This year on Planet Earth - 29 July 2016

Friday 29 July 2016

Here’s an overview of some key factors for the global economic outlook.

I’m away on holiday this week, so rather than provide an up-to-date market report for bitcoin and the wider financial picture, I thought it would be worth zooming out a bit and taking a look at some of the factors that might influence the global and crypto markets in the coming months and beyond.

Bitcoin

First up, bitcoin. The Halving itself has passed relatively uneventfully. Bitcoin is currently trading around its all-time high in terms of market cap (back when it topped $1,000 there were fewer coins in existence). We now have the medium-term picture to consider. All things being equal, reduced supply will mean demand takes over, so there will likely be increased upward pressure on price. Against this, we have to balance potential disruption to the network caused by reduced profits for miners - some of whom will inevitably switch off their rigs. It will be worth keeping an eye on hashrate, but it is currently too early to know the effect. If hashrate drops faster than new miners coming online can absorb the change, then transactions may back up until Difficulty can adjust again. That could potentially cause problems and a loss of confidence. If enough miners adopt SegWit quickly enough, however, the additional capacity should mitigate this problem.

Fire

This blog isn't ZeroHedge, so we'll include the good news as well as preparing for the apocalypse

Traditional markets

Of as great a significance to bitcoin is what is going on in the wider global economy. Whilst bitcoin’s fundamentals are relatively strong at present, short-term movements in price are frequently driven by shocks in the wider financial markets - sometimes because bitcoin is used to circumvent capital controls, and sometimes because it is perceived (by a small minority) as a ‘safe haven’ investment akin to gold. In both cases, speculators amplify the effects of genuine demand.

Brexit is a moderate but not cataclysmic threat to the Eurozone and global markets. The fall in the value of the pound - down to around $1.32 from $1.50 pre-Brexit - has made the UK more competitive. A cut in interest rates to 0.25% and/or further quantitative easing is likely in August, hitting the pound again but boosting stock markets. A slowdown in the property sector is expected.

Eurozone. The likelihood of a slight recession in the UK will also hit the Eurozone, which may itself need a further round of easing (interest rates are already negative there). Elsewhere in the Eurozone, Italy’s banks are in poor shape and a bailout could well be required. It is not clear how this would occur in practice, since EU rules prevent a bank from receiving state aid. A bail-in is politically unfavourable since, unusually in this kind of situation, around a third of bondholders are ordinary Italians rather than institutional investors. However, if it is allowed to fail there could be a systemic effect. It’s a real conundrum, so prepare for some rule-bending.

In the US, the dollar is likely to weaken going into the election in November. Further rates rises are unlikely before then, and uncertainty is always damaging - but the reality of a Trump presidency could prove rocky for the global markets, to say the least.

China dominates the economic picture. Growth is slowing, but there are a couple of other factors to consider. One is what is currently happening in the South China Sea, and the potential for tensions with the US to evolve into something more serious. Looking a year ahead, five of the seven members of the Politburo Standing Committee will be replaced - a key opportunity for President Xi Jinping to consolidate power, with far-reaching political and economic consequences. 

Lastly, Turkey’s attempted coup is significant because it underlines the instability of the country, which is viewed by Western leaders as critical in the ongoing struggle to foster peace in the middle east.

Is there any good news? Well, oil has stabilised and there are fewer concerns around a ‘hard landing’ in China. The rapid acquisition of ARM Holdings by Japan’s Softbank proves that the UK is still open for business even outside the EU, with implications for everyone. The Eurozone is showing some signs of life. Overall, global growth is expected to be solid, if not stellar. They’re interesting times with plenty of challenges, but it’s not all doom and gloom - especially for the new and fast-growing crypto sector.


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