Daily Analysis 13 April 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as like an old man sliding into a warm bath, markets continue their almost inevitable sink into the abyss.

In brief (TL:DR)

  • U.S. stocks ended lower on Tuesday with the Dow Jones Industrial Average (-0.26%), the S&P 500 (-0.34%) and the Nasdaq Composite (-0.30%) all down slightly as U.S. Treasuries recovered, with core inflation slowing but with equities still coming under pressure.

  • Asian stocks were mixed Wednesday as investors calibrated economic risks from elevated inflation.

  • Benchmark U.S. 10-year Treasury yields rose two basis points to 2.74% (yields rise when bond prices fall) as inflation remains topmost of the agenda for investors.

  • The dollar was steady.

  • Oil topped US$100 a barrel with May 2022 contracts for WTI Crude Oil (Nymex) (+0.32%) at US$100.92 after Russian President Vladimir Putin vowed to continue the war in Ukraine and China partially eased Covid curbs adding to the demand side of the equation.

  • Gold rose with June 2022 contracts for Gold (Comex) (-0.12%) at US$1,973.80.

  • Bitcoin (+1.56%) recovered to US$40,094 as blockchain data suggests that the number of long-term investors may be steadily growing.


In today's issue...

  1. First GameStop, Now Gas Stop?

  2. U.S. Inflation Hits 8.5% but Below Most Estimates

  3. Bitcoin Below US$40,000


Market Overview

Investors are bracing for the latest earnings season as they evaluate the threat from inflation, amid concerns that rising commodity costs and more circumspect consumers will end up squeezing company profits.

Not far away from the decision-making matrix is also the threat of a recession, whether due to rising inflation or the inopportune timing of a U.S. Federal Reserve policy-tightening.

The U.S. session Tuesday was shaped by inflation data, which came in at 8.5% for the headline number - the highest in over four decades - but was better-than-expected at the core level, which excludes volatile food and energy prices.

Asian markets were up on Wednesday with Seoul's Kospi Index (+1.41%), Tokyo's Nikkei 225 (+1.67%), Hong Kong's Hang Seng Index (+0.21%) and Sydney’s ASX 200 (+0.30%) all higher in the morning session as lockdowns look to be eased in Shanghai.



1. First GameStop, Now Gas Stop?

  • Senvest Management clocked a staggering 86% gains in 2021, ranking the hedge fund among the best-performing in the world, and is now claiming to have a quarter of its portfolio in fossil fuel stocks which are unloved.

  • Investors are also concerned that soaring inflation as well as tighter U.S. monetary policy could potentially tip the U.S. economy into recession, souring demand for energy.

Can the hedge fund that made the right bets on the meme stock frenzy, starting with GameStop (-1.40%) make another well-placed bet on the oil and gas industry?

Perhaps, at least according to New York-based Senvest Management, which made a staggering US$700 million betting on the meme stock GameStop.

Senvest Management clocked a staggering 86% gains in 2021, ranking the hedge fund among the best-performing in the world, and is now claiming to have a quarter of its portfolio in fossil fuel stocks which are unloved.

With the Russian invasion of Ukraine culminating in a final showdown in Donbas, concerns that countries have not had an opportunity to decouple from the energy giant that is Russia, is pushing investors to seek profit from the West’s need to secure sources of energy less susceptible to geopolitical risk.

ESG investors have thus far held back on going all-in with fossil fuel companies, but even the most ideological investors will waver as the world seeks to secure energy supplies, an issue that will not go away anytime soon.

Senvest Management made a prescient bet on GameStop in late 2020, buying up more than a 5% stake in the vide game retailer, before a frenzy of retail investor buying just months later pushed the share price up by as much as 2,400% at one stage.

Years of under-investment in the traditional energy sector means that supply can’t immediately increase to meet soaring demand and Senvest Management believes that years will be needed to produce a meaningful production response to satisfy demand.

The hedge fund has put its money where its mouth is, with two of its biggest positions in Canadian energy groups, Paramount Resources and Arc Resources, which are trading at substantial discounts to American equivalents.

Oil however has had a volatile ride, soaring well over US$100 at one stage, before the Washington’s release of strategic reserves and concerns over Chinese demand have seen the price of crude sink back below the century mark.

Investors are also concerned that soaring inflation as well as tighter U.S. monetary policy could potentially tip the U.S. economy into recession, souring demand for energy.


Over the past week, stocks, bonds, and oil have all sunk on recession concerns.



2. U.S. Inflation Hits 8.5% but Below Most Estimates

  • Ultimately the Consumer Price Index increased 8.5% last month compared with a year ago, according to the Bureau of Labor Statistics, the highest pace of price increases since 1981.

  • Even when volatile items such as food and energy were stripped out, prices still romped ahead with a 6.5% annual increase.

Depending on which side you’re looking at prices from, inflation may have already peaked or is on its way higher.

With the Russian invasion of Ukraine roiling commodity markets, expectations were already high that the pace of price increases would have quickened in March, with most estimates putting inflation at around 8.9%.

Ultimately the Consumer Price Index increased 8.5% last month compared with a year ago, according to the Bureau of Labor Statistics, the highest pace of price increases since 1981.

The monthly jump was also 1.2%, the quickest pace of rising prices since September 2005 and a sharp acceleration from the 0.8 increase recorded in February.

Even when volatile items such as food and energy were stripped out, prices still romped ahead with a 6.5% annual increase.

On the bright side, prices could have accelerated even faster, especially considering that March was the first full month when the effects of the Russian invasion of Ukraine were factored in, but measures such as the release of strategic oil reserves by the Biden administration helped to put a lid on fuel price increases.

More importantly, the “core” CPI data which strips out food and energy prices, was a lot more moderate in its increase, prompting a rally in U.S. Treasuries and suggesting that there may be some light at the end of the tunnel when it comes to supply chains.

Prices of used vehicles, which had been skyrocketing since the pandemic as Americans shied away from mass transit, fell 3.8% in March and which before the Russian invasion had been a major contributor to overall inflation data.

Markets are now pricing in a more sanguine increase in interest rates this year of about 2.45%, down from the 2.59% earlier in the day, but much higher than the current range of between 0.25% to 0.50%.



3. Bitcoin Below US$40,000

  • Bitcoin dipped below US$40,000, a psychologically-important level of support, on multiple occasions this past week.

  • Bitcoin has fallen below its 50-day moving average and that has some chart watchers concerned it could have risks to the downside.

Bitcoin continued to feel the effects of its ever-increasing correlation with U.S. equities, in particular tech stocks, as it dipped below US$40,000, a psychologically-important level of support, on multiple occasions this past week.

Slower-than-expected rises in core CPI data – which strips out volatile food and energy prices from inflation, provided a boost for U.S. Treasuries, but stocks, measured by the benchmark S&P 500 still slipped lower.

For the first time in over three weeks, Bitcoin has dipped below US$40,000 on more than two occasions this past week alone, while Ether also tested US$3,000.

At the time of writing, both Bitcoin and Ether are above US$40,000 and US$3,000 respectively, but there are signs that the broader cryptocurrency market will continue to face headwinds as the U.S. Federal Reserve begins hiking interest rates and appears determined to combat stubbornly high inflation.

Geopolitical turmoil has also dented risk appetite while technical analysts suggest that Bitcoin is in a “consolidation” phase with its upper boundary at US$47,500 and the lower boundary at US$36,500, which suggests that Bitcoin is well within its forecast range.

More disconcerting perhaps is Bitcoin’s role as a portfolio diversifier, with signs that the cryptocurrency is increasingly correlated with tech stocks and therefore more vulnerable to policy tightening.

Bitcoin has fallen below its 50-day moving average and that has some chart watchers concerned it could have risks to the downside.

But this is crypto and the charts don’t tell the full story because of the effect of narrative, that could see sudden reversals and more twists than a daytime soap opera.

Bitcoin has two major narratives from an investment perspective – on the one hand as a risk asset that is going to move in lockstep with other risk assets, like loss-making tech stocks, and the other narrative is as a store of value or inflation hedge – which would be ripe for accumulation especially if inflation continues to head higher.

Because most Bitcoin that is traded represents a small fraction of the amount in circulation, much will depend on which narrative investors who are either entering or exiting the cryptocurrency space buy into.

If more investors see Bitcoin as an inflation hedge, then its price should be expected to rise regardless of policy tightening, because the central bank measures are in response to soaring inflation, which feeds into Bitcoin’s investment narrative.

A quick inspection of the Bitcoin blockchain reveals far more accumulation than selling and with more Bitcoin being held in illiquid “cold wallets” or longer-term addresses, there’s just less Bitcoin available for macro investors or for new market entrants, meaning that price could swing violently either way.

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