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Daily Analysis 15 June 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as stocks wind lower as the U.S. Federal Reserve meets later today to determine the path of rate hikes against a backdrop of stubbornly persistent inflation.

In brief (TL:DR)

  • U.S. stocks continued to bleed ahead of the U.S. Federal Reserve's rate setting meeting with the Dow Jones Industrial Average (-0.50%) and S&P 500 (-0.38%) lower while the Nasdaq Composite (+0.18%) was slightly higher, as markets priced in the likely biggest rate hike by the Fed since 1994.

  • Asian stocks closed mostly lower on Wednesday with the one exception being Hong Kong, which was buoyed by mainland China stocks.

  • Benchmark U.S. 10-year Treasury yields soared to 3.406% (yields rise when bond prices fall) as traders priced in monster Fed rate hikes.

  • The dollar retreated from its 2-year high in Asian trading.

  • Oil fell with July 2022 contracts for WTI Crude Oil (Nymex) (-1.45%) at US$117.21 on concerns that a recession and diminished demand from China.

  • Gold rose with August 2022 contracts for Gold (Comex) (+0.59%) at US$1,824.20 as the dollar pared gains.

  • Bitcoin (-10.43%) fell sharply to US$20,155, on rumors that major cryptocurrency hedge fund Three Arrows Capital was facing margin calls and forced liquidations of assets as the bleed turns into a rush for the exits.

In today's issue...

  1. Blood on the Streets

  2. Betting Big on China Stocks? Better Listen to the Locals

  3. Cryptocurrency Bloodbath takes Market Cap below US$1 trillion

Market Overview

All eyes will be on the U.S. Federal Reserve's rate-setting meeting that will happen later today, as markets have priced in rate hikes as high as 75-basis-points, which would mark a departure from the central bank's current practice of providing some degree of certainty on policy moves.

A 50-basis-point rate hike could see a rebound in risk assets but nevertheless be tempered by Fed posturing on the policy path ahead - it's entirely possible that cheer from a 50-basis-point hike will still be met with concern over a forecast tightening of policy with more aggressive hikes later this year.

Asian markets closed mostly lower with Tokyo's Nikkei 225 (-1.14%), Seoul's Kospi Index (-1.83%) and Sydney’s ASX 200 (-1.27%) down, while Hong Kong's Hang Seng Index (+1.14%) was helped higher by shares of Chinese companies.

1. Blood on the Streets

  • Investors trying to figure out whether they should sell everything now can consider to sell half to cut losses and hold on to the other half in case markets rebound suddenly.

  • There has been a greater portfolio concentration than at any time in the past towards high growth tech sectors, investors may want to reconsider pouring into "new" profit centers such as energy, but rather take the opportunity to create a diversified portfolio.

Investors had been skirting around the possibility for some time now – a bear market.

Most refused to believe that the U.S. Federal Reserve would allow stocks to tank, and most, as in all other cases in history, were wrong.

With U.S. inflation burning white hot, pressure is rising on the Fed to ratchet up rates to the point of recession, come what may, costs must come down.

Assurances that the Fed would hike by just 50-basis-points on Wednesday, have been replaced by fears that the rate hike will be closer to 75-basis points.

These fears of course are fair, the Fed will have to get more aggressive, but it won’t likely be this Wednesday.

Nevertheless, stocks are officially in a bear market, defined as a close of at least 20% below its peak.

The tech stocks which powered the pandemic-driven rally have fallen harder than the benchmark S&P 500, with Meta Platforms (-0.32%) down more than 50%, Amazon (-1.31%) losing 39% and Microsoft (+0.92%), Apple (+0.67%) and Alphabet (+0.30%) all losing about a quarter of their value.

Meanwhile, the growth stock benchmark Nasdaq Composite Index has been in a bear market since March and is down about a third from its high last year.

But to put things in perspective, an S&P 500 index fund has still returned, with dividends, almost 70% over the past five years.

The reason most investors don’t think in these terms is because we are all emotional creatures, who feel losses far more intensely than gains.

In bear markets, it may feel hopeless, but the best response may be to stick with a plan for steadily investing in a diversified portfolio, to benefit from dollar cost averaging at least methodically.

Over the past several years, more investors than ever had most of their pot riding on tech stocks, and even after the recent correction, the top five tech-driven stocks on the S&P 500 still make up more than a fifth of the market capitalization-weighted index.

Many investors doubled down on technology and as such are nursing losses far more than a diversified portfolio.

But investors may not want to aggressively sell tech stocks now yet could consider making them less dominant in a portfolio down the line.

Similarly, sectors that are flying high now, driven by the supply shock created by the end of pandemic lockdowns and Russia’s war on Ukraine, such as energy stocks on the S&P 500, which have returned more than 50% this year, bear close monitoring.

Instead of making binary decisions, sell all or nothing, investors could consider making half-sized bets, sell half, so if the stock falls further you took some money off the table, but if it rebounds, you still have the half in hand – either way, your brain will clock it as a win.

And what about retreating into cash entirely? Stuff it into a mattress and hope for a better day.

The problem with that is it’s difficult to time the markets, even for professionals and even harder to guess when markets will turn.

Being caught on the sidelines means that investors who hold on to cash will miss the largest and strongest leg up.

2. Betting Big on China Stocks? Better Listen to the Locals

  • Chinese stocks draw lackluster interest from local investors.

  • Global investors bullish on Chinese stocks may want to check their exuberance against the lack of retail interest as retail flows are the primary driver in China.

Whenever you visit a foreign country, it pays to get a bit of local insight – what are the places that are safe to eat at, which neighborhoods to avoid, a basic lay of the land, to stay out of trouble.

Yet now that Beijing has eased up on its crackdown of industries which powered its economic miracle, foreign funds are pouring back in, despite having made a disappearance earlier in the year.

These global investors sniffing around for bargains in the world’s second largest economy should take heed of what the locals are doing, because they don’t appear to be biting.

China’s benchmark CSI 300 Index has rebounded less than 5% since its mid-March rout, even as the Hang Seng China Enterprises Index has rallied some 18%.

Mainland Chinese shares have underperformed even as Beijing has promised incentives for sectors including automotive and infrastructure, while still pledging to keep macro policies loose.

Unlike the U.S. or Europe, the vast majority of investors in Chinese markets are retail, making up as much as 80% of flows, and it is from this demographic that sentiment remains particularly weak.

The number of new investors in China’s onshore stock market totaled just 1.2 million last month, the least since October and the lowest for the month of May using data from the China Securities Depository and Clearing Corp. going back to 2019.

Chinese investors appear to have cooled their enthusiasm to open stock accounts, possibly because of rolling zero-Covid lockdowns.

Much of the froth that was synonymous with Chinese stock markets has also evaporated, with margin financing, which allows equity traders to borrow funds to buy stocks, steadily declining this year, according to data from Bloomberg.

Margin data, an indicator of risk appetite by Chinese investors, hasn’t seen any meaningful recovery after reach a trough in April.

Perhaps global investors bullish on China should quiz the locals on their views of the market.

3. Cryptocurrency Bloodbath takes Market Cap below US$1 trillion

  • Trouble at VC-backed Celsius Network, one of the largest decentralized lenders in the cryptocurrency space, sent prices plunging.

  • Crisis of confidence has taken the entire cryptocurrency industry below the US$1 trillion market cap.

Not so long ago, the market cap for Bitcoin alone was over US$1 trillion, and now the entire coterie of cryptocurrencies can’t even bust a trill.

As with so many things in the cryptocurrency sector, what started off as a spark has turned into a raging wildfire and exposed (yet again) some of the systemic weaknesses of the industry that has yet to be properly regulated.

While white hot U.S. inflation data may have fed the narrative in the selloff in cryptocurrencies from last Friday, news that one of the industry’s biggest lenders was freezing withdrawals sent prices into a tailspin.

Celsius Network, which was founded in 2017, wrote in an email to its customers that because of the market conditions, it would need to freeze withdrawals until further notice,

Concerns that one of the biggest lenders in crypto and a key player in the world of decentralized finance was pausing withdrawals, swaps and transfers, following weeks of speculation over its ability make good on promised outsized returns on its products, including yields as high as 17% sent the price of cryptocurrencies plummeting.

Bitcoin plunged to its lowest price in a over 18 months after the announcement by Celsius Network fueled rumors that the lender was systemically important and could accelerate the digital asset market meltdown.

Unlike in traditional finance, there are no relief valves such as exchange halts or any mechanism to stop the rout.

Nor is there a central bank or regulators who can step in to nationalize a crucial lender to restore confidence back to the system.

Unlike the collapse of TerraUSD and its sister token Luna, the implosion of Celsius Network would have far more implications for the industry because of the amount of Bitcoin and Ether that it held in custody on behalf of customers and what they ended up doing with it.

That race to sell off customer assets such as Bitcoin and Ether to meet obligations has resulted in the equivalent of a bank run.

Although Celsius Network had long derided banks, it operated as an unregulated one itself, enticing customers with staggering rates for deposits of cryptocurrencies and then loaning out those deposits to other customers.

The potential collapse of Celsius Network will have reverberations throughout the cryptocurrency sector, especially since the firm is a large, venture capital-backed entity which attracted a valuation of US$4.1 billion after its most recent Series B funding round last November.

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