Daily Analysis 12 July 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as stocks decline ahead of a key inflation print in the U.S. for June which could set the tone for rate hikes later this month.

In brief (TL:DR)

  • U.S. stocks closed lower on Monday with the Dow Jones Industrial Average (-0.52%), S&P 500 (-1.15%) and the Nasdaq Composite (-2.26%) all down on concerns of white-hot inflation rolling into June and emboldening the Fed to tighten further with another 75-basis-point rate hike at its policy meeting later this month.

  • Asian stocks fell Tuesday as the dollar and sovereign bonds rose, a pattern highlighting pervasive unease about the economic outlook amid high inflation and China’s struggles with its zero-Covid policies.

  • Benchmark U.S. 10-year Treasury yields declined three basis points to 2.96% (yields fall when bond prices rise) on a souring of risk.

  • The dollar pushed toward levels last seen at the height of the market panic over Covid.

  • Oil fell with August 2022 contracts for WTI Crude Oil (Nymex) (-2.20%) at US$101.80 on a bleaker economic outlook.

  • Gold was little changed with August 2022 contracts for Gold (Comex) (+0.06%) at US$1,732.80.

  • Bitcoin (-2.73%) dropped to US$19,850 tumbling alongside stocks as investors shunned the riskiest assets and sent the dollar soaring.


In today's issue...

  1. Cutting China tariffs will not tame inflation, warns US commerce secretary

  2. China Tech Stock Rout Reminds Investors Who They’re Dealing

  3. A Strengthening Dollar is Damaging Bitcoin


Market Overview

Much is riding on upcoming company profit filings and this week’s U.S. inflation data with a brief equity rebound from this year’s rout already fizzling ahead of reports.

Risk appetite may struggle to digest a darkening earnings outlook alongside stubborn price pressures that point to more monetary tightening on the cards.

Meanwhile, the latest Fed commentary highlighted both the central bank’s hawkishness and the risks that come with aggressive interest-rate hikes.

In China, investors are concerned more Covid lockdowns may lie ahead as Beijing continues with a strategy of mass testing and mobility curbs and as fresh outbreaks in Shanghai spark off a new series of lockdowns.

Asian markets were mostly lower on Tuesday with Tokyo's Nikkei 225 (-1.77%), Seoul's Kospi Index (-0.96%) and Hong Kong's Hang Seng Index (-1.28%) down, while Sydney’s ASX 200 (+0.06%) was up slightly.



1. Cutting China tariffs will not tame inflation, warns US commerce secretary

  • With the midterm elections around the corner, Biden administration officials are struggling to face formulate an effective plan to combat soaring prices.

  • Yet there’s only so much that the Biden administration can do to relieve price pressures, in what has essentially been an inherited problem.

U.S. commerce secretary Gina Raimondo conceded that eradicating Trump-era tariffs on Chinese goods was no silver bullet for inflation, revealing that rolling back those measures would have little effect in cooling inflation in a “very significant way.”

With the midterm elections around the corner, Biden administration officials are struggling to face formulate an effective plan to combat soaring prices.

In an interview with NBC on Sunday, Raimondo said that “lifting tariffs isn’t going to bring down top-line inflation in a very significant way, but highlighting U.S. President Joe Biden’s emphasis on battling inflation as the administration’s top priority.

The Biden administration is desperately looking to cool supply-related constraints but given how the U.S. trade deficit is at its narrowest in years, it’s unlikely that measures to lower trade barriers will move the needle.

At the NBC interview, Raimondo called on Congress to pass a bipartisan bill aimed at bolstering the domestic supply of semiconductors, a sector that has taken body blows from critical shortages which has rocketed prices of vehicles and industrial technology.

Raimondo suggests that current inflationary pressures have been wrought by a “lack of supply”, which is why the bill is key in mitigating high inflationary rates, and a “perfect example” in boosting capacity.

Yet there’s only so much that the Biden administration can do to relieve price pressures, in what has essentially been an inherited problem.

Years of perennially loose monetary policy coupled with pent-up pandemic-era demand has been exacerbated by the Russian invasion of Ukraine taking key agricultural and industrial commodities out of global markets, leaving much of the burden of inflation to the Fed to fix.

U.S. headline inflation data is due out this week and if it shows a slowdown for June from the white-hot figures in May, could provide sufficient justification for the Fed to dial down this month’s rate hike to 50-basis-points instead of 75 as promised, but it will be down to the wire.



2. China Tech Stock Rout Reminds Investors Who They're Dealing With

  • A slew of further regulatory probes and stinging fines have sent China’s biggest tech names plummeting back to earth once again, marking their second consecutive day of declines.

  • Chinese corporate earnings are due in the coming weeks and investors will have more data to chew on, as well as an opportunity to assess the impact of zero-Covid policies on China’s companies.

Just when you thought it was safe again to dip your toe into Chinese tech stocks, a slew of further regulatory probes and stinging fines have sent China’s biggest tech names plummeting back to earth once again, marking their second consecutive day of declines.

The Hang Seng Tech Index, which comprises primarily Chinese tech giants, fell 2.8% yesterday, after dipping to as low as 3.9% at one point, taking declines from its June peak to 12% and reminding investors that they could be catching falling knives, rather than picking pennies off the floor.

Ecommerce giant Alibaba Group Holdings (-5.53%) and owner of the ubiquitous WeChat app Tencent Holdings (-1.29%) were slapped with regulatory fines over the weekend, reviving fears that Beijing’s purge of its tech sector is not quite over.

For the past several months, global investors were tempted back into Chinese tech counters, believing that Beijing’s slew of measures to bolster the rapidly slowing economy, including monetary and fiscal stimulus, were a sign that the purge of China’s tech companies was over as well.

Signs that Beijing was also easing up on its zero-Covid lockdown measures was also fueling optimism that the worst of China’s pandemic-era policies were likely in the rearview mirror.

But that optimism was snubbed out by the tech sector fines and fresh movement restrictions in Shanghai after an outbreak in the financial center, just weeks after the city exited strict lockdowns.

Global investors are now growing increasingly concerned that Beijing’s earlier measures to shore up confidence in its most lucrative sectors was nothing more than window dressing and unsure about the durability of any policy shifts.

Earlier this month, Beijing made a sharp U-turn on its vaccine mandate in response to public backlash, a rare concession by the Chinese Communist Party that controls almost every aspect of the lives of its citizens, but also reflecting how difficult it will be for China to exit this seemingly endless cycle of lockdowns.

Chinese corporate earnings are due in the coming weeks and investors will have more data to chew on, as well as an opportunity to assess the impact of zero-Covid policies on China’s companies.

If the past several weeks were anything to go by, Chinese corporate earnings could yet provide another fresh trigger to spark another selloff.



3. A Strengthening Dollar is Damaging Bitcoin

  • A strengthening dollar and growing uncertainty is rattling nerves and making investor more skittish to bet on nascent assets, including Bitcoin.

  • Cryptocurrencies have struggled of late and continue to closely track risk assets, in particular tech stocks, as central banks globally attempt to combat high inflation by tightening monetary policy for the first time in over a decade.

As it turns out the dollar itself is an inflation hedge, and not Bitcoin, at least according to recent movements with the greenback now worth more than the euro and as Bitcoin slumps in the face of a rising dollar.

Falling below US$20,000 again on Tuesday, after enjoying its strongest week in over three months, a strengthening dollar and growing uncertainty is rattling nerves and making investor more skittish to bet on nascent assets, including Bitcoin.

Despite being a relatively immature asset class, Bitcoin has demonstrated that it is not immune to macro headwinds and is down by over 70% from its all-time-high from last November.

Ether, the world’s second most valuable cryptocurrency is down almost 80% from its all-time-high, despite a major software upgrade on the cards that could revolutionize Ether’s blockchain and make it more energy efficient.

Ahead of a key U.S. inflation print, due out later this week, investors are taking cover in cash until the policy outlook becomes more predictable, with divided traders adding to the volatility and just as many opinions as there are likely outcomes.

Last week’s U.S. jobs report revealed a strong U.S. labor market, fueling fears that the U.S. Federal Reserve will be emboldened to institute a fresh round of supersized rate hikes at its next policy meeting later this month.

Even the typically dovish Raphael Bostic of the Atlanta Federal Reserve has sung a different tune of late and suggested that the U.S. economy is sufficiently resilient to stomach further supersized rate hikes.

Even if the Consumer Price Index data for June comes in at less than May, it’s unlikely that robust flows can be expected back into cryptocurrencies, especially given the strength of the dollar ahead of inflation data.

Cryptocurrencies have struggled of late and continue to closely track risk assets, in particular tech stocks, as central banks globally attempt to combat high inflation by tightening monetary policy for the first time in over a decade.

A recent MLIV Pulse survey that ran in the first week of July suggests that over half of respondents expect Bitcoin to hit US$10,000, with the other half anticipating a recovery to US$30,000 and reflecting just how divided opinion continues to be in the cryptocurrency markets.

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