Market Update: 08/05-15/05

This week in market updates we look at the effects of rising interest rates. In particular, one specialist lender bucking the trend of passing on interest rate hikes and the effect of these interest rates on the cryptocurrency markets.

The ASX 200 has ended the week with another loss, ending at 7,075.10 points. Almost all sectors of the ASX 200 posted losses, with healthcare only making an incremental gain of 0.06%.

Specialist lender Decreases Rates on Mortgages Amid Increasing Interest rates

Pepper Money, a leading specialist lending company, has announced cuts on their home loan rates, despite the increase in cash rates by the RBA last week.

Pepper Money’s Pepper near prime range has allowed customers with people who have not been able to obtain mortgages due to low credit scores but have not missed any payments in the last few years. Pepper 60 mortgages, which are suitable for people who have not defaulted or had a county court judgment in 60 months, will now begin from 2.9 percent for a two year fixed rate or 70% loan to value for a 5 year fixed loan. Pepper 40 mortgages, another home loan suitable for those with no defaults or country court judgments for 40 months, will now begin at 3.5% for a two year fixed rate loan. This is vastly cheaper than the big four banks, where their fixed rates for a 2 year loan ranged from 3.79% to 3.99%.

With the RBA increasing interest rates and banks passing on those increases, customers will likely begin looking towards alternatives in order to fund their needs. The non-bank lending industry will also follow the trend, depending on how they fund their lending. However, this may not be an issue for Pepper Money, as they have been able to raise $2.2 billion from the securitisation markets in order to continue providing customers with loans that meet their financing needs.

This, in addition to a low fee structure, will make Pepper Money a popular choice for borrowers and a leading competitor in the mortgage industry in the future.

Crypto Crash energizes Critics

Long heralded as a “ponzi scheme” by its critics, the concept of cryptocurrency has made waves in the financial world as a so-called ‘Get rich quick’ scheme, encapsulated by the skyrocketing of Bitcoin, the world’s first cryptocurrency’s value from US$0.0008 per coin in June 2010 to a $68,000 high in November 2021 (a rise of 850 million percent). However, this all came crashing down on Thursday, with a massive sell-off of the renownedly volatile asset causing the cryptocurrency market to lose over $200bn in value within 24 hours.

Described as “inevitable” due to crypto’s “lack of intrinsic value” and “[backing] by physical assets” by Hamish Douglass (Chief Investment Manager of leading fund Magellan), the crash was largely sparked by rising interest rates in numerous countries including America and Australia in order to combat record inflation. As there is no inherent way of obtaining the physical value of cryptocurrencies, coins’ pricing and equivalence to the dollar are largely based on their short-term supply and demand. However, with the rise in interest rates, people’s liquidity (worth in cash) decreased, in turn decreasing the demand for volatile assets such as cryptocurrency and thus, the price and overall value of the crypto market.

While larger coins such as Ethereum and Bitcoin are still valued in the five and four figures respectively, a so-called ‘stablecoin’ (coin whose value is tied to a physical asset or currency) Terra (Luna) lost over 99% of its value in the month between April 15th - May 15th, with its affiliate coin UST, which is tied to the US dollar and meant to be valued at exactly $1 USD falling to $0.29 USD simultaneously. While Friday the 13th showed some recovery within the cryptocurrency market, it is yet to be seen whether Douglass’ doomsday prediction that unbacked cryptocurrencies will “ultimately go to zero” will become a reality in the not-too-distant future.