US equity indexes finished the week strong: S&P 500 5.9%, NASDAQ 8.1% and DJIA 4.1% as October's inflation reading came in lower than the consensus expectation, raising hope the Federal Reserve would slow its rate hiking pace. This was the S&P 500's best week since June. US Treasury yields plunged Thursday on the back of the weaker-than-expected inflation print. The US 10 year yield fell from 4.092% to 3.812%. The bond market was closed on Friday to observe Veterans Day.
While equities rallied, crypto melted down (see table below) due to the rapidly developing situation with cryptocurrency platform FTX. Here is the timeline of that situation:
Nov. 6 - Binance CEO Changpeng Zhao ("CZ") said his firm would liquidate its holdings of FTT (FTX's token) which dated back to an early investment by Binance in FTX due to unspecified "recent revelations". Perhaps CZ is referring to this article "Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet" written by Coindesk Journalist Ian Allison that reviews FTX related hedge fund Almeda's balance sheet.
Nov. 7 - FTX Founder/CEO Sam Bankman-Fried ("SBF") said "FTX is fine. Assets are fine".
Nov. 8 - FTT collapses by 72% as clients swamp the exchange with withdrawal requests. Announcement made that Binance will buy FTX non-US unit to help cover liquidity crunch, but the agreement is nonbinding. CZ said in a tweet that FTX “asked for our help."
Nov. 9 - Binance decides against pursuing a nonbinding agreement to bail out FTX after a “corporate due diligence” review. U.S. regulators reportedly begin investigating FTX. The SEC and the CFTC start investigating the company's relationships with its related entities Alameda Research and FTX US, as well as allegations that the company mishandled customer funds.
Nov 10 - SBF announced that Alameda Research will wind down trading.
Nov 11 - FTX, FTX US, and related hedge fund Alameda file for voluntary Chapter 11 bankruptcy and SBF resigns.
Source: Twitter, Yahoo News, Protocol
Table: Crypto Melts Down this Week
US Inflation, while still very elevated, came in lower than expected for October. Headline inflation rose 0.4% m/m vs the consensus expectation of 0.6% m/m to come in at 7.7% Y/Y, down from 8.2% Y/Y in September. Core CPI rose 0.3% m/m vs expectations of 0.5% to come in at 6.3% Y/Y, down from 6.6%Y/Y in September. On Friday, University of Michigan Consumer inflation expectations were released. Longer-term inflation expectations (5 year) rose from 2.9% in October to 3.0% for the November preliminary read (chart below). The risk that consumers' inflation expectations could become unanchored is still present.
With inflation still well above the Fed's 2% target and investors re-examining their crypto holdings, real assets and commodities should remain attractive on investors' radar screens. On the crypto front, the meltdown of FTX will likely accelerate regulatory review of crypto. Near term, market participants will focus on recovery of customer of funds and possible further contagion.
Chart: UMich Inflation Expectations 1yr & 5yr tick up for November
Respite from USD Strength
The USD backed off this week with its large downward movement coming post the US October CPI report on Thursday NY morning and continuing through Friday close. With the release of the October CPI data, DXY Index broke downside support at 110.00. The DXY ended Friday at 106.40, falling 4.1% on the week. USDJPY broke support at 140.00 ending the week at 138.63. EURUSD was able to push above parity on Thursday NY morning and move more than three big figures higher to end the week at 1.0356. Similarly, GBPUSD moved from just above 1.1400 to 1.1842 at the week's end.
Chart: DXY Index vs US 10 year yield and SPX Index (inverted). US Equity gains weighed heavily on USD.
DIAMINDX fell 0.17% for the week. Gold rose 5.0% and Silver was up 3.7%. This was gold's largest weekly gain since March. Gold's gain was caused by the lower than expected October US CPI read, which weighed on US yields and the USD. DIAMINDX seasonally is weak in November, but has rebounded in December, on average, over the past 5 years. Year to date through October, DIAMINDX is a strong performer vs other financial market assets in challenging markets.
Chart: DIAMINDX (purple) performance YTD through October vs other assets
Diamond News: KP Disappoints, Pink Diamonds in Spotlight
The Kimberley Process ("KP") concluded its 2022 Plenary. Attempts to discuss a broader definition of "conflict diamonds" in light of the Russia-Ukraine war failed. On a brighter note, the wins for the 2022 KP Plenary included: 1). Establishment of a permanent Secretariat in Botswana and 2). Formation of an Ad Hoc Committee that will oversee the next Review and Reform Cycle, which takes place every five years, and which will begin in 2023. Angola and South Africa were named respectively as the chair and vice chair of the Ad Hoc Committee. For more updates from the Plenary - see this note (would need ability to link previous email, which ideally would be published on our website).
The Pink Diamonds exhibit opened at the Melbourne Museum in Melbourne, Australia and runs through January 29, 2023. The exhibition "showcases the largest collection of some of the world’s most beautiful Australian Pink Diamonds, including the 2.83 carat Argyle Violet, one of the scarcest gems on Earth," says the Melbourne Museum in its exhibitions announcement. The gems on display were mined at the Rio-Tinto owned Argyle Diamond mine.
The exhibition seems well-timed. Despite closing its Argyle diamond mine in Western Australia in 2020, Rio Tinto "is slowly releasing the small inventory of rare and valuable diamonds it retained after the facility’s closure," reports the Sydney Morning Herald. Patrick Coppens, a general manager at Rio’s diamond division noted in the SMH article that "rather than selling them in a very short period of time, we really want to create special pieces that reflect the rarity and the magic that are Argyle pink diamonds."
The 18.18-ct Fortune Pink - largest pear-shaped fancy vivid pink diamond ever to be auctioned was sold this week at Christies Geneva for USD 28.8 million, which was above its USD 25m low estimate but below the USD 35m high estimate. The National reported that it was bought by an Asia-based private collector.
Ahead next week: Nov 15: the 170.2-carat Lulo Rose, believed to be largest pink diamond found in the last 300 years, to be sold at a rough tender by Sodiam, Angola's state-owned diamond trading company.
This report has been prepared by the Strategy Team of Diamond Standard Inc. (“Diamond Standard”). This report, while in preparation, may have been discussed with or reviewed by persons outside of the Strategy Team, both within and outside Diamond Standard. While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or securities.
Opinions and estimates offered constitute our judgement and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Under no circumstances does the information contained within represent a recommendation to buy, hold or sell any security, and it should not be assumed that the transactions discussed were or will prove to be profitable.