Daily Analysis 16 March 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as stocks wowed investors with a convincing rebound while oil prices declined in the wake of fresh pandemic lockdowns in China.

In brief (TL:DR)

  • U.S. stocks were higher on Tuesday with the Dow Jones Industrial Average (+1.82%), the S&P 500 (+2.14%) and the Nasdaq Composite (+2.92%) all up as oil prices receded.

  • Asian stocks rose Wednesday as Chinese technology shares rebounded from a brutal selloff, though investors remain braced for volatility surrounding Russia’s war in Ukraine and a looming U.S. Federal Reserve policy decision.

  • Benchmark U.S. 10-year Treasury yields rose to 2.14% (yields rise when bond prices fall) on anticipation of tightening by the U.S. Federal Reserve.

  • The dollar was steady.

  • Oil pared recent losses with April 2022 contracts for WTI Crude Oil (Nymex) (+1.10%) at US$97.50.

  • Gold was lower with April 2022 contracts for Gold (Comex) (-0.34%) at US$1,923.10.

  • Bitcoin (+1.46%) rose to US$39,469 in line with broader increases in stocks.


In today's issue...

  1. Renewed Lockdowns in China Put a Pause on Oil’s Relentless Rally

  2. Chinese Stocks Face Challenges on Many Fronts

  3. Bitcoin Battles to Get Out of Tight Trading Range


Market Overview

A quarter-point U.S. Federal Reserve rate increase, the first since 2018, to fight high inflation is widely anticipated but there’s less certainty beyond that.

While markets expect a total of seven such moves this year, policy makers also have to factor in growth risks emanating from the war and the isolation of Russia in retaliation.

China’s equities have been under severe pressure on regulatory fears and speculation that Beijing’s ties with Russia raise the risk of a U.S. backlash.

Asian markets were higher on Wednesday with Tokyo's Nikkei 225 (+1.73%), Sydney’s ASX 200 (+0.84%), Hong Kong's Hang Seng Index (+2.03%) and Seoul's Kospi Index (+0.78%) all up in the morning trading session.



1. Renewed Lockdowns in China Put a Pause on Oil's Relentless Rally

  • China’s zero-Covid policy has provided a welcome respite as oil prices fell below US$100, by locking down some of the country’s main manufacturing hubs.

  • China is one of the biggest consumers of oil, and a major slowdown in the world’s second largest economy could prove a drag on prices that have otherwise only gone upwards until now.

In signs of just how volatile energy markets have been of late, benchmark oil prices, which analysts had just last week predicted would soar to as high as US$200 are now below US$100, as concern over Chinese consumption puts pressure on prices.

Both Brent crude, the benchmark global oil gauge and West Texas Intermediate, the U.S. equivalent, are below US$100, their lowest since the Russian invasion of Ukraine.

Just earlier this month, oil was at its highest level since 2008 and analysts had been calling for oil prices to keep rallying even higher, as Russia’s supply is taken off global markets.

Russia was the world’s second largest producer of oil last year, just behind the U.S., with 9.7 million barrels a day, but much of that oil now sits languishing in tankers parked in places like Singapore as traders hesitate to buy that oil, no matter how heavily discounted, for fear of falling afoul of sanctions or public relations backlash.

Against this backdrop, China’s zero-Covid policy has provided a welcome respite as oil prices fell below US$100, by locking down some of the country’s main manufacturing hubs.

Nevertheless, some say that the respite could be brief as markets have yet to fully price in the potential impact of lost Russian supply.

U.S. equities rallied at the prospect of lower oil prices (no matter how brief) and expectations that the U.S. Federal Reserve will raise interest rates by 0.25% at its policy meeting later today.

Because oil is such a key feedstock across a range of industries, and not just transport, prolonged higher prices could affect demand which could serve as a ceiling on prices.

U.S. carrier Delta Airlines (+8.70%) is already set to raise ticket prices in response to higher fuel costs, a move that is likely to be followed by other airlines and could put a damper on demand ahead of the summer driving season as American consumers face rising costs of all commodities.

And slowing manufacturing activity in China, with the lockdown of major manufacturing hubs like Shenzhen, a city of 17.5 million people, could also crimp demand for plastics, which are made from oil byproducts.

China is one of the biggest consumers of oil, and a major slowdown in the world’s second largest economy could prove a drag on prices that have otherwise only gone upwards until now.



2. Chinese Stocks Face Challenges on Many Fronts

  • With a slowing economy, a President that looks set to rule for life, the path ahead for China looks more uncertain than it has in decades.

  • China’s tech giants, once lauded as the Sino supra equivalents of their U.S. counterparts are now facing pressure to cut profits, redistribute wealth and dismantle capitalist models of making money.

It would take a brave investor to buy the dip on Chinese stocks and the economic miracle that has been China.

Any student of Chinese history will know that it tracks a relatively predictable path – centralization leading to decline, forcing decentralization, leading to ascendency, which inevitably leads to overconfidence and centralization, preempting a fresh period of decline.

A civilization as old as China’s has seen countless periods of ascent and decline, from the imperial age to the current epoch.

With a slowing economy, a President that looks set to rule for life, the path ahead for China looks more uncertain than it has in decades.

Chinese who have grown accustomed to knowing nothing other than the price of their properties rising are now having to contend with a rapidly slowing real estate sector.

Developers hopped up on leverage and building shiny new apartment buildings at breakneck speed are facing default on their debts.

China’s tech giants, once lauded as the Sino supra equivalents of their U.S. counterparts are now facing pressure to cut profits, redistribute wealth and dismantle capitalist models of making money.

On their own, each individual factor could be dismissed as socialism with “Chinese characteristics” but taken in totality, appear to represent a failure by top Communist Party apparatchiks to understand what had made China great again.

Washington is tightening the screws on Chinese companies listed on American exchanges, requesting (rightfully so) more transparent accounting practices and those firms unwilling or are unable to do so, are finding themselves struggling to relist closer to home in Hong Kong.

Investors who had been punch drunk on China’s economic miracle are now questioning their portfolio allocations to the Middle Kingdom, especially as its leader, Chinese President Xi Jinping, draws closer with Moscow.

Far from distancing itself from Russia’s unwarranted invasion of Ukraine, Beijing appears to be doubling down on its close ties with Moscow, spreading disinformation about potential chemical weapons developed by Ukraine in conjunction with the U.S. and refusing to condemn the invasion.

U.S. officials have also claimed that Beijing has entertained the prospect of supplying both military and financial aid to Russia, so that it can continue to bombard Ukrainian cities and slaughter civilians.

While Xi has publicly stated that Beijing is neutral on the invasion, Chinese state media plays out a very different story, continuing to repeat and bolster Moscow’s justifications for its invasion.

But that could be Beijing being adroit at playing both sides.

China is a major importer of Russian oil and commodities, but also has a strong trading relationship with Ukraine – the war does little to help Xi’s bid for an unprecedented third term in office, coming at a time when he needs prosperity and stability in for his 1.4 billion subjects.

Internally, there are signs of division on Russia’s invasion of Ukraine, even at the highest echelons in Beijing.

But the extent and determination with which Western sanctions have been brought to bear on Russia should serve as a reminder to investors contemplating dollar-cost averaging strategies on Chinese equities – they could be catching falling knives.

Should Xi’s personal relationship with Russian President Vladimir Putin cause him to throw his weight behind Russia, even a limited set of sanctions on China could see shares in that country fall further.

There are just so many reasons right now not to be excessively bullish on China – from a property sector that has plenty of skeletons in its closet, to an obsession with zero-Covid that is driving its all-important manufacturing sector into the ground – Beijing casting its lot with Moscow could be the last straw that breaks the camel’s back.

Economic miracles, regardless of how compelling can rapidly become illusory if not tended to.



3. Bitcoin Battles to Get Out of Tight Trading Range

  • Trading within 10% of a key trendline, 50-day moving average, data compiled by Bloomberg suggests that Bitcoin has been locked in its narrowest trading range since October 2020.

  • But Bitcoin enjoys more than a single investment narrative, and some investors have been doubling down on the cryptocurrency on bets that an inflationary environment will see the nascent asset class come into its own as a hedge against higher prices and lower growth.

For all the criticism of volatility that has been leveled against Bitcoin, the benchmark cryptocurrency has demonstrated very little of that over the past week.

Even as global stocks were whipsawed by the Russian invasion of Ukraine and the soaring prices of commodities, Bitcoin has instead remained relatively calm given the circumstances.

Trading within 10% of a key trendline, 50-day moving average, data compiled by Bloomberg suggests that Bitcoin has been locked in its narrowest trading range since October 2020.

A study of blockchain flows however reveals that Bitcoin investors have been accumulating, using the dip as a buying opportunity for whenever prices fall, but that source of buying pressure is being offset by more short-term traders who have been opportunistically moving in and out of markets.

The convergence of these two conflicting forces, long-term holders on the one hand, and short-term traders selling the mini-rallies in Bitcoin, has meant that whatever Bitcoin is traded, has stayed relatively glued to a very tight trading range, unable to capitulate and unable to rally either.

Like practically every other asset class this year, Bitcoin specifically, and cryptocurrencies in general are beset by a host of macroeconomic forces well out of their control – from the Russian invasion of Ukraine, to tightening monetary policy, against a backdrop of slower growth globally, there are overall no shortage of reasons to be bearish on risk assets in general.

But Bitcoin enjoys more than a single investment narrative, and some investors have been doubling down on the cryptocurrency on bets that an inflationary environment will see the nascent asset class come into its own as a hedge against higher prices and lower growth.

To be sure, U.S. tech stocks have lost around a fifth on average from recent highs, while Bitcoin has been relatively flat, suggesting that investors remain divided on the value of the cryptocurrency as well as its role in a typical portfolio.

Because cryptocurrencies are not beholden to any government, their value was proved when Russia’s banks were locked out of the SWIFT messaging system, an integral function that enables cross border transfers.

Millions of Russians who suddenly found their rubles turning worthless overnight, turned to cryptocurrencies to stem the bleed, while Ukrainians have used donations in cryptocurrencies to buy everything from flak jackets to helmets, to equip and defend themselves against the Russian onslaught.

On-chain Bitcoin data, which is transparent and searchable by anyone, reveals that digital wallet addresses holding anywhere between 1,000 to 10,000 Bitcoin saw a dramatic increase shortly after Western sanctions were announced on Russia.

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