Daily Analysis 11 October 2022 (10-Minute Read)

A terrific Tuesday to you as Fed officials offer cautious note in push to quell price gains.


In brief (TL:DR)


  • U.S. stocks continued to fall on Monday with the Dow Jones Industrial Average (-0.32%), the S&P 500 (-0.75%) and the Nasdaq Composite (-1.04%) all down.

  • Asian stocks fell Tuesday amid intensifying concern over rising global interest rates.

  • Benchmark U.S. 10-year Treasury yields advanced seven basis points to 3.96% (yields rise when bond prices fall).

  • The dollar climbed to the highest this month.

  • Oil slipped with November 2022 contracts for WTI Crude Oil (Nymex) (-1.73%) at US$89.55, giving up more of last week’s 17% rally.

  • Gold extended a decline with December 2022 contracts for Gold (Comex) (-0.07%) at US$1,674.10.

  • Bitcoin (-1.75%) fell to US$19,078 with Bollinger bandwidth shrunk to the narrowest since 2020.


In today's issue...

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  1. Recalculating the Risk-Free Rate of Return

  2. Chipmaker Rout Spreads Further

  3. Technical Watchers See more Pain in Bitcoin Charts


Market Overview

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The mood is fragile ahead of Thursday’s US inflation data, with the case for another 75 basis-point rate hike likely to be strong if the reading comes in higher than than forecast. Fed officials until now show little sign they are in a mood to pause the rate-hiking cycle despite the potential hit to economic growth. European shares declined for a fifth straight session as bond yields jumped amid concerns of persistently high inflation as well as the impact of hawkish central bank policies on global growth. Asian markets fell on Tuesday with Tokyo's Nikkei 225 (-2.64%), Hong Kong's Hang Seng Index (-2.23%), Sydney’s ASX 200 (-0.34%) and Seoul's Kospi Index (-1.83%) all in the red.



1. Recalculating the Risk-Free Rate of Return

  • While Treasuries may still be well and truly backed, their markets are becoming more illiquid than ever before in the US$23.7 trillion market.

  • With the Fed upping the pace at which it plans to offload Treasuries from its balance sheet to US$60 billion a month, the once deep and liquid Treasury markets are becoming an increasing source of concern and volatility.

Whilst it’s not uncommon to use U.S. Treasuries when calculating the risk-free rate of return to benchmark other riskier investments, one thing that most investors may have not have factored into the mix is the liquidity premium.

U.S. sovereign debt is considered by many investors as the safest investment vehicle, with deep liquid markets and the backing of the government of the United States of America.

But while Treasuries may still be well and truly backed, their markets are becoming more illiquid than ever before in the US$23.7 trillion market.

From Japanese pension funds and life insurers to foreign governments and U.S. commercial banks, once unflappable buyers of U.S. Treasuries are stepping away, led by the biggest buyer of them all – the U.S. Federal Reserve.

With the Fed upping the pace at which it plans to offload Treasuries from its balance sheet to US$60 billion a month, the once deep and liquid Treasury markets are becoming an increasing source of concern and volatility.

If one or even two steadfast sources of Treasury demand were to pull back, their absence may have gone unnoticed, but all the buyers, all at once, against a backdrop of tepid demand at recent Treasury auctions and markets start to take notice.

Benchmark 10-year U.S. Treasury yields have already soared to 3.95%, while the 30-year sits at 3.94%, a mild inversion, but reflective of heightened recession expectations.

While some investors may be expecting the Fed to swoop in and stabilize Treasury markets, the way the Bank of England intervened to shore up gilts when the pound all but collapsed against the dollar, the Fed has far less wiggle room if it remains resolute in its fight against inflation.

Making matters worse, Japanese pension funds are seeing costs for hedging currency risks on Treasuries soar in tandem with the dollar at a time when Tokyo may need to start selling its hoard of U.S. Treasuries to further prop up the yen.

But U.S. households and hedge funds are finding Treasuries attractive now, betting that the Fed will tip the economy into recession and taking advantage of multi-decade high yields.

It’s unlikely that non-traditional sources will be sufficient to make up for the shortfall of demand in Treasuries and such bets also assume that the Fed is nearing the nadir of its policy peak, none of which is a given.



2. Chipmaker Rout Spreads Further

  • On Friday, Washington announced fresh export curbs on China’s access to U.S. semiconductor technology, adding complications for an industry that has had a disappointing start to the earnings season amid slumping demand.

  • As a result, chip-related stocks in Japan, South Korea and Taiwan slumped as traders returning from Monday’s holidays reacted to the Biden administration’s move.

During the pandemic, the global economy couldn’t get enough chips, and now it seems geopolitics is throwing a spanner in the works of what ought to be one of the most lucrative sectors of the economy.

On Friday, Washington announced fresh export curbs on China’s access to U.S. semiconductor technology, adding complications for an industry that has had a disappointing start to the earnings season amid slumping demand.

As a result, chip-related stocks in Japan, South Korea and Taiwan slumped as traders returning from Monday’s holidays reacted to the Biden administration’s move.

Taiwan Semiconductor Manufacturing (-8.33%) plunged more than 7%, the most since May 2021, while Samsung Electronics (-1.42%) dropped as much as 3.9%. In other key moves, SK Hynix (-1.10%) slid as much as 3.5%, while Tokyo Electron (-5.49) lost as much as 5.3%.

Once pandemic darlings, chipmakers are being hammered by a rapidly deteriorating global economy and simmering tensions between the U.S. and China.

In response to the lastest restrictions from Washington, Chinese state media and officials have warned of economic consequences, stirring speculation about potential retaliation at a time when the global economy can least afford fresh shocks.

The latest U.S. move could prompt China to move faster in fostering its domestic chip industry, a sector it has long professed an interest in developing self-sufficiency.

Although the U.S. is seeking to ensure Chinese companies don’t transfer technology to the country’s military and that chipmakers in China don’t develop the capability to make advanced semiconductors themselves, other chipmakers are being caught in the crosshairs as well.

Some chipmakers who had doubled down on investments to increase manufacturing capacity during the pandemic may now be saddled with billions of dollars of additional capital expenditure at a time when global demand for chips has waned.

Dismal iPhone 14 sales are also an indicator that demand for chips is likely to remain muted as central banks hike interest rates to combat inflationary pressures and risk tipping their economies into recession.



3. Technical Watchers See more Pain in Bitcoin Charts

  • Some technical chart watchers are pointing to a potentially portentous indicator known as the Bollinger bandwidth, a popular way of gauging volatility, which has shrunk to the narrowest since 2020.

  • Technical analysts view the tight Bollinger bandwidth as a harbinger of increased Bitcoin swings and potentially a drop in its price, especially in the absence of catalysts to push the cryptocurrency higher.

U.S equities started the week on a weak note as investors remain unconvinced that the U.S. Federal Reserve will pull back its aggressive monetary policy, and that’s put pressure on cryptocurrencies as well.

While all eyes will be fixed on the U.S. Consumer Price Index data for September to be released on October 13, many traders have already bugged out of risk assets, including cryptocurrencies.

Many see Thursday’s U.S. CPI data as a key tipping point that could influence the Fed’s decision on the size of the rate hike at its next meeting in November, with estimates divided between another 75-basis-point hike and a more sanguine 50-basis-point increase.

Depending on how the market perceives the reading, legacy markets and the cryptocurrency markets may witness a pick-up in volatility.

A global wave of monetary tightening to fight inflation has spurred a near 60% slide in Bitcoin this year and some US$2 trillion has been wiped off cryptocurrencies since a high in November 2021.

Against a backdrop of falling prices, a string of high-profile failures at cryptocurrency lenders has also prompted heightened regulatory oversight, with the Biden administration putting pressure on Congress to develop more robust legislation to govern the nascent sector.

However, a minor positive for bulls is that Bitcoin has not tested its June lows and has outperformed the Nasdaq and the S&P 500 in the short term, oscillating in a relatively constrained range around the US$20,000 level in the four months since hitting a low in mid-June.

But some technical chart watchers are pointing to a potentially portentous indicator known as the Bollinger bandwidth, a popular way of gauging volatility, which has shrunk to the narrowest since 2020.

In the past two years, the bandwidth has been similarly narrow five other times and on four of those occasions, Bitcoin subsequently shed almost 16% over 20 days.

Some technical analysts view the tight Bollinger bandwidth as a harbinger of increased Bitcoin swings and potentially a drop in its price, especially in the absence of catalysts to push the cryptocurrency higher.

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