9/16/2024

Good Morning. 

• Core CPI rose .03% MoM, caused by a spike in housing and travel costs. This recent rise in core CPI is further evidence that a 50 basis point interest rate cut is unlikely.

• PE’s entrance into the NFL will raise evaluations and grant team owners greater liquidity.

  • Miami Dolphins potentially valued at $7 billion in possible acquisition 

  • Potential buyers include Ares and Sixth Street; the latter already has significant investments in sports teams.

• Imminent monetary policy:

  • (Wednesday) Federal Reserve is expected to cut rates by 25 basis points, setting the Federal Funds Target Rate at 5.00%  to 5.25%. It would be the first rate change since July of 2023.

  • (Thursday) Bank of England is expected to keep rates at 5% after a 25 basis point cut in August. 

  • (Friday) Bank of Japan will likely maintain rates at .25%. After a global selloff following BOJ’s last meeting, BOJ will likely maintain course to continue rate cuts in coming months.

In today’s newsletter we will cover:

• Proposed Basel III Endgame and its implications

• Gold price movements

Markets 

• This marks another interesting week in the financial markets in terms of asset pricing. Let’s begin with gold, followed by hedge fund capital!

Over the course of this year gold has soared to all time highs. Many factors have led to these gains and could potentially drive further price increases. These include potential interest rate cuts by the Federal Reserve, gold purchases by emerging central banks, and speculation over the U.S. debt burden.

• Fed rate cuts 

  • As rates have remained high for a sustained period, investors typically deploy more capital into fixed income securities rather than gold or similar commodities. Rate cuts will bring Western investors back into the gold market, thus increasing demand.  

• Central bank purchases 

  • Central banks from around the world continue to purchase gold at a brisk pace. This pace has been amplified since Russia’s invasion of Ukraine in 2022. Central banks typically increase their gold reserves for inflation control, to mitigate risk, and to rebalance holdings.

https://www.goldmansachs.com/insights/articles/gold-prices-forecast-to-climb-to-record-high

Hedge Fund Capital

• Point72 plans to return billions back to investors as AUM has ballooned to $35.2 billion. Hedge funds restrict and return capital in order to avoid becoming too big. There is only so much money that can be effectively deployed into the financial markets without hindering returns. 

  • The trend remains within the $4 trillion hedge fund industry where the biggest funds (Point72, Millennium Management, and Citadel) get flooded with more cash than they can manage. Citadel for example has returned $25 billion to clients since 2017. The exodus away from smaller funds continues, evidenced by the fact that over 1,000 funds have closed since the start of 2022. 

https://www.bloomberg.com/news/articles/2024-09-12/point72-plans-to-return-billions-as-big-hedge-funds-cap-assets

(Steve Cohen, Point72)

Proposed Basel III Endgame 

After the 2008 global financial crisis, significant financial reforms were enacted globally to address the vulnerabilities in the global financial system. Sweeping regulation was made that led to increased oversight and enhanced risk management practices for banks. The U.S. passed its own regulations, and in cooperation with other countries the U.S. passed the proposed Basel III in 2010. Basel III was an outline for increasing bank regulations that most importantly included increased capital and liquidity requirements in order to protect banks from becoming insolvent. 

In 2017 the Basel Committee on Banking Supervision announced it would make revisions to Basel III that would increase regulation in order to further protect the global financial system from a crisis similar to that of 2008. This set of amendments is known as the Basel III Endgame and has led to a long battle between regulators and banks.

Regulators originally proposed a 19% hike in capital requirements for the 8 largest U.S. banks in 2023. This proposal met fierce backlash from banks who lobbied against the proposal. 

Last week the Fed Vice Chair Michael S. Barr announced that proposed capital hikes would be cut in half to 8%. Lobbyists argued that proposed capital hikes would stifle economic growth because banks would have to decrease lending. In addition,  another win for banks would be that banks with assets of $100 billion to $200 billion will not be affected by the new policy. Further strengthening the banks’ case was sentiment coming from Fed officials agreeing that concessions to banks would be ok.

“Life gives you ample opportunity to learn and relearn the lesson of humility.” (Michael S. Barr)

(Michael S. Barr, Vice Chair for Fed)

What's to come?

• Revised policies have yet to be accepted by banks who could argue for further concessions.

• The election could have serious implications because the president nominates Fed governors.

• Serious outcry from supporters of stricter regulation, including Senator Elizabeth Warren

What to look out for this week

• Tuesday: Retail sales (August), Federal Open Market Committee meeting begins, housing market index (September)

• Wednesday: FOMC interest rate announcement, Federal Reserve Chair Jerome Powell's press conference

https://www.investopedia.com/what-to-expect-in-the-markets-this-week-8710971

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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