Digital assets and US stocks are increasingly moving in tandem, reflecting the influence of similar macroeconomic factors.

A recent correlation study reveals that the 40-day correlation coefficient between the largest 100 cryptocurrencies and the S&P 500 Index is approximately 0.67.

This figure approaches the record high of 0.72 set in the second quarter of 2022, indicating a significant alignment between these two asset classes.

A correlation coefficient is a number that measures the strength and direction of the relationship between two variables.

Historically, cryptocurrencies were viewed as non-correlated or even counter-cyclical to traditional markets.

However, during times of economic uncertainty, this perception has shifted.

The growing involvement of institutional investors and the shared economic drivers—such as monetary policy, inflation, and global risk sentiment—are now increasingly influencing both equities and the crypto market.

Fed policy fuels market synchronization

Recent actions by the Federal Reserve have further shaped this correlation.

US stocks reached all-time highs, and Bitcoin surged past $64,000 following a 50-basis-point rate cut, signaling the start of a monetary easing cycle.

Caroline Mauron, co-founder of Orbit Markets, emphasized this trend, stating, “Macro factors are driving crypto prices currently, and this should continue throughout the Fed’s easing cycle unless we see a crypto-specific black swan event.”

Market participants are now closely monitoring commentary from Fed officials and the upcoming release of the Personal Consumption Expenditures (PCE) price index, which is the central bank’s preferred inflation measure.

Sean McNulty, director of trading at Arbelos Markets, noted, “We view the speakers as being more important than the PCE inflation data, as it’s the FOMC reaction function that is key at the moment.”

Source: Bloomberg

2022: the year of unprecedented correlation

The year 2022 marked a significant shift in the relationship between cryptocurrencies and US equities.

As the Federal Reserve began tightening monetary policy to combat rising inflation, the correlation between these asset classes reached unprecedented levels.

The correlation coefficient between Bitcoin and the S&P 500 climbed to around 0.72 in the second quarter of FY23, showcasing how both markets responded similarly to interest rate hikes, inflation fears, and broader risk-off sentiment.

During this period, Bitcoin and other major cryptocurrencies mirrored the performance of risk assets like tech stocks, particularly as both crypto and stock markets entered bear territory.

In early 2023, however, the correlation moderated to approximately 0.5, as some crypto-specific events, such as developments in decentralized finance (DeFi) and regulatory news, temporarily decoupled the markets.

As of Monday morning, Bitcoin, the largest cryptocurrency, saw a modest rise of less than 1%, reaching $63,480, alongside similar gains across other major digital tokens.

This uptick coincided with increases in US equity futures, driven by expectations of further monetary stimulus in China and heightened interest in artificial intelligence and cryptocurrency investments, following a recent pledge from US Vice President Kamala Harris.

Overall, the evolving correlation between digital assets and traditional equities underscores the need for investors to remain vigilant about macroeconomic factors shaping both markets.

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Eurozone business activity unexpectedly contracted in September, signaling deepening troubles in both the services and manufacturing sectors.

The region’s Purchasing Managers’ Index (PMI), compiled by S&P Global, plummeted to 48.9 from 51.0 in August, marking the first contraction since February.

This decline, driven by weak demand and economic challenges in major economies like Germany and France, raises significant concerns about future growth prospects and intensifies speculation regarding potential policy easing by the European Central Bank (ECB).

The PMI’s dip below the critical threshold of 50 highlights deteriorating economic conditions across the eurozone.

The services PMI fell sharply from 52.9 in August to 50.5 in September, while the manufacturing index decreased from 45.8 to 44.8.

Germany’s struggles

Germany, the largest economy in the region, is particularly affected, having contracted by 0.1% in the second quarter and facing further decline in the third quarter.

Economists warn that a technical recession, defined as two consecutive quarters of negative growth, is increasingly likely.

Germany’s struggles reflect a broader trend as France also slips into contraction after a temporary growth spurt driven by the Olympics earlier in the year.

The widespread weakness in the eurozone, combined with easing inflation pressures, paints a picture of a fragile economic landscape for the months ahead.

In the services sector, which had previously shown relative resilience, September’s PMI indicates a significant slowdown, dropping to 50.5, below all forecasts.

Companies are experiencing a sharp decline in new orders, with the new business index falling to 47.2—the fastest contraction rate in eight months.

Although price pressures are easing, analysts suggest that the ECB may need to implement more aggressive interest rate cuts to stimulate demand.

Some predict that further deposit rate reductions could be introduced as soon as October to mitigate the economic downturn.

Manufacturing continues to face challenges

Meanwhile, manufacturing in the eurozone continues to face steep challenges, as evidenced by the PMI’s decline to 44.8, the lowest level since early 2023.

This marks the 26th consecutive month of readings below 50, indicating sustained contraction.

The output index for September fell to 44.5, with business optimism waning significantly as the future output index dropped to an 11-month low of 52.0.

This persistent weakness raises concerns about a potential lack of demand stabilization and the ongoing impact of broader macroeconomic uncertainties on Europe’s factories.

Recent data also indicates a slight easing in eurozone inflation, a critical concern for businesses.

The services output prices index dropped to 52.0, its lowest level since April 2021.

While inflationary pressures persist, this development offers some hope for policymakers, leading many economists to suggest that the ECB might consider rate cuts in October.

Overall, business sentiment across the eurozone remains bleak as September’s PMI data ignites fears that the ECB’s recent measures may not be sufficient to avert a prolonged downturn.

As central banks worldwide adjust their monetary policies, Europe finds itself at a pivotal juncture, with further stimulus likely needed to stabilize growth and restore confidence in the economy.

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The potential takeover of Germany’s Commerzbank by Italy’s UniCredit has ignited a fierce political and economic debate, with German Chancellor Olaf Scholz coming out firmly against the deal.

As UniCredit raises its stake in Commerzbank from 9% to 21%, concerns over national sovereignty and economic independence have taken center stage.

The Italian bank, led by CEO Andrea Orcel, plans to increase its shareholding further, targeting up to 29.9%.

Scholz told Reuters on the sidelines of a visit to New York on Monday that “unfriendly attacks (and) hostile takeovers are not a good thing for banks and that is why the German government has clearly positioned itself.”

This move marks a critical moment in the long-simmering tensions over European banking consolidation, particularly when it involves cross-border mergers.

With the German government’s refusal to support the takeover, it’s clear that the deal faces substantial political resistance.

“We do not support a takeover, and we have informed UniCredit about this,” a German government official told the Financial Times.

National sovereignty and strategic interests

At the heart of the opposition is Germany’s deep-rooted concern about losing control over a critical financial institution to a foreign entity.

Commerzbank, a key lender to the nation’s small and medium-sized Mittelstand businesses, is considered vital to the German economy.

Any disruption to its operations, such as the potential changes in management or strategic direction under UniCredit, could have far-reaching consequences.

Labour unions have raised alarms over possible job cuts, while Commerzbank executives warn that a merger with UniCredit could undermine lending to Mittelstand companies, threatening the backbone of Germany’s economy.

Friedrich Merz, leader of Germany’s opposition party, expressed his dismay over the prospect of the takeover, calling it a “disaster for the German banking sector.”

His remarks underscore the broad-based political resistance to the deal, cutting across party lines and labor interests.

For many in Germany, this is not just a business deal but a matter of national interest.

UniCredit’s ambitions and Berlin’s resistance

UniCredit’s interest in Commerzbank is part of a broader strategy by CEO Andrea Orcel to position the Italian lender as a European banking giant.

Orcel’s vision includes using UniCredit as a vehicle to consolidate the fragmented European banking sector, with the Commerzbank deal potentially catalyzing further mergers across the continent.

A successful acquisition would mark the first significant cross-border bank deal in Europe since the financial crisis, which could lead to a wave of similar mergers.

However, Germany’s opposition to the takeover complicates this vision.

After initially acquiring 9% of Commerzbank—half of which came directly from the German government—UniCredit has met resistance from Berlin at every turn.

A person familiar with Commerzbank’s management told FT that Orcel’s latest move seems at odds with his earlier statement that he would not pursue a hostile takeover.

The German government, which still holds a 12% stake in Commerzbank, had previously planned to sell down its holdings but has since backtracked in response to domestic opposition to a takeover.

By blocking further negotiations, Berlin effectively forced UniCredit’s hand, prompting the Italian bank to raise its stake without government backing.

As one government official stated, “Berlin supports the strategy of Commerzbank which is geared towards independence.”

Germany-Italy relations at stake?

Beyond political resistance, UniCredit also faces regulatory obstacles.

To increase its stake beyond 10%, the bank requires approval from the European Central Bank (ECB), and while the 11.5% stake has been acquired, the transaction will not be finalized until all necessary approvals are in place.

If successful, UniCredit would leapfrog the German government as Commerzbank’s largest shareholder, putting even more pressure on Berlin.

The takeover attempt has not only strained relations between UniCredit and the German government but has also introduced diplomatic tensions between Italy and Germany.

Italian Foreign Minister Antonio Tajani defended UniCredit’s actions, stating they were “more than legitimate.”

Meanwhile, officials in Rome, including those close to Prime Minister Giorgia Meloni, have privately expressed frustration over Germany’s opposition, accusing Berlin of hypocrisy, Bloomberg reported.

According to sources cited in the Bloomberg report, Italian officials are frustrated that Germany promotes European integration but balks at the idea of a cross-border bank merger within the EU.

At the same time, some in Rome have also expressed frustration at Orcel for being overly aggressive in his bid for the German bank, according to the report.

They are worried that it could affect relations between the two countries.  

European banking consolidation

This battle over Commerzbank could serve as a pivotal moment for the future of European banking consolidation.

While UniCredit aims to position itself as a leader in this consolidation, its attempt to acquire Commerzbank is likely to set a precedent for future cross-border deals.

Should the acquisition succeed, it could inspire other European banks to explore similar moves, consolidating a sector that has long been fragmented.

However, the UniCredit-Commerzbank saga also reveals the deep challenges facing such consolidation efforts, particularly when national interests are at stake.

Germany’s opposition highlights how political considerations, national sovereignty, and economic strategy can clash with the broader vision of a unified European banking market.

As UniCredit continues to pursue its strategic ambitions, it remains unclear whether Orcel’s vision of a cross-border banking giant can overcome the formidable resistance posed by national interests and political opposition.

For now, the battle over Commerzbank is far from over, and its outcome will have significant implications for the future of European finance.

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Mexico’s economic activity rebounded strongly in July, posting a notable 3.8% growth compared to the same month last year.

This sharp recovery follows a disappointing 0.6% decline in June, exceeding market expectations of just 1.8% growth, according to the Instituto Nacional de Estadistica, Geografia e Informatica.

This marks the highest growth in three months and the third-largest increase in 2024, underscoring the economy’s resilience despite broader challenges.

The impressive performance provides a renewed sense of optimism for Mexico’s economic outlook.

Sectoral growth: agriculture leads the way

A closer look at the data shows that the primary sectors, including agriculture, mining, and fishing, experienced an 11.9% growth in July, reversing a 2.9% decline in June.

Leading this surge was a significant 16.7% rise in agricultural activities, driven by favorable weather conditions and increased demand.

Agriculture remains a crucial contributor to Mexico’s economy, not only ensuring food security but also creating jobs in rural areas.

The sector’s performance highlights its vital role in supporting both local economies and national growth.

The tertiary sector, encompassing services, also reported robust growth, expanding by 4.3% in July compared to a 0.4% contraction in June.

Several industries within this sector experienced significant gains, reflecting rising consumer confidence and spending.

Retail sales surged by 5.4%, while wholesale trade rose by 7.2%. Additionally, professional, scientific, and technical services saw a dramatic 17% increase, suggesting a growing demand for specialized expertise.

This shift towards higher-value services indicates modernization across multiple industries and signals an expanding service-based economy.

Mexico’s secondary industries, including manufacturing, construction, and mining, grew by 2.1% in July after a 0.7% contraction in June.

While this sector’s recovery was less dramatic than agriculture and services, it remains a positive indicator of broader economic stability.

Construction, in particular, posted a 2.6% rise, supported by renewed infrastructure projects and housing demand. However, mining slightly contracted by 0.4%, pointing to ongoing challenges in the sector.

Overall, the modest rebound in secondary industries complements the stronger performances seen in other parts of the economy.

Retail sales contract for the third month

Despite the broader economic recovery, retail sales in Mexico declined for the third consecutive month, falling 0.6% year-on-year in July.

This follows a revised 3.1% drop in June.

The contraction was primarily driven by declines in self-service and department store sales, which fell by 6.2%.

Categories such as textiles, costume jewelry, clothing, and footwear also experienced a 3.1% decline.

However, there was a bright spot: online sales, including those through printed catalogs and television, surged by 33%.

Additionally, grocery and food sales rose by 5.5%, while household goods and computers saw a 4.3% increase.

The stronger-than-expected economic growth gives the Bank of Mexico (Banxico) room to reassess its monetary policy in the coming months.

The robust performance may prompt Banxico to slow its monetary easing efforts, as policymakers balance growth with inflation risks.

With increased consumer demand and spending potentially raising inflationary pressures, Banxico is expected to take a cautious approach to further policy adjustments. The central bank’s decisions will be crucial in steering the economy through this period of recovery while maintaining financial stability.

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In a significant move to address mounting financial pressures, China has announced plans to recapitalize its largest commercial banks for the first time in over a decade.

The initiative is aimed at bolstering a banking sector struggling with record-low margins, shrinking profits, and growing bad debt.

During a rare press conference on Tuesday, Chinese financial regulators outlined a series of measures to support the country’s six major commercial banks, including increasing their core tier 1 capital.

This marks the first capital injection into these banks since they became public companies, and the first recapitalization by authorities since the 2008 financial crisis.

Core capital boost for six major banks

Li Yunze, Minister of the National Financial Regulatory Administration, announced the recapitalization plans, stating that capital will be injected into different banks at different times, though further details were not provided.

The goal, according to Li, is to enhance capital management capabilities and strengthen the banks’ operations so they can better support China’s real economy.

“The recapitalization process will involve a combination of internal and external capital-raising channels,” Li said.

The move comes as part of a broader strategy to ensure the stability of China’s banking sector, which plays a critical role in managing economic risk and driving growth.

Among the six banks targeted for recapitalization are the Industrial & Commercial Bank of China Ltd. (ICBC), Agricultural Bank of China Ltd., China Construction Bank Corp., Bank of Communications Co., Bank of China Ltd., and Postal Savings Bank of China Co.

These state-owned commercial lenders have traditionally relied on retained profits to bolster their capital bases, but declining margins and fee reductions have increasingly put pressure on their balance sheets.

Declining margins and profitability prompt action

The recapitalization comes at a time when the profitability of China’s commercial banking sector is under significant strain.

Combined profits at the country’s commercial lenders increased by just 0.4% in the first half of 2023, marking the slowest growth since 2020.

This slow growth has been exacerbated by sliding net interest margins, which dropped to a record low of 1.54% by the end of June—well below the 1.8% threshold considered necessary for maintaining sustainable profitability.

The six major banks’ core tier 1 capital adequacy ratio, a critical measure of financial stability, averaged 11.77% at the end of June.

While this figure remains above the 8.5% minimum requirement for China’s systemically important banks, it has edged downward, prompting concerns that further declines could endanger the stability of the broader financial system.

Li Yunze’s comments echoed these concerns, noting that without additional capital, the banks could struggle to continue offering the same level of support to China’s economy.

The recapitalization plan is intended to mitigate these risks by ensuring the banks have sufficient capital to absorb losses and support lending activities.

Broad economic measures to support recovery

The recapitalization announcement was part of a broader stimulus package unveiled by Chinese authorities aimed at stabilizing the real estate market and boosting economic growth.

Among the key measures was a broad-based cut to existing mortgage rates, a move expected to lower annual interest expenses by approximately 150 billion yuan ($21 billion).

However, the mortgage rate cut also adds pressure on the banks by reducing their income from loans.

To counterbalance the impact of the mortgage rate cuts, regulators also announced reductions in the amount of reserves banks are required to hold, as well as a cut to the key policy rate.

These adjustments are expected to free up additional capital for lending, helping to offset some of the revenue lost due to lower mortgage rates.

People’s Bank of China Governor Pan Gongsheng addressed concerns about the effect of the interest rate adjustments on bank profitability, stating that the changes would have a neutral impact.

The freeing up of additional funding and the alignment of deposit rates will offset the effect of lower loan rates, preventing significant harm to bank profits and margins.

Banks look to recover amid tough conditions

Despite the challenges, some of China’s major banks saw a positive reaction in the stock market following the recapitalization announcement.

Shares of ICBC, the largest of China’s commercial banks, rose by 5.2% in Hong Kong, while Bank of China saw its stock climb by 4.2%.

Analysts suggest that the recapitalization signals a clear intent from Chinese regulators to stabilize the banking sector and send a positive message to the market.

“This recapitalization plan shows that regulators are taking decisive action to address the pressures facing the banks and ensure they remain a reliable force in serving the real economy,” said Liao Zhiming, an analyst at Huayuan Securities Co.

However, challenges remain. In addition to declining margins, China’s banks are contending with a rising volume of non-performing loans (NPLs), particularly in the struggling real estate sector.

The financial health of many developers has deteriorated in recent years, leading to a surge in bad debt.

This has forced banks to take on increasing provisions for loan losses, further cutting into profits.

Recapitalization process could take several years

As China’s commercial banks prepare for a recapitalization process that could play out over several years, the sector remains under significant pressure.

The combination of declining profitability, rising bad debt, and economic uncertainty is likely to keep China’s banks on a cautious path as they navigate an increasingly challenging financial landscape.

At the same time, the recapitalization plan underscores the central role that China’s state-owned commercial banks play in the country’s economy.

By injecting fresh capital into these institutions, regulators are signaling their commitment to maintaining stability in the financial system, even as broader economic risks continue to mount.

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