Daily Analysis 15 September 2022 (10-Minute Read)

A terrific Thursday to you as traders remain focused on US economic data after stocks slump the most in two years.

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In brief (TL:DR)

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  • U.S. stocks were little changed on Wednesday with the Dow Jones Industrial Average (+0.01%), the S&P 500 (+0.34%) and the Nasdaq Composite (+0.74%) all up slightly.

  • Asian stocks were stable as investors awaited the latest batch of economic data amid expectations of large interest rate hikes by the Federal Reserve.

  • Benchmark U.S. 10-year Treasury yields advanced four basis points to 3.45% (yields rise when bond prices fall).

  • The dollar was steady.

  • Oil fluctuated with October 2022 contracts for WTI Crude Oil (Nymex) (-0.24%) at US$88.27 as traders grappled with concerns about global demand and assessed comments from the US on refilling strategic reserves.

  • Gold fell with December 2022 contracts for Gold (Comex) (-0.75%) at US$1,696.20.

  • Bitcoin (-1.33%) fell to US$20,116.

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In today's issue...

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  1. Gold Unable to Hedge Against Anything

  2. Beijing Bolsters Embattled Economy with Billions in Loan Support

  3. Ethereum’s Long-Awaited Merge is Complete – Uncertainty is All That Lies Ahead


Market Overview

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Swaps traders are pricing in a 75 basis point hike when the Fed meets next week, with some wagers appearing for a full-point move.

The continued rise in rate-sensitive Treasuries deepened the curve inversion -- a harbinger for a looming recession -- to a level unseen this century.

Jobs, manufacturing and retail numbers later Thursday will be parsed for clues on the strength of the economy and inflation expectations.

Asian markets were little changed on Thursday with Tokyo's Nikkei 225 (+0.21%), Sydney’s ASX 200 (+0.21%) and Hong Kong's Hang Seng Index (+0.44%) up, while Seoul's Kospi Index (-0.40%) was down.

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1. Gold Unable to Hedge Against Anything

  • Falling the most in a month, gold’s inverse relationship with the dollar, has seen the precious metal hammered as investors poured into the greenback.

  • Despite claims that gold is intended to be a hedge against inflation, historical data reveals that this is true only for extremely long investment horizons, typically well beyond the timeframe for an average investor.

Conventional wisdom would suggest that during periods of high inflation, precious metals such as gold would appreciate in value, given their supposed ability to hedge against rising prices.

But these are far from conventional times, and historically, gold’s ability to hedge against the rising cost of living is at best, highly debatable.

Which is why it shouldn’t come as a surprise that bullion has been hammered with U.S. inflation for August coming in a lot hotter than what economists had predicted, putting pressure on the U.S. Federal Reserve to ratchet up rates more aggressively later this month.

Falling the most in a month, gold’s inverse relationship with the dollar, has seen the precious metal hammered as investors poured into the greenback, driving it to its highest level in weeks, on concerns of recession from rate hikes.

Investors have now shifted to an expectation of a 75-basis-point rate hike for September, from just 50-basis-points before the U.S. Consumer Price Index data was released this month.

Gold fell below the psychologically-important US$1,700 level momentarily, as investors started pricing in a more hawkish Fed and one that is not likely to relent in its path of tightening for the rest of this year.

Despite claims that gold is intended to be a hedge against inflation, historical data reveals that this is true only for extremely long investment horizons, typically well beyond the timeframe for an average investor.



­2. Beijing Bolsters Embattled Economy with Billions in Loan Support

  • The Chinese central bank will provide more than US$28.7 billion in special re-lending funds to commercial banks in an effort to boost investment.

  • Banks were encouraged to lend to companies in the manufacturing and services sector, as well as small firms, at an interest rate not higher than 3.2%.

According to a report in the official Xinhua News Agency, the Chinese central bank will provide more than US$28.7 billion in special re-lending funds to commercial banks in an effort to boost investment.

In the latest effort by authorities to boost loans to companies and support the economy, China’s powerful State Council announced on Tuesday that the re-lending funds will be used to support banks to make loans to firms who upgrade equipment in the fourth quarter.

These loans will be provided for a year via the re-lending program and can be extended twice, in the hope that soft terms will encourage companies to invest more in capital.

Banks were encouraged to lend to companies in the manufacturing and services sector, as well as small firms, at an interest rate not higher than 3.2%.

Beijing will also subsidize the interest payments on these re-lending loans to ensure the actual interest rate is no higher than 0.7%.

But whether or not the incentives will be sufficient to spur fresh borrowing and investment is less clear.

Sentiment in China is at its lowest in decades as continual, rolling, zero-Covid lockdowns shake out demand and industries remain reluctant to double-down on investment.

Not helping matters, the arbitrary and unpredictable nature of crackdowns in various sectors mean that entrepreneurs and business owners remain uncomfortable to take loans to invest for the future, because another series of measures could be just around the corner.

Business and consumer sentiment in China continues to be extremely fragile and Beijing’s measures so far have helped to restart abandoned real estate projects, but not been enough to spur a significant turnaround that would suggest a durable change of conditions.



3. Ethereum’s Long-Awaited Merge is Complete – Uncertainty is All That Lies Ahead

  • The Merge was replete with both doomsday forecasts and highly optimistic projections of what would happen next.

  • While The Merge has been successful, substantial risks remain, especially given the likely creation of copies of Ethereum that remain stuck on Proof-of-Work.

In the run-up to the year 2000, doomsdays prophesies of aircraft falling out of the sky and nuclear holocaust ran amuck, as the world was gripped in collective horror at the prospect of computers which had come to control much of the modern world changed dates.

By convention and as a shortcut, the year in computers was recorded using just 2-digits, for instance “98” was intended to represent the year 1998 in programs.

But when the world crossed over into the year 2000, that year would be represented by “00,” which could mean the millennium, or a shift back to 1900, possibly causing massive amounts of turmoil for anything that relies on computers.

In similar fashion, “The Merge” – as the software upgrade of Ethereum is otherwise known, was replete with both doomsday forecasts and highly optimistic projections of what would happen next.

As the world’s most heavily-used blockchain, Ethereum is arguably the most important commercial highway in cryptocurrency, with about 3,500 active decentralized applications from games to finance, built on top of it.

Seven years in the making, The Merge would see Ethereum shift from the energy-hungry Proof-of-Work method of securing transactions, to the far more energy-efficient Proof-of-Stake system.

By some estimates, The Merge will help reduce Ethereum’s energy consumption as a blockchain by as much as 99%, making it a more approachable blockchain for institutional players for whom ESG concerns have otherwise kept them away.

Further upgrades to Ethereum will make the blockchain faster and cheaper, and more importantly, the circulating supply of Ether will start to decrease, which has some betting on a long-term increase in the price of the token.

So far however, The Merge has been more of a non-event, especially in terms of price action, although it is still too early to tell.

Significantly, The Merge has been successful purely from a technical standpoint, which is a huge achievement, given the number of things that could have gone wrong, although the coming weeks and months will reveal any lingering bugs or other issues not spotted by developers.

Staked Ether is expected to now generate a yield of around 5.2% in Ether terms for those locking up Ether to secure the Ethereum blockchain.

While The Merge has been successful, substantial risks remain, especially given the likely creation of copies of Ethereum that remain stuck on Proof-of-Work.

These copies or forks, and the existence of several versions of Ether, each running on their own discrete version of the original Ethereum blockchain, is likely to create confusion and become fertile ground for fraud, including double-spending of similar-looking and sounding tokens

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