[Part 2] Inflation Is At Record High, What Will Financial Markets Look Like In 2022

In part 1, we discussed the high inflation, which led to a 0.75% increase in the Red Rate in the past month. Besides, the structure of increasing inflation is led by a strong increase in oil prices. In this part 2, we will discuss how to tie money through interest rates in the past and how it affects the present.

Core knowledge:

• World economic growth will bottom out in 2023.
• Besides, a lot of news related to the legal issues for the crypto market is released by legislators.

What Should The Financial Market Pay Attention To In The Near Future?

Fed’s Tightening Monetary Policy to Feal With Inflation

The upcoming meeting of the Fed (to take place on June 15) will decide a lot on the cash flow trend in the financial market in the period of 2022 – 2023.   

Currently, although the economic growth indicators are not very positive, the US still maintains a stable unemployment rate.

The unemployment rate remains at 3.6% will be the driving force for the Fed to consider the 0.75% interest rate figure, although Chairman Jerome Powell has repeatedly denied this before because inflation is still ” the leading enemy of the American economy.

As a factor with great influence on the economy and financial markets on a global scale, the FED in the upcoming meeting is likely to offer views and other policy plans compared to the previous meeting. with what we saw at the Fed meeting in December 2021.

With a roughly 22% drop from the current top of the S&P500 index and interest rate projections above, it seems that institutions have taken action and bet on the 0.75% scenario. However, for institutional investors holding large positions, it is quite difficult to finish placing bets by “rolling” the portfolio (due to liquidity problems).

⇒ Therefore, in the 0.75% scenario, the market is likely to have quite strong fluctuations.

However, if the Fed keeps its plan (continues to raise interest rates by 0.5%) then maybe things will change, and the market will become more positive (for both US stocks and crypto). 

In fact, many experts have said that inflation will ease when people’s travel demand declines, causing oil prices to cool down. Besides, there were also comments from economists at Wells Fargo bank that raising interest rates will not help much in restraining commodity prices from rising.

To summarize, the Fed’s monetary policy:

• It is more likely that the Fed will take a more “hawkish” stance on interest rates and traders have bet on this, however, it is likely due to liquidity issues that keep the whales from completing their bets. fully “rolling” their positions ⇒ The stock market is likely to fluctuate strongly when this information is released.
• On the contrary, if the Fed keeps the increase of 0.5% in the next meeting (on the basis that raising interest rates does not help too much in lowering oil prices and also increases unemployment and makes the economy worse) will make stocks and crypto more positive.

Negative Forecast For Economic Growth

The forecast of GDP growth data was revised by the World Bank in the latest report updated on June 7.

GDP growth in 2022 of the global economy is only 2.9% (down 1.2% compared to the previous forecast of 4.1%). Growth figures for 2023 were also revised down by 0.2%. Especially developed countries (the USA, Euro Area and Japan) will record the bottom growth in 2023 – 2024. 

The World Bank also compared the current situation with many similarities with the recession of the 1970s. For the current macro situation, people and businesses are facing difficulties, so cash flow will continue to find safe haven investment channels (low volatility) ⇒ High-risk markets like stocks or crypto are not likely to receive cash flow in the near future.

However, when the economy recovers, it is likely that the FED will introduce a looser monetary policy again to stimulate growth. Then stocks and crypto will have an easier basis for growth.

Crypto Impact From Legislators

A Few Updates From Crypto Regulation In the US

Control over the crypto market in the US could be delegated to the CFTC instead of the SEC, US Commodity Futures Trading Commission Chairman Rostin Behnam is making moves to get Congress to pass this bill.

Mr Behnam also provided further information that CFTC will be more deeply involved in the market, especially in terms of technology. This could help expedite the approval of crypto spot ETFs in the US (instead of relying on CME futures as they are today) due to improved regulatory and infrastructure benevolence.

Also on crypto regulations in the US, a 600-page copy was shared on Twitter of government bills aimed at this market.

https://twitter.com/bot_slam/status/1533973084889403392?s=20&t=a5HMpCfZaicFZekkK-G04g

Some important highlights include:

• The bill targets a variety of categories including DeFi, stablecoins, DAOs, and exchanges.
• Requires DAOs, exchanges, stablecoin service providers, and DeFi platforms to register as legal entities in the US, otherwise, they will be treated as individual taxpayers.
• The regulator will charge more fees on exchanges, although users will have to bear more fees, but will reduce the phenomenon of exchanges against users causing conflicts of interest.
• Refers to the market management rights to be handed over to the CFTC.
• In the event that exchanges go bankrupt, they are also not allowed to liquidate users’ assets and must add terms of service for consumers to agree to before using their services.
• ETC.

However, for DeFi platforms or DAOs, when users and founders are completely anonymous or are not US citizens, this bill still has many shortcomings in management with these “legal entities”.

⇒ However, due to the decentralized nature of crypto, it is unlikely that legislators will be able to come up with specific laws to fully govern these protocols. 

It can be seen that these bills will help the crypto market become more transparent and protect users, but at the same time, it will also increase costs and control.

This government move shows us that:

• They want the market to develop sustainably in the long term with risks (especially from Crypto-related CeFi companies such as stablecoins or exchanges) to be controlled and limited.
• If this bill is real and the official version is passed, it will likely cause a negative market reaction in the short term (due to problems with DeFi control, DAOs, tax increases, …)

However, we have yet to receive official information from this bill, so it is still possible that this is just a rumour to cause negative effects in the short term. 

SEC Investigates Binance

Currently, Binance is cooperating to investigate the following key issues:

• Is a BNB Initial Coin Offering (ICO) an event to sell securities without registering with the SEC?
• Market-making company investigation involving Binance CEO, Changpeng Zhao (CZ).
• And finally, the Insider Trading activity of Binance employees (is there any fact that the Binance company uses trading data from customers and advantages from the exchange for profit?)

We can see that the SEC has conducted a lot of investigations and lawsuits related to organizations in the crypto market such as Ripple, Mirror Protocol, Terraform Labs, Tether, etc., so in the future similar activities. may continue to happen, causing negative sentiment on the market.

However, this is also a necessity to protect customers:

• For example, for stablecoin companies, the SEC investigation will make information about the Treasury transparent. Ensure Peg hold and market stability. 
• As for exchanges like Binance, investigating Insider Trading activities will also ensure that in the future, stop – losses will be less likely to happen.

The Trend of Crypto Payments Creates Real Demand In The Market

Not all news is negative for crypto. According to a recent survey from Deloitte, the majority of entrepreneurs in the US prefer crypto payment methods.

The results of the survey collected from 2,000 senior executives of retail organizations across the US show that 85% of those surveyed expect that crypto will be ubiquitous within 5 years. next.

In addition, the survey noted that 64% of consumers are currently interested in crypto, and 85% of organizations think that crypto payments will be popular by 2027. 

Additionally, 54% of major retailers with revenue of $500 million or more have invested more than $1 million in building crypto payments infrastructure.

If companies really want to implement this plan, there will be positive effects on the market as follows:

• Drive demand, liquidity, and capitalization of stablecoin platforms. It is likely that most will be just centralized stablecoins due to clear regulations and risk management strategies.
• The above trend will also increase the applicability of blockchain platforms, creating more sustainable demand for crypto (as stablecoins currently do not have their own blockchain but will issue through other blockchains and ecosystems).
• From there, indirectly maintain the demand for DeFi.

However, these are long-term plans and there are many uncertainties in terms of management policy and infrastructure. Therefore, we still can’t expect this news to have a positive impact on the market in a short time.

Verdict

Above is my sharing about the history of the Fed in coordinating the macro economy.

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