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Daily Analysis 1 June 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as stocks struggle over inflation concerns and with bond yields going higher over U.S. Federal Reserve rate-hike wagers.

In brief (TL:DR)

  • U.S. stocks pared last week's gains as inflation concerns clouded last week's rebound with the Dow Jones Industrial Average (-0.67%), S&P 500 (-0.63%) and the Nasdaq Composite (-0.41%) all lower.

  • Asian stocks were mostly higher as Beijing rolls out more measures to support its moribund economy.

  • Benchmark U.S. 10-year Treasury yields rose to 2.869% (yields rise when bond prices fall) as traders factored in the effect of Fed balance sheet runoff with inflation data.

  • The dollar rose in Asian trading.

  • Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+1.55%) at US$116.45 on supply side concerns.

  • Gold fell with August 2022 contracts for Gold (Comex) (-0.87%) at US$1,832.30 against a strengthening dollar.

  • Bitcoin (-0.13%) was flat at US$31,589, but remains over key technical levels of support, at US$31,500 and could trade lower if it fails to maintain above US$29,000 or edge higher rangebound if it can sustain the rally over US$30,000.

In today's issue...

  1. Insiders are Buying the Dip

  2. Eurozone Inflation Catches Up with U.S.

  3. Bitcoin Stays Above US$30,000

Market Overview

U.S. and European stocks wavered as investors duked it out over the scale of central bank policy tightening that would be required to fight inflation.

Signs that the European Central Bank may tighten monetary conditions more aggressively rippled through European stock markets and sent bond yields soaring.

Exacerbating matters, OPEC+ is meeting tomorrow to discuss supply policy for July and there are fears that producers will use this opportunity to recharge depleted coffers from previous years where the price of oil was strongly depressed, but national spending grew or remained constant.

Asian markets were mixed with Tokyo's Nikkei 225 (+0.65%), Seoul's Kospi Index (+0.61%) and Sydney’s ASX 200 (+0.32%) higher, while Hong Kong's Hang Seng Index (-0.56%) was lower.

1. Insiders are Buying the Dip

  • Top executives are buying the dip on their own stocks, a potential sign that a bottom may have been reached.

  • Pace of insider buying comparable with 2018 and portends well for investors looking for some respite in the volatile markets.

“Be greedy when others are fearful.”

– Warren Buffett

It’s easier said than done, to be “greedy when others are fearful,” especially when it comes to investing, because of information asymmetry.

Without visibility into the prospects of a company, the macroeconomic conditions and the long-term trend of things like interest rates and inflation, investors, particularly retail, are understandably taken at a disadvantage when making short-term portfolio decisions.

Which is why few retail investors are advised to become traders, most are better off becoming long-term investors who hold their portfolios for years.

But some investors do have greater insight into prospects, and perhaps more so than others – the corporate executives who work for the very companies whose shares have been hammered by market conditions.

And over the past month, the “sell in May and go away” adage apparently fell on deaf ears when it came to executives as some of America’s largest listed companies.

According to data from VerityData, insider buying at S&P 500 companies has been the strongest since March 2020, when the pandemic first caused market panic.

Retail investors, once again, have been pulling out of the stock market amidst the looming threat of a slowdown or recession.

Some analysts suggest that insider buying has historically been a good sign of market bottoms and this makes sense.

As insiders are privy to prospects and products, costs and challenges, outlook and overruns, they are best-placed to know the value of the stocks of their companies relative to what the market thinks.

Take Starbucks (+2.33%) for instance, whose shares are down about 35% since the start of this year – interim CEO Howard Schultz, the founder of the company who has returned, bought shares for the first time since 2018.

RingCentral (-4.10%), a web-based app company that replaces landline phones saw its co-founder and CEO snap up US$1.2 million on his first stock purchase since the company went public in 2013 – shares in RingCentral are down by more than 60% this year alone.

Starbucks and RingCentral are hardly the only companies whose top executives have been snapping up shares on the dip, Intel (-0.29%), Asana (-4.69%), Ford (+0.48%), GameStop (-9.02%), Eastman Kodak (+0.43%), the list is long of companies whose insiders feel that prices have come down enough to jump back in.

2. Eurozone Inflation Catches Up with U.S.

  • Eurozone inflation hits a high of 8.1%, almost as high as the U.S. but with the European Central Bank likely behind the curve when it comes to tightening.

  • European stock investors may take some comfort that the ECB is unlikely to have the same level of resolve and coherence when it comes to policy as the U.S. Federal Reserve, meaning that any move towards tightening is likely to be half-hearted despite soaring inflation.

In terms of monetary policy, the European Central Bank (ECB) has adopted a far more dovish stance than its counterpart, the U.S. Federal Reserve, especially after pandemic pressures started to ease on keeping the liquidity taps open.

But the unprovoked Russian invasion of Ukraine is changing the situation rapidly, from the soaring cost of energy, in particular natural gas, to the rising prices in essential food items such as wheat and chickens.

And yesterday, the ECB reported inflation of 8.1% across the Eurozone, well beyond economist estimates and heaping pressure on the central bank to do more to rein in price pressures.

Significantly, the core inflation number, which strips out volatile energy and food prices and is a key indicator for ECB policymakers, rose from 3.5% to 3.8% and could force the central bank to get more aggressive on rate hikes.

ECB Chief Economist Philip Lane signaled earlier this week that the centra bank would raise rates by 0.25% in July, with another similar hike in September, almost mirroring the U.S. Federal Reserve’s response to rising prices.

But now that inflation has come onto the doorsteps of Europe, policymakers are having to contend with steeper hikes, especially at next week’s meeting, and a move that could provide an unwelcome surprise for European stocks that saw a rebound last week.

The ECB may already be behind the curve, as the Bank of England and the U.S. Federal Reserve already started tightening, which appears to be having the intended effect – there are signs that the pace of price growth is slowing in the U.S.

If so, the ECB may be under pressure to take far more aggressive action, but this is unlikely.

Unlike the Bank of England and the Fed, the ECB answers to the European Parliament, with its diverse national interests and plethora of sovereign bonds where the spread between yields is starting to widen.

If nothing else, more ECB members are worried about tipping the Eurozone into recession, just as the economic bloc is coming out of years of slowing growth.

Inflation is also not uniform across the Eurozone – if affects poorer members disproportionately harder than the richer ones.

The fastest rate of inflation in the 19-member Eurozone was 20.1% in Estonia, whereas Malta only saw a 5.6% increase in prices.

That disparity and the bureaucracy that stymies decisive action at the ECB should provide some comfort for investors.

3. Bitcoin Stays Above US$30,000

  • Bitcoin maintains well above US$30,000 but the resilience of the rebound is uncertain.

  • Signs of institutional investors buying the dip have helped to maintain price, but further rallies are not a given until the latter half of the year when the block reward for mining Bitcoin is halved.

The decoupling that so many cryptocurrency investors had hoped for worked out, but not exactly as planned.

For weeks, investors bemoaned the strong correlation of Bitcoin and other cryptocurrencies with stocks, in particular the tech-heavy Nasdaq 100.

But those correlations broke down last week as equities rose on the back of heightened expectations the U.S. Federal Reserve won’t be as trigger happy when it comes to tightening, over recession and unemployment concerns.

Even as the riskiest stocks rebounded last week, cryptocurrencies remained in the doldrums, with Bitcoin pushing US$28,000.

But what a difference a week makes.

Investors took the opportunity to buy the dip on Bitcoin, and it is now well over the psychologically significant US$30,000 level of support.

Ether, the world’s second largest cryptocurrency still hovers just below the US$2,000 level and suggests that the durability of this recent rebound is questionable.

Some closely-watched technical measures suggest that cryptocurrency prices could still drop to their lowest since December 2020, especially if Bitcoin fails to maintain its support over US$29,000.

If Bitcoin manages to maintain well over US$30,000, there is the outside chance that it could range-trade to resistance at US$40,000 but a break down below US$29,000 would confirm the ominous double-top pattern, that risks seeing Bitcoin capitulate to US$25,400 and then the 200-day moving average at US$22,100.

Nevertheless, there are green shoots of recovery for the world’s largest cryptocurrency – increased institutional flows.

Over the past week, there have been signs that more institutional investors, including family offices, have been snapping up Bitcoin on the cheap, as a much more price-friendly entry point compared to the all-time-high of last year.

Whereas in 2021, there were many institutional investors sitting on the fence when it came to Bitcoin, prices appear low enough to at least tempt some back in.

Those flows have also been reflected in retail investors and a total of US$255 million flowed into Bitcoin-based products in May alone.

The second half of the year will also provide some bullish resolve for Bitcoin, with its expected halving that will reduce the mining reward and reduce some of the sell-side pressure that is exerted by miners.

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