Overview

An eventful week has come and gone. In terms of data, lower than expected US CPI and PPI readings offered a notable positive surprise. US bonds and equities were sent higher and the dollar lower. For crypto markets, a ruling by a US district judge that XRP was not a security sent ripples through the market while Binance fires 1000 staff following SEC’s filing and a rumoured US Department of Justice investigation. Looking ahead, earnings season is approaching once again and will likely dominate headlines in the coming weeks.

Monetary Policy

With CPI and PPI numbers at 0.2% and 0.1% respectively, there is a strong hint that the Fed has largely succeeded in reaching their target of 2% inflation. The fact that core inflation which has proven sticky in the past months now follow headline numbers is especially encouraging. Thus far, the market has consistently been pricing in rate cuts ahead of Fed projections but it looks like the the two are finally largely in agreement, though expect at least a few meetings where rates are held steady as the FOMC verifies the trend is sustained and not simply a fluke in data, something that has happened before in past two years. Lowered rates will offer a significant boon to risk assets across the board as the risk free rate of returns falls and valuations can grow more aggressive, a fact not lost on equity markets which have reached 15 month highs and may suggest further upside for the crypto market as well.

Crypto

US District Judge Analisa Torres’ ruling in favour of Ripple Labs that XRP was not a security when sold to retail investors but can be considered a security when sold to institutional investors  sets a strange but significant legal precedent for the cryptosphere. In response, XRP rose more than 50% while Coinbase’s shares rose 30%.

While the market is taking the news well, the ruling itself does little to provide legal clarity. The argument goes that less informed investors should not have the detailed knowledge to expect XRP to increase in value over time, and thus XRP is not a security to them, while more sophisticated institutional investors would expect Ripple to take relevant action to increase token price, making them see XRP as a security. This means that XRP and similar tokens can be freely marketed to retail and Coinbase can reasonably argue its primary business is not facilitating the trading of unregistered securities. Without going into what the judge thinks about the expectations and sophistication of retail investors, the outcome of this ruling is that “sophisticated” institutional investors are protected by the SEC and the US’ more comprehensive security laws, while “naive” retail investors are not, an outcome that is contradictory to the intent of the law. The ruling also rests this differentiation not on what XRP is inherently but what investors may think it is. As such, expect the ruling to be seriously challenged.

Binance’s firing represents another view on the legal status of crypto. Following the departure of several senior executives in response to a DoJ investigation, Binance has now additionally axed 1000 of its employees. While the SEC’s filing are serious, they are civil charges that ultimately can be resolved with money and a change in operations. A DoJ investigation suggests serious criminal charges may be in the playbooks for the world’s largest crypto exchange.

Upcoming Calendar Events

• China GDP, industrial production (Jul 17)
• U.S. industrial production, retail sales; Canada CPI (Jul 18)
• Morgan Stanley, Bank of America earnings (Jul 18)

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