 20% betting that the first move comes as soon as next month. China’s Shanghai Composite dropped just over half a percent, while the Hang Seng jumped 2.4%.
In commodities, oil prices are continuing to climb on hopes that a rate pivot could boost economic growth and therefore oil demand. Brent crude futures are up seven tenths of a percent so far this morning, trading at 77 dollars and 25 cents a barrel, on track for the first weekly gain in two months.
Gold is holding on to recent gains, up two tenths of a percent to trade at 2,040 dollars.
Stay with us – after the break we’re going to look at an ETF issue that is getting a lot of attention this week.
Welcome back!
Today I’m going to continue with the Friday tradition of answering a listener question, and the one I’ve chosen has to do with an ETF plumbing conflict that could end up impacting both the number of issuers and investor demand.
The question is about how ETF redemptions would work, and why this matters.
It’s a really wonky but potentially significant twist to the bitcoin spot ETF story.
The redemption process works like this – this is very simplified, but it’ll serve for this discussion: Let’s say you want to sell your ETF shares. You do so in the market, which pushes the price of the ETF share down. A market maker buys those ETF shares, bringing the price back up to what it was before your sale, which presumably reflects the prices of the underlying assets. The market maker then delivers those ETF shares to the issuer for cancellation. They are taken out of circulation, but something must now be done with the underlying assets that correspond to those shares.
Here’s where there is some disagreement.
Normally ETFs use what is known as in-kind redemption. In exchange for the ETF shares sent over for cancellation, the issuer sends the market maker the underlying assets. In this case, the issuer would send over the corresponding amount of bitcoin, and then the market maker would handle the sale.
This is popular because it does not trigger a tax event. Since the issuer is not selling, it is just transferring, it does not have to pay capital gains tax on that transaction.
But the SEC does not like this idea. Basically, it is not happy about mainstream broker dealers and handling bitcoin, because of the risk. This is strange because broker dealers work with market makers whose job it is to handle risk. But whatever.
What the SEC wants is cash redemptions. It wants the issuer to do the selling, not the market maker. This is not great, because if the issuer does the selling, that triggers a tax event. And if the issuer has to pay capital gains tax on profits when it sells bitcoin, it is going to somehow have to distribute that extra and unnecessary cost to investors.
This is not necessarily a deal breaker, and it’s not clear what the net impact to investors would be. But it could make the product less attractive.
So far, Invesco, Bitwise and Valkyrie have said they’re ok with cash redemptions until in-kind redemptions are approved. Anything to get this over the finish line. Fidelity is sticking to its request to have in-kind transactions.
BlackRock has apparently proposed a compromise which will give issuers and market makers more flexibility while protecting investors from redemption-linked price swings.
Whatever happens, we are still likely to get BTC spot ETFs within the next few weeks. And the advantage of cash redemptions is that large legacy banks can get involved in the ETF plumbing since they wouldn’t be touching actual bitcoin. This could further broaden market support for the products.
And meanwhile, issuers will continue to pressure the SEC to let bitcoin spot ETFs be, you know, ETFs, with all the tax advantages this model offers. It’s been a long hard road, and there are obstacles ahead. But we’re getting there.
