Daily Analysis 16 May 2022 (10-Minute Read)

Hello there,

A magnificent Monday to you as U.S. markets rebound last Friday while Asian stocks muddled through the start of the week.

In brief (TL:DR)

  • U.S. stocks closed higher Friday with the Dow Jones Industrial Average (+1.47%), S&P 500 (+2.39%) and the Nasdaq Composite (+3.82%) all in the green with the U.S. Federal Reserve reiterating that it won't be super-sizing its rate hikes.

  • Asian stocks wavered Monday as disappointing Chinese data buffeted markets, underscoring concerns about the global economic outlook.

  • Benchmark U.S. 10-year Treasury yields fell three basic points to 2.89% (yields fall when bond prices rise).

  • The dollar was stable.

  • Oil slid with June 2022 contracts for WTI Crude Oil (Nymex) (-1.32%) at US$109.03 on concerns over Chinese demand.

  • Gold was little changed with June 2022 contracts for Gold (Comex) (+0.07%) at US$1,809.50.

  • Bitcoin (+2.66%) rose to US$30,741 (at the time of writing) as the cryptocurrency industry slowly but surely recovers from the demise of algorithmic stablecoin TerraUSD and the fallout of the collapse of its sister token LUNA.


In today's issue...

  1. No One is Cheering a Stronger Dollar

  2. When Doing Nothing may be your Best Investment

  3. Does Wall Street see something in Coinbase no one else does?


Market Overview

The risk of an economic downturn amid high inflation and rising borrowing costs remains the major worry for markets, alongside Russia’s war in Ukraine and China’s Covid outbreak.

Many traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year.

China’s economy contracted in April, with Covid lockdowns dragging the industrial and consumer sectors to the weakest levels since early 2020.

Asian markets were mixed Monday with Tokyo's Nikkei 225 (+0.24%) and Sydney’s ASX 200 (+0.19%) up, while Hong Kong's Hang Seng Index (-0.26%) and Seoul's Kospi Index (-0.18%) were down in the morning trading session.




1. No One is Cheering a Stronger Dollar

  • The dollar is powering a slowdown in the global economy that would take the U.S. down along with it.

  • For now at least, investors have yet to call a top in the dollar rally, in part because bets at the end of 2021 that the dollar had peaked have been thoroughly undermined.

Although a stronger dollar is supposed to make imports for Americans cheaper, hardly anyone has noticed it as supply chain snarls and the Russian invasion of Ukraine has added to commodity and fuel price pressures.

But with the U.S. Federal Reserve raising rates and the bulk of global offshore debt denominated in the greenback – the dollar is powering a slowdown in the global economy that would take the U.S. down along with it.

The Bloomberg Dollar Spot Index has risen by an astounding 7% since January to a 2-year high as the U.S. Federal Reserve embarks on its most aggressive series of rate hikes in over two decades.

While it would stand to reason that a rising dollar should help the Fed cool prices and support American demand for foreign goods, it also increases the raw material and input prices of feedstock into the manufacturing process that spills into U.S. imports anyway.

Where it does help though is for global investors whose assets are American, and who have seen the value of their dollar-denominated investments soar relative to their home currencies.

The euro hit a fresh 5-year low against the greenback and the Swiss franc is now at parity with the dollar – the first time since 2019.

Other countries have had to respond to the rapidly rising dollar as well, Hong Kong has had to intervene to shore up its currency peg, while Malaysia and India surprised with rate hikes.

The durability of the dollar rally is uncertain, and a combination of slowing U.S. growth and expected cooling of inflation means that investors who buy U.S. assets now, may find themselves with less relative to their own currencies when an equilibrium is finally found.

For now at least, investors have yet to call a top in the dollar rally, in part because bets at the end of 2021 that the dollar had peaked have been thoroughly undermined.

And given the weaker economic base from which the rest of the world is working from compared to the U.S., demand for dollar assets will likely feed into a self-perpetuating feedback loop, unless and until the rest of the global economy regains its footing.



1. No One is Cheering a Stronger Dollar

  • The dollar is powering a slowdown in the global economy that would take the U.S. down along with it.

  • For now at least, investors have yet to call a top in the dollar rally, in part because bets at the end of 2021 that the dollar had peaked have been thoroughly undermined.

Although a stronger dollar is supposed to make imports for Americans cheaper, hardly anyone has noticed it as supply chain snarls and the Russian invasion of Ukraine has added to commodity and fuel price pressures.

But with the U.S. Federal Reserve raising rates and the bulk of global offshore debt denominated in the greenback – the dollar is powering a slowdown in the global economy that would take the U.S. down along with it.

The Bloomberg Dollar Spot Index has risen by an astounding 7% since January to a 2-year high as the U.S. Federal Reserve embarks on its most aggressive series of rate hikes in over two decades.

While it would stand to reason that a rising dollar should help the Fed cool prices and support American demand for foreign goods, it also increases the raw material and input prices of feedstock into the manufacturing process that spills into U.S. imports anyway.

Where it does help though is for global investors whose assets are American, and who have seen the value of their dollar-denominated investments soar relative to their home currencies.

The euro hit a fresh 5-year low against the greenback and the Swiss franc is now at parity with the dollar – the first time since 2019.

Other countries have had to respond to the rapidly rising dollar as well, Hong Kong has had to intervene to shore up its currency peg, while Malaysia and India surprised with rate hikes.

The durability of the dollar rally is uncertain, and a combination of slowing U.S. growth and expected cooling of inflation means that investors who buy U.S. assets now, may find themselves with less relative to their own currencies when an equilibrium is finally found.

For now at least, investors have yet to call a top in the dollar rally, in part because bets at the end of 2021 that the dollar had peaked have been thoroughly undermined.

And given the weaker economic base from which the rest of the world is working from compared to the U.S., demand for dollar assets will likely feed into a self-perpetuating feedback loop, unless and until the rest of the global economy regains its footing.



2. When Doing Nothing may be your Best Investment

  • Even though the worst markets are supposed to have havens, it’s increasingly apparent that this one doesn’t.

  • For most investors though, the best thing may be to do nothing at all until conditions become more certain.

Many investors have taken to just ignoring their portfolios altogether, on concern that it will affect their psyche and ability to function day-to-day.

That may be a good choice.

Because even though the worst markets are supposed to have havens, it’s increasingly apparent that this one doesn’t.

The S&P 500, that benchmark of American industriousness and innovation, is down 16% and off to its worst start for a year since 1970, according to Dow Jones Market Data.

But stocks are hardly alone in hemorrhaging.

Gold, which is typically considered a haven, especially during inflationary periods, is lower now than it entered the year.

Bonds have been hammered alongside stocks, undermining their value in a typical 60/40 stock and bond portfolio mix that’s supposed to provide some degree of shelter in uncertain times.

A dash to cash seems less attractive when inflation acts as a wood worm, eating away at it at the rate of 8% per annum.

Real estate seems especially risky considering that borrowing costs are likely to start rising and prices have started to show signs of wavering.

And spreads for high-yield bonds are opening up, with higher interest rates raising the risk of the shakiest borrowers defaulting.

Even cryptocurrencies, which used to live in their own silo, have been crashed on the shore by the wave of policy tightening.

So were all of the gains illusory from the get go?

Was it the case that the only reason everything was worth anything was because the Fed was funding it?

Nobody knows and it seems as if the best thing to do at the moment is just sit tight.

Even as some investors cut losses and sell, they’re having difficulty knowing where to deploy their money next.

Some are doubling down, dollar-cost averaging, whereas others are holding on because they can’t think of anything better to do and the data seems to support that.

A recent Bank of America analysis reveals that outflows from stock funds have been relatively benign, estimating that for every US$100 poured into the stock market since the start of 2021, just US$4 has been pulled out to date.

So investors aren’t panicking, but it could also be that they’re paralyzed until they do start panicking.

By way of comparison, during the height of the pandemic, fear gripped the market so that US$61 was pulled for every US$100 invested while during the 2008 Financial Crisis, investors deleveraged and US$113 was withdrawn for every US$100 put in.

Investors are having to grapple with the two emotions that all investors have to contend with – fear and greed.

Fear that they could lose more is making investors search for safe places to park their money, for which there are almost none, and greed which desires market returns over the rate of inflation but are riskier.

For most investors though, the best thing may be to do nothing at all until conditions become more certain.



3. Does Wall Street see something in Coinbase no one else does?

  • According to data compiled by Bloomberg, Coinbase was recommended a “buy” by no less than 22 analysts, while 5 gave it a “hold” and only 4 recommending a “sell.”

  • In many ways, a bet on Coinbase is a bet on the longevity of the cryptocurrency industry and to that end, there are still plenty of reasons to be optimistic.

With shares of America’s only listed cryptocurrency exchange Coinbase Global (+16.02%), down 77% so far this year, and unfounded rumors being spread about its bankruptcy, it may seem peculiar that Wall Street is still bullish on the firm’s prospect.

Even as shares of Coinbase plummeted, Cathie Wood’s Ark Investment Management picked up more and WIT, an investment firm that manages money for the world’s richest family the Waltons, bought stock in the cryptocurrency exchange as well.

Coinbase entered the public markets through a direct listing at a price of US$250 and closed on its first day of trading at US$328.28 last April.

It currently trades at just US$67.87, or around 80% off its all-time-high, yet analysts are still broadly recommending the stock, despite its weaker-than-expected first quarter earnings report.

According to data compiled by Bloomberg, Coinbase was recommended a “buy” by no less than 22 analysts, while 5 gave it a “hold” and only 4 recommending a “sell.”

That overwhelming stamp of approval by Wall Street analysts is all the more surprising especially considering that cryptocurrency markets have lurched from one crisis to the next, as policy tightening saw prices tumble and now with the TerraUSD algo stablecoin collapse.

Speaking with Bloomberg, Mark Palmer, a fintech analyst at BTIG, who set a target price for Coinbase at US$380 suggests,

“The extent of that decline is vastly overblown and stems, in large part, from a lack of understanding among many retail investors of how well capitalized Coinbase is.”

And that may make all the difference.

In the early days of cryptocurrencies, there were at one point more exchanges than there were tokens to list.

Even today, there are far too many exchanges, which makes for plenty of price inefficiencies and arbitrage opportunities.

As the cryptocurrency markets enter what could be a fresh Crypto Winter, consolidation or collapse amongst lesser exchanges could see the rise of a handful of dominant ones, that come to represent the global market, a huge opportunity for Coinbase.

Investors may be looking at Coinbase’s shares now and worried that the price could fall further, but imagine if one day, Coinbase becomes the equivalent of the New York Stock Exchange or even Nasdaq, what would its value be then?

In many ways, a bet on Coinbase is a bet on the longevity of the cryptocurrency industry and to that end, there are still plenty of reasons to be optimistic.

While the collapse of algo stablecoin TerraUSD has been bad for the market in general, it hasn’t resulted in the sort of systemic failure that Lehman Brothers wrought on the global financial system.

Decentralization may have worked and to that end, Wall Street might be betting on something that Main Street doesn’t yet fully understand.

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