“May you live in interesting times” is a famous Chinese curse and irony would have it that a Coronavirus originating from China makes the current times truly interesting, challenging even, but it is within turmoil that most innovation and opportunities are found.
When shocks hit the global economy, Wall Street tends to look at history as guidance to the future and with last week’s FED rate cut, we are propelled to draw comparisons to the last time this happened — October 2009. It is around that time that an unknown person going by the pseudonym Satoshi Nakamoto published a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Nexo’s research team has been following global trends and has identified a chain of events as catalysts for the record-high pressure on the commercial banks: the current coronavirus outbreak, the oil price wars between Russia and Saudi Arabia and the subsequent record low-yield of government bonds.
Despite the market meltdown, Nexo’s ‘Earn Interest’ rates will remain a stable 8% through these tumultuous times.
For more information on how we are able to retain our excellent service throughout this uncertain moment in global finance, our team has prepared the article below that will elaborate on the series of events surrounding the downward market trend.
- The current coronavirus outbreak was among the primary catalysts for the downward movement across markets.
- The oil price wars between Russia and Saudi Arabia were yet another factor that prodded forward the general market downtrend.
- The rally for government bonds that followed led the yield on the 10-year US bonds to dip as low as 0.4% early on the morning of March 9th.
- The historic bottom of the US government yields combined with fears of global recession might result in an irreversible dent in commercial banks’ balance sheets.
- Despite suffering some significant lows, the normally very volatile crypto market has been relatively stable compared to other industries.
- Nexo’s overcollateralized balance sheet and crypto and digital asset-based business model shield the company from the negative influences currently hitting incumbent banking institutions and allow the company to retain a stable 8% interest for clients with assets on the platform.
The Role of the Coronavirus in the Recent Market Drop
Since 2009, equity investors have had a pleasant ride — the major indexes were hitting new all-time highs on a daily basis. However, two weeks ago, a de-risking provoked by the coronavirus turned into a multi-asset capitulation. There has been a lot of speculation about the role of the coronavirus in various markets’ recent downward activity.
The coronavirus has infected more than 111,500 (1,693 over the last 24 hours alone), killing in excess of 3,800 (79) patients. Most critical remains the situation in China. However, the virus is quickly spreading with the highest number of new cases registered in Iran (595 over the past 24 hours), Spain (362), South Korea (165), and Germany (111). At the same time, no new cases or deaths were registered in Italy (7,377 total cases/ 366 deaths) and France (1,209 total cases/19 deaths), which were among the five most affected countries.
Coronavirus has also reached high-profile events attended by global leaders. Yesterday, an attendee of the Conservative Political Action Conference (CPAC) tested positive for COVID-19. President Trump, Vice President Pence, numerous administration officials, and celebrities were also present at the event.
While the numbers surrounding the coronavirus are concerning and may have caused some de-risking, it is only in combination with a few other factors that the downward market trend actually came to be. One of these other large-scale catalysts is the oil price wars.
Oil Price Wars Between Russian and Saudi Arabia Further Push Global Sell-Off
The latest catalyst fueling the global sell-off was geopolitical tension between two of the largest oil exporters — Saudi Arabia and Russia. The Gulf kingdom was advocating for larger production cuts among OPEC nations and Russia to support prices amid the coronavirus outbreak. While there seemed to be a consensus among the group, Russia opposed the plan. Moscow stated that from April 1 all parties will be able to produce as much as they wish.
Enjoying one of the lowest oil production costs and the largest spare capacity, Riyadh was quick to respond by boosting extraction and offering its crude at a steep discount. The result was an inevitable price war. While the motivation behind the behavior of both countries remains unclear (speculations vary from an attempt to steal market share to a US shale industry attack), the result is evident — a severe correction in the oil prices and an exchange trading halt on Monday morning as the S&P 500 fell 7%. It was the first time such a breaker was triggered since the depth of the financial crisis in December 2008.
The political power plays around oil further trigger market downtrends and drive people and investors to seek out “safe havens” for their money. Presently this is exactly what occurred with people flocking towards government bonds.
Rally on Government Bonds and How This Led to an Exceptionally Low Yield
As global equities plummeted, investors piled into what is historically perceived as the absolute safe haven — government bonds. The result was the sharpest rally for US 10-year Treasuries in more than a decade, depressing the yield to as low as 0.40%:
Low interest rates are generally beloved by businesses — the cheaper the capital the better. Interest rates interventions are also the primary tool for central banks to conduct monetary policies: stimulating the economy when necessary while cooling it down in case of overheating.
There is one industry, however, that is disadvantaged by low interest rates: commercial banking.
Commercial Banks Most Negatively Impacted by the Prevailing Low Interest Rate Environment
The negative impact the current environment has on banks can be explained easily with given the way these institutions make their money. First, they borrow for short durations at lower rates while lending long-term at higher ones. The difference between the two is called net interest spread. Second, they leverage their capital by lending up to 10 times more funds than shareholders own.
As long-term yields are falling, so is banks’ profitability. To make matters worse, these legacy players are heavily exposed to endangered industries like the oil and gas, or a correction in the real estate market due to economic contraction.
For example, Citigroup’s net exposure to energy and commodities is 35% of the bank’s tangible common equity (TCE). Some regional US players have an energy loan exposure to TCE ratio of 100%. A series of bankruptcies in the oil and gas sector could quickly wipe out a major bank’s equity balances, replaying events from 2008. Unsurprisingly, the financial sector was the worst-performing one on Monday, March 9th, with only basic materials lagging behind it (e.g. oil and gas):
In the midst of the struggles of traditional finance, many investors and retail clients alike are seeking out safe and profitable ways to store and use their wealth. With commercial banks hindered by the current circumstances many of these users are turning to Nexo and we have received many questions about our business, whether the overall market lows are affecting the company and what we can offer potential clients in this complicated moment for finance.
The Crypto Market in Today’s Context
Despite cryptocurrency’s volatile nature, most digital assets remained relatively stable during the broad market massacre.:
While BTC generally took a hit and a substantial portion of this year’s gains were wiped out, the returns of the largest crypto asset are still in positive territories, dipping only recently below gold’s performance. The uncorrelated nature of BTC in connection with traditional markets creates unique diversification potential.
Moreover, besides the reduction of portfolio risk and improved returns, crypto assets can serve as a hedge especially against the diminishing effect of monetary stimulus.
Another argument for the stability of Bitcoin in the face of the coronavirus crisis is the recent dynamics of mining activity. There have been concerns that the coronavirus outbreak will lead to a reduction in hash power, especially given the concentration of mining activity in China. Nevertheless, the expected halving of bitcoin in May has prevailed and mining activity has continued the rise overall.
Nexo Maintains Stable Interest Rates for Clients Amid Financial Uncertainty in the Global Markets
Nexo’s business model, unlike traditional banks, is currently unaffected by the factors that have caused uncertainty and downward trends in other areas. This is because, in contrast to commercial banks, our market exposure is limited to digital assets, which as observed above, experienced relative stability during the recent market turbulence.
Furthermore, unlike the incumbent banking institutions, our balance sheet is overcollateralized with digital assets. We generally hold 200–500% of the face value of our assets as collateral, making Nexo extremely resilient to severe stress across the financial system.
As such Nexo clients can continue to enjoy earning up to 8% daily compounding interest on fiat and stablecoins. This rate will not be affected by all the circumstances mentioned above. Additionally, for anyone hoping to use crypto as a hedge, Nexo’s tax-efficient Instant Crypto Credit Lines will continue to provide crypto owners with instant liquidity without having to sell their digital assets.