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SPI Management Newsletter 01.09.23

European Central Bank Grapples with Persistent Inflation Amid Economic Slowdown

The European Central Bank (ECB) finds itself in a challenging position, dealing with persistently high inflation while economic indicators point to slowing growth in the Eurozone. The situation has been exacerbated by the spike in energy and food prices, making the economic outlook in the Eurozone comparatively worse than that in the U.S. Despite a weakening economy, the European Union’s statistics agency reported a stubborn 5.3% year-on-year inflation rate in August, confounding expectations of a decline.

In response to the earlier inflation surge, the ECB raised its key interest rate last month but signaled that it might hold off on further hikes in its next meeting, scheduled for September 14th. However, the unexpectedly robust inflation figures could compel the ECB to change course. Policymakers are particularly concerned that the rate of inflation isn't falling rapidly enough, which could result in workers pushing for larger pay increases—a historical precursor for making inflation more tenacious.

Adding complexity to the situation are recent data that show a clear economic downturn, particularly in powerhouse Germany. Bank lending to households and businesses has slowed, signaling a cooling investment climate and declining economic growth. Surveys from last month indicate a sharp drop in business and household confidence, as well as the largest decline in business activity since April 2013, if pandemic months are excluded. On the other hand, Southern European countries like Spain are enjoying a tourism revival. The ECB's dilemma is thus multi-faceted. If it raises interest rates to curb inflation, it risks exacerbating an already fragile economic condition. Conversely, keeping rates low may fail to put a lid on inflation and could contribute to wage-price spirals. In either case, the ECB's upcoming policy decisions will require a delicate balancing act in navigating these conflicting economic currents.

Grayscale’s Court Victory Over SEC Brings Mixed Signals for Future of Bitcoin ETFs

Cryptocurrency asset manager Grayscale recently secured a significant legal win against the U.S. Securities and Exchange Commission (SEC), a move that led to a 7% increase in Bitcoin's value. A federal appeals court ruled that the SEC was unjustified in denying Grayscale's application to convert its existing Bitcoin Trust into a spot Bitcoin exchange-traded fund (ETF). Despite this, the SEC still has 45 days to decide on its next steps, including appealing the decision, thereby delaying the actual creation of a Grayscale spot ETF.

The ruling also calls into question the SEC’s existing approach towards Bitcoin ETFs, and by extension, the cryptocurrency industry at large. Although the SEC has allowed Bitcoin futures ETFs since October 2021, it has been wary of spot funds due to concerns about market manipulation. The court criticized the SEC for its inconsistent treatment of these financial products.

This case brings up broader implications for other pending Bitcoin ETF applications in the U.S., including those from major asset managers like BlackRock. Legal experts caution that even with this court victory, Grayscale isn't automatically at the front of the approval line, nor does this ensure other pending applications will receive a green light.

Importantly, the ruling doesn’t directly impact the SEC’s ongoing enforcement cases against crypto exchanges such as Coinbase and Binance for alleged securities law violations. However, the court victory has been seen as a step towards greater legal clarity in the crypto industry, even as calls for comprehensive federal crypto regulation grow louder. The Grayscale ruling, while landmark, falls within a complex regulatory landscape and suggests that the debate over cryptocurrency regulation is far from settled. Industry observers note that the decision could potentially shift some regulatory authority from the SEC to the Commodity Futures Trading Commission (CFTC), which has a different mandate and perspective on crypto assets.

Blackrock’s Bitcoin ETF application was delayed until October by the SEC this Thursday and the situation has to be monitored for further updates.

Adapted from WSJ, FT, NYT, Reuters, CNBC, Bloomberg, Coindesk

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