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Overview of the topics

• Stocks Highlights: On Thursday, the ECB announced a 25 basis points rise in its benchmark interest rate.
• Social Data: The Fed’s announcement that it will end its hiking cycle was seen as good news for US investors.
• Economic Data: While growth and cyclical stocks underperform with high rates, non-cyclical stocks do better.
• Wall Street is wrapping up a strong April with moderate gains as companies report strong profits.
• Onchain Data: Against a possible recession, investors are considering buying Bitcoin and Ethereum.
• Deep Dive: However, FTX's collapse caused a shift towards self-custody in the crypto industry.

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Stocks Highlights

ECB confirms 25-basis points hike

On Thursday, the European Central Bank (ECB) announced a 25 basis points rise in its benchmark interest rate to curb surging consumer prices. With the latest increase, rates will be at levels not seen since November 2008.

The ECB expressed concerns that the inflation outlook continues to be too high for too long. Inflation figures released earlier this week showed a rise in the headline rate to 7% for April, with core inflation, which excludes food and energy prices, decreasing to 5.6%. Despite “consistent” rate rises, inflation remains well above the ECB's target of 2%. Then, the eurozone economy grew less than expected in Q1, registering a GDP of 0.1%.

The ECB acknowledged that the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, but the strength of transmission to the real economy remains uncertain. The ECB also said it would likely stop reinvestments under its Asset Purchase Program (APP) in July, which is a bond-buying stimulus package that started in mid-2014 to deal with persistently low inflation levels.

The decision to hike rates by 25 points was nearly unanimous, with ECB President Christine Lagarde stating that it was necessary. However, there was a divergence across the different sectors of the economy, with the manufacturing sector's prospects worsening, while the services sector growing.

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Social Data

But the US will stop its hiking cycle…

The Federal Reserve's announcement that it may be ending its marathon hiking cycle was seen as good news for US investors, but it also raised concerns that the economy is slowing.

Economist and portfolio strategist Lauren Goodwin noted that the Fed's reference to tightening credit conditions confirms her expectations of an economic downturn, and she believes that a recession in the following months is highly likely. This sentiment was reflected in the stock market, since all three major indexes marked their fourth straight day of losses.

The S&P 500 bank index and the KBW regional banking index both closed down, as concerns about banks and tighter lending conditions spilled into other sectors. The dollar gained against the euro, and benchmark 10-year yields and 2-year yields sank as investors worried about regional banks and signs of a weakening economy.

Crude oil prices stabilized after three straight days of declines, but spot gold reached its highest level as U.S. banking concerns accelerated a flight to the safe-haven asset. Overall, the announcement from the Fed has created a sense of unease among investors, because they try to digest the balance between potential interest rate stability and a rise in recession risk.

One of the most apparent signs of an impending recession is a consistent rise in job losses and a corresponding spike in unemployment rates. Claudia Sahm, an economist and former Federal Reserve staff member, has pointed out that in the post-World War II era, any rise in the unemployment rate of half a percentage point over a few months has often marked the beginning of a recession.

To determine whether layoffs are rising, many economists keep track of the number of individuals who file for unemployment benefits every week. This metric provides an indication of the severity of layoffs. In this period, many companies, including 3M, Lyft, and Meta, have declared layoffs, and weekly applications for jobless aid have been steadily increasing.

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Economic Data

How do interest rates affect stocks?

Interest rates have a significant impact on the macroeconomic environment and market sentiment, particularly on stocks. When central banks increase or cut rates, there can be both winners and losers.

High-interest rates tend to have a negative effect on earnings and stock prices since companies face higher costs for borrowing and payments on current debt. Growth stocks and cyclical stocks tend to underperform in a high-rate environment, with value as well as non-cyclical stocks likely to do better.

Growth stocks, which are rapidly expanding companies, take out loans that they expect to pay back, assuming rates will remain stable. However, they are more negatively affected by higher interest rates because they tend to be in the early stages of development and have longer-term cash flow horizons.

Value stocks, on the contrary, tend to represent well-established firms that pay stable dividends and are perceived as a better store of value during turbulent economic times. Hence, if interest rates are high, investors often allocate funds to value stocks as a means of preserving capital.

Cyclical stocks are more negatively impacted by interest rate hikes as they are more affected by macroeconomic changes. When rates tumble, the economy tends to be stimulated, and consumers buy more, which helps cyclical stocks. However, when rates rise, they have less spending power.

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Onchain Data

What if there is a recession?

The US Federal Reserve has warned of a potential recession, and the IMF predicts a sluggish global economy. Against this backdrop, some investors are considering buying Bitcoin and Ethereum.

Bitcoin has had a strong start to the year, with a 65% increase in value since January. However,  analysts urge caution and predict a potential decline in the coin's value, offering a chance to acquire Bitcoin at a reduced price.

Ethereum has also seen a 53% increase in value, but its performance has been marked by dips in February and March. Industry experts have made various price predictions for Ethereum in 2023. Moreover, the value of ETH is reflective of the wider adoption of DeFi and Web3.

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Community

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Deep Dive

Investors move back to hardware wallets

FTX's collapse caused a shift towards self-custody in the crypto industry. Self-custody has risks such as losing private keys, but companies like Ledger have seen increased sales of hardware wallets for self-custody.

To make self-custody safer, Ledger is launching a service called Ledger Recover, which splits a wallet recovery phrase into three encrypted shards and distributes them to three custodians for a monthly fee.

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News of the week

• Banks: US regional bank share rebound and Apple lift Wall Street. [Read more]
• Technology: Meta Platforms scoops up the AI networking chip team from Graphcore. [Read more]
• Markets: This is how the banking crisis ends. [Read more]
• Investments: Central bank gold demand hits first-quarter record, investments surge on U.S. banking turmoil. [Read more]

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