Daily Analysis 10 June 2022 (10-Minute Read)

Hello there,

A fantastic Friday to you as markets flounder amidst growing inflationary concerns.

In brief (TL:DR)

  • U.S. stocks fell again on Thursday ahead of CPI data due out on Friday with the Dow Jones Industrial Average (-1.94%), S&P 500 (-2.38%) and the Nasdaq Composite (-2.75%) all lower, on expectations that the inflation print will be higher.

  • Asian stocks sank on fresh virus flare-ups in China and concerns about rising oil prices.

  • Benchmark U.S. 10-year Treasury yields fell slightly 3.035% (yields fall when bond prices rise) as bond demand remained flat ahead of CPI data.

  • The dollar was flat ahead of a key U.S. inflation print.

  • Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+0.26%) at US$121.82.

  • Gold fell with August 2022 contracts for Gold (Comex) (-0.40%) at US$1,845.40.

  • Bitcoin (-1.97%) fell to US$29,987 slipping below a key level of support at US$30,000 yet again as evidence that the number of investors holding Bitcoin at loss-making levels surpassed 50% and on fears of further capitulation should U.S. inflation data be higher than forecast.


In today's issue...

  1. U.S. Unemployment Rose at Fastest Pace in a Year

  2. Inflation in China is Moderating

  3. Cryptocurrency Hodlers May Grow Fatigued & Capitulate


Market Overview

Who's got money for stocks and cryptocurrencies when they're struggling to put food on the table and gas in the car.

Investors are growing increasingly jittery that U.S. Consumer Price Index data will likely confirm fears that inflation is being stubbornly persistent and force central banks to get more aggressive on borrowing costs, by hiking interest rates at a faster pace.

Asian markets were lower with Tokyo's Nikkei 225 (-1.49%), Seoul's Kospi Index (-1.13%), Hong Kong's Hang Seng Index (-0.29%) and Sydney’s ASX 200 (-1.25%) all down into the weekend.



1. U.S. Unemployment Rose at Fastest Pace in a Year

  • State unemployment claims rise at the fastest pace in a year.

  • U.S. labor market remains strong but if the unemployment trend persists, could complicate matters for policymakers looking to tighten monetary policy.

Complicating matters for U.S. Federal Reserve policymakers looking set to raise rates later this month, U.S. state unemployment insurance rose by the most in nearly a year, in a week that was shortened by the Memorial Day holiday.


According to U.S Labor Department data released on Thursday, initial unemployment claims across states rose by 27,000 to 229,000 for the week ended June 4 surpassing most economist estimates.


To be fair, the jobless claims data tends to be volatile from week to week, especially around holidays, but even when smoothing out for such swings, unemployment claims rose by 8,000 to 215,000 and the trend has been upwards.


The marked jump in unemployment insurance applications, if sustained, could signal a softening in what many had believed to be a white hot job market, in the coming months and add just one more factor of complexity to Fed policy making.


Central bankers are due to meet last this month to set interest rates and are widely expected to hike by another 50-basis-points, in an effort to curb the highest pace of price increases in four decades, but by doing so, could also increase unemployment.


All eyes will be on U.S. Consumer Price Index data due out on Friday, which could show that the pace of price increases is starting to moderate.


Nevertheless, investors ought not bet on a dovish pivot for the U.S. Federal Reserve, especially as it will take time and significant policy intervention to bring inflation back to the 2% target from the 6.3% it’s currently at, based on the Fed’s preferred measure.



2. Inflation in China is Moderating

  • Chinese demand cools, lifting pressure on commodity prices globally.

  • Slower pace of Chinese inflation allows room for greater stimulus.

It’s hard to be bullish on China given its unpredictable political situation and at times arbitrary and sudden policy shifts, but at least on the macro front, it appears to be ahead.


At a time when most major central banks are being forced to tighten policy, China is seeing inflation moderate as global commodity prices have cooled and domestic demand weakened thanks to rolling zero-Covid lockdowns.


Slowing inflation in China means that the central bank can ease monetary policy and add stimulus to shore up the economy without a risk of overheating.


According to China’s National Bureau of Statistics, producer price index rose just 6.4% last month from a year earlier, the weakest pace since March 2021 and down from the 8% rise in April.


Consumer prices in China meanwhile, rose just 2.1%.


Much of the moderation may be a consequence of Covid lockdowns and slowing factory demand, but provides plenty of leeway for Chinese policymakers to enact more stimulus this year as the country tries to shore up economic growth.


China’s policy divergence also provides opportunities for global investors, especially from Europe and the U.S. who can expect that their currencies will rise against the Chinese yuan, making Chinese assets which can outperform the rest of the world, more attractive.


Global investors have yet to put in with China, and this has been reflected with small gains and losses for China’s benchmark CSI 300.


Global commodity prices aren’t nearly as high as they were earlier this year, in response to the shock of Russia’s invasion of Ukraine, and moderating prices have kept factory-gate inflation in check.


Core CPI data in China also suggests that underlying demand in China is soft, which should help to moderate global commodity prices as China remains the world’s biggest importer of raw materials to feed its factories.


Given how China’s CPI data is less than its target 3%, and as PPI normalizes, it’s entirely possible for the People’s Bank of China to take more aggressive steps to stimulate the economy, especially since its measures have been somewhat moderate so far.


Rates have so far remained unchanged, but could shift by the end of the year and provide a much-needed boost for Chinese equities which have so far traded flat despite an interim gain.



3. Cryptocurrency Hodlers May Grow Fatigued & Capitulate

  • Blockchain data suggests that over half of all anonymous private Bitcoin wallets are under water in terms of dollar price performance.

  • Institutional investors who bought at a high may be under pressure to pare back holdings or rationalize portfolios.

Data from Bequant suggests that more than half of all anonymous Bitcoin addresses are holding onto losing positions in the world’s largest cryptocurrency by market cap.


According to Bequant, a digital asset firm, 51% of anonymous Bitcoin addresses bought the cryptocurrency at a price well above current levels and “points to capitulation.”


Cryptocurrency prices alongside other risk assets, have been in a broad slump this year as central banks around the world tighten to face off higher levels of inflation.


From tech companies to cryptocurrencies, investors are shying away from risk, and instead of pouring into bonds, as would normally be expected, are rotating into cash, as rising interest rates see yields spiking.


Bitcoin has already lost over a third of its value this year alone, and Ether, around half.


Bitcoin miners who have to pay for things like rent and electricity in fiat currencies like the dollar, are said to be selling their Bitcoin hoard as they struggle to keep up with operating expenses and over concerns that prices could capitulate further.


Unlike in 2018, the number of active cryptocurrency investors has soared since the pandemic and the unprecedented fiscal and monetary stimulus that central banks poured into the financial system to cushion the economic effects of Covid-19.


For many investors, the easy-money central bank policies fueled unprecedented rallies in risk assets, including cryptocurrencies and now that that narrative is being unwound, it’s understandable that the wind beneath Bitcoin’s wings has disappeared.


Bitcoin is now trading at the lower end of its 17-month range and the bulk of buyers are nursing unrealized losses, according to blockchain analytics firm Glassnode.


Glassnode has suggested that less than 25% of Bitcoin is being held in profit.


Nevertheless, those who had bought Bitcoin much earlier on, before the recent rally late last year, are unlikely to be selling now, with those who bought at much higher prices, likely to be the first to capitulate.


As more institutional investors got in on Bitcoin, the odds of them selling, especially as they look to rationalize their portfolios increases, and this will have an outsized influence on price.


Data from Skew, a data service provider, suggests that bearish sentiment is still very much prevalent in the Bitcoin markets, with the put-to-call ratio hitting a high of 0.75 meaning that traders continue to buy bearish puts (the right to sell at a certain price) for downside protection or to profit from Bitcoin’s further price decline.

The information contained in this email communication and any attachments is for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals. The price and value of the digital assets and any digital asset allocations referred to in this email communication and the value of such digital asset may fluctuate, and allocators may realize losses on these digital assets, whether digital or financial including a loss of principal digital asset allocations. 

 

Past performance is not indicative nor does it guarantee future performance. We do not provide any investment, tax, accounting, or legal advice to our clients, and you are advised to consult with your tax, accounting, or legal advisers regarding any potential allocation of digital assets. The information and any opinions contained in this email communication have been obtained from sources that we consider reliable, but we do not represent such information and opinions as accurate or complete, and thus such information should not be relied upon as such. 

 

No registration statement has been filed with the United States Securities and Exchange Commission, any U.S. State Securities Authority or the Monetary Authority of Singapore. This email and/or its attachments may contain certain "forward‐looking statements", which reflect current views with respect to, among other things, future events and the performance of a digital asset allocation with the Novum Alpha Pte. Ltd. ("the Company"). Readers can identify these forward‐ looking statements by the use of forward‐looking words such as "outlook", "believes", "expects", "potential", "aim", "continues", "may", "will", "are becoming", "should", "could", "seeks", "approximately", "predicts", "intends", "plans", "estimates", "assumed", "anticipates", "positioned", "targeted" or the negative version of those words or other comparable words. 

 

In particular, this includes forward‐looking statements regarding, growth of the blockchain industry, digital assets and companies, the venture capital and crowdfunding market, as well as the potential returns of any digital asset allocation with the Company. Any forward‐looking statements contained in this email and/or its attachments are based, in part, upon historical performance and on current plans, estimates and expectations. The inclusion of forward‐looking information, should not be regarded as a representation by the Company or any other person that the future plans, estimates or expectations contemplated will be achieved. Such forward‐looking statements are subject to various risks, uncertainties and assumptions relating to the operations, results, condition, business prospects, growth strategy and liquidity of the Company, including those risks described in a separate set of documents. If one or more of these or other risks or uncertainties materialize, or if the underlying assumptions of the Company prove to be incorrect, actual results may vary materially from those indicated in this email and/or its attachments. 

 

Accordingly, you should not place undue reliance on any forward‐looking statements. All performance and risk targets contained herein are subject to change without notice.  There can be no assurance that the Company will achieve any targets or that there will be any return on a digital asset allocation with the Company.  Historical returns are not predictive of future results. The Company is intended to be a specialist digital asset allocation and trading vehicle in the early stage technology sector and digital assets. Allocation of digital assets in early stage technology carry significantly greater risks and may be considered high risk and volatile. There is a risk of total loss of all digital assets allocated with the Company – please refer to a separate set of documents for a details of risks. 

 

By accepting this communication you represent, warrant and undertake that: (i) you have read and agree to comply with the contents of this notice, and (ii) you will treat and safeguard this communication as strictly private and confidential and agree not to reproduce, redistribute or pass on this communication, directly or indirectly, to any other person or publish this communication, in whole or in part, for any purpose.