Week in Review: Crypto's Sell-off

The move lower was driven by mixed signals from Elon Musk and Tesla’s decision to reverse a decision to allow bitcoin as payment for cars, pointing to the environmental impact of bitcoin mining. Also weighing on bitcoin’s price Wednesday was the news that China had banned financial institutions and payment firms from providing cryptocurrency-related services, reiterating its tough stance on digital currencies.

After staging a rebound on Thursday, Bitcoin cut gains after the US Treasury Department said it is taking steps to crack down on cryptocurrency markets and transactions and said it will require any transfer worth $10,000 or more to be reported to the Internal Revenue Service.

This week’s crypto crash has helped erase almost 40% from bitcoin’s price from a peak of almost $65,000 in mid-April to current levels of $36,500.

Equities were mixed in the U.S. over the week with the tech-heavy Nasdaq (+0.31%) gaining a little ground and the other major U.S. indices (S&P 500 and Dow Jones) ending modestly lower. Investors continue to be concerned that strong U.S. growth could result in higher prices (inflation), forcing the Federal Reserve to pare back its accommodative monetary stance earlier than planned. The minutes of the April meeting of the Federal Open Market Committee revealed that a number of members were “thinking about” discussing tapering bond purchases “at some point in upcoming meetings.” According to a number of economists, the base effects caused by the global lockdowns, as well as transitory supply chain bottlenecks and the presence of significant labour market slack justifies the Federal Reserve’s outlook given that U.S. unemployment is still 5% below pre-pandemic levels. With this in mind, we continue to expect the Federal Reserve to ultimately maintain its credibility and sustain its accommodative monetary policy stance.

Shares in Europe rose on signs that the economy is rebounding with the Eurozone May flash services PMI 55.1 vs 52.5 (expected) reaffirming the pick-up in services activity in the euro area as economies start to reopen and move on from virus restrictions. The pan-European STOXX 50 Index ended the week 0.21% higher.

Meanwhile, as the UK continued to lift lockdown controls retail sales rebounded strongly in April. Sales volumes jumped 9.2% month on month - twice the average forecast in a Reuters poll of economists and the biggest rise since June - after rising 5.1% in March. Clothing sales soared by almost 70%. The UK’s FTSE 100 Index fell 0.36% over the week as the pound strengthened on the back of the stronger economic data.

Japan’s stock markets finished the week higher, with the Nikkei 225 Index returning 0.83% while Chinese stocks recorded a mixed week with the benchmark Shanghai Composite Index shedding 0.1%.

Market Moves of the Week:

South Africa's central bank left its repo rate unchanged at 3.5% in a unanimous decision on Thursday, saying it saw the inflation risk on the upside. Reserve Bank (SARB) Governor Lesetja Kganyago said a recent spike in consumer prices was temporary, but that the bank would not hesitate to tighten policy if it became permanent. At the meeting the bank trimmed its forecast for consumer price-growth in 2021, to an average of 4.2% from 4.3% in March. It left forecasts for CPI in 2022 and 2023 unchanged, at 4.4% and 4.5% respectively.

Both S&P Global Ratings and Fitch decided not to cut their rating of South Africa deeper into sub investment grade on Friday, with Fitch noting that South Africa’s state finances have “improved substantially” despite continued “substantial risks to debt stabilisation”. Fitch noted that strong commodity prices have helped South Africa to achieve a current-account surplus of 2,2% of GDP, the first since 2002. S&P also highlighted the boost of higher commodity prices but said that structural constraints, a weak pace of economic reforms and a slow vaccination rate will continue to constrain economic growth.

The JSE All Share Index recorded a loss of 0.54% for the week dragged down by the resource sector (-3.27%) which was sharply down on the week. The rand gained for a second day on Friday ending the week at R13.97 to the U.S. Dollar.

Chart of the Week:

What the chart is telling us:

Bitcoin is down about 25% since last Friday, though it’s up from a Wednesday plunge to as low as $30,000. The volatile week started with Elon Musk suspending acceptance of Bitcoin payments at Tesla Inc. followed on Wednesday by China’s central bank adding a statement warning against using virtual currencies. China has long expressed displeasure with the anonymity provided by Bitcoin and other crypto tokens and warned earlier that financial institutions weren’t allowed to accept it for payment. While on Thursday, it emerged the U.S. may require crypto transactions of $10,000 or more to be reported to tax authorities. Bitcoin’s price fell back below $40,000 level on Friday with Chinese authorities intensified calls to crackdown on mining and trading the cryptocurrency.

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