The ECB Continues to Fight Policy Expectations 💥

🐺 Hi pack-mates,

This is Howling Markets, the newsletter that leverages your understanding of the financial markets!

Today we will be covering:

• Education: What Is a Leveraged ETF? 📈

• ProShares Plans to Launch Leveraged Bitcoin EFTs 🚀

• The ECB Continues to Fight Policy Expectations 💥

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What Is a Leveraged ETF?

Over the past months we have extensively talked about different types of ETFs in relation to the newly launched Bitcoin spot ETFs.

Just as a quick reminder, a spot ETF is a security that tracks the price of an underlying asset, or basket of securities, and that it is traded just like a normal stock. Future ETFs, instead, are the same type of financial instrument but which track the price of futures contracts, that are derivatives used to trade the future price of a security.

Now we introduce the leveraged ETFs. These financial instruments are similar to spot ETFs, but they have the characteristic of leveraging the returns of the underlying, usually by a factor of either 2x or 3x.

For example, ProShares Ultra S&P500 (Ticker: SSO) is a leveraged ETF that offers 2x exposure on the SPX index, meaning that if the SPX goes up by 1%, SSO goes up by 2%. However, also the opposite is true. If the SPX goes down by 2%, SSO goes down by 4%.

Because of this, these financial instruments are not offered by all brokers and not to all types of clients. They are usually reserved for traders and risk seeking speculators that are willing to open and close a position in a matter of days.

ProShares Plans to Launch Leveraged Bitcoin ETFs

After the 11 Bitcoin’s Spot ETFs launched last Thursday, some companies are already preparing the launch of other many interesting crypto ETFs.

First of all, BlackRock’s chief executive commented that in October the SEC allowed many Ethereum futures ETFs to launch and that he saw value in having a Ethereum spot ETF in the near future.

Additionally, considering that BlackRock’s Bitcoin spot ETF (Ticker: IBIT) surpassed $1 billion in Asset Under Management (AUM) in just a week, it is possible to believe that the investment company is extremely motivated to make this new ETFs happen, despite the potential roadblocks the SEC could come up with.

On the other hand, remaining on the topic of Bitcoin, ProShares has just filed the request to launch another 5 ETFs. However, knowing ProShares, you can bet that these products will have some “spice” to them.

These five ETFs will all be geared products, where this term is used to define leveraged and inverse financial instruments. At the beginning of today’s newsletter, we have defined what a leveraged ETF is, but what about an inverse ETF?

An inverse ETF is simply an exchange traded fund that tracks the inverse performance of an asset or a basket of securities. For example, the ShortS&P500 (Ticker: SH) is tied with a relationship -1x to the SPX, so when the index goes up by 1%, SH goes down by -1%.

Well, now ProShares wants to launch 5 geared ETFs including leveraged, inverse and both simultaneously!

Today’s Howling Question

And now, it is time for our howling question!

Knowing that the fed funds rate is at 5.25% - 5.50%, which is the policy interest rate range that is currently set by the ECB?

a)  3.00% - 3.75%

b)  4.00% - 4.75%

c)  4.50% - 5.25%

d)  4.75% - 5.50%

e)  5.00 – 5.75%%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

The ECB Continues to Fight Policy Expectations

On Thursday, the day after Chirstine Lagarde’s speech, the ECB Minutes regarding their last meeting held on the 13^th and 14^th  of December were released.

Much like the Fed Minutes released a couple of weeks ago, the main goal of the ECB, together with Wednesday’s speech, was to dampen future expectations pushing as far away as possible the first expected rate cut.

Essentially, market participants are playing a poker game against the ECB and the winner is going to be who bluffs the best.

We have recently discussed the trading strategy “buy the rumors, sell the news” which expressed the idea that once something is announced, the markets will have already entirely priced it in, leaving no additional room for profitability.

Because of this, investors want to get in the markets as soon as possible now that the prices are still relatively low. However, at the same time they don’t want to get in too early, risking a hard landing or adverse financial conditions.

The ECB, instead, wants to cut rates as soon as possible in order to avoid a hard landing, but they want to be sure that inflation has reached the target. Additionally, letting investors know in advance when they are going to cut rates will cause everyone to jump in the markets, neutralizing the effectiveness of the monetary policy.

In the latest minutes it transpired that the earliest the ECB expects to cut rates will be June and that even if inflation is projected to pick up during the first quarter, it should reach the 2% target by year-end.

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

Thursday was a very good day for the stock market as the prices managed to rebound off the previous’ day sell-off caused by the ECB announcement. As we expected, due to Wednesday’s candle shape, stock prices marched higher and closed the day at +0.88%.

However, interestingly enough, also bond yield marched higher, continuing to price in the high interest rate environment. The US 10 year government bond yield closed the day at +0.97%, but we will have to keep a close eye on the situation as most likely either the stocks or the bonds will perform a reversal over the next few days.

Answer

The correct answer is b) 4.00% - 4.75%.

According to the last ECB Minutes, the policy rates remained unchanged and respectively equal to:

• 4.00% for the deposit facility

• 4.50% for main refinancing operations

• 4.75% for marginal lending

So, the interest rate channel in the European interbank system is currently 4.00% - 4.75%. If you would like to learn more about these three rates in particular and how European monetary policy work, let me know!

Howl-Worthy Memes 😂

🐺 See you next time!

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