Daily Analysis 16 September 2022 (10-Minute Read)

A terrific Friday to you as stocks slide deepens as Treasury yields climb.


In brief (TL:DR)

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  • U.S. stocks were lower on Thursday with the Dow Jones Industrial Average (-0.56%), the S&P 500 (-1.13%) and the Nasdaq Composite (-1.43%) all down.

  • Asian stocks extended declines on Friday, with an index of global stocks on track for the worst week since June.

  • Benchmark U.S. 10-year Treasury yields advanced two basis points to 3.47% (yields rise when bond prices fall).

  • The dollar fluctuated.

  • Oil was poised to fall for a third week with October 2022 contracts for WTI Crude Oil (Nymex) (+0.76%) at US$85.75 amid the deteriorating global economic backdrop.

  • Gold edged lower with December 2022 contracts for Gold (Comex) (-0.42%) at US$1,670.20.

  • Bitcoin (-1.89%) fell to US$19,782 as Ethereum trends downward despite the successful Merge.


In today's issue...

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  1. U.S. Home Mortgage Rates Soar to 6%

  2. Massive Stimulus Bumps China’s Economy Ever So Slightly

  3. Ether Falls Victim to the Expected “Sell the News”


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Market Overview

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Equities extended declines on Friday, with an index of global stocks on track for the worst week since June, while Treasury yields rose, reflecting bets for outsize Federal Reserve interest rate hikes.

The market weakness follows data showing applications for US unemployment insurance fell for a fifth straight week, suggesting demand for workers remains healthy.

The latest US economic data painted a mixed picture for the economy that backed the view for hawkish monetary policy.

Asian markets slid on Friday with Tokyo's Nikkei 225 (-1.11%), Sydney’s ASX 200 (-1.52%), Hong Kong's Hang Seng Index (-0.89%) and Seoul's Kospi Index (-0.79%) all in the red.



­1. U.S. Home Mortgage Rates Soar to 6%

  • For the first time since the 2008 financial crisis, average mortgage rates have topped 6%.

  • The home borrowing benchmark has nearly doubled since January in the steepest and fastest increase in interest rate in more than 50 years.

The U.S. housing market is starting to venture into uncharted territory at a time when the global economy can least afford it.

After over a year of frenzied buying through the pandemic, high home prices and rate volatility have started to spook potential buyers.

For the first time since the 2008 financial crisis, average mortgage rates have topped 6% which show how the U.S. Federal Reserve’s aggressive policy of monetary tightening is ratcheting up the cost of financing the purchase of a home.

At the height of the pandemic, demand for larger houses soared through the roof as Americans wanted room for home offices and larger living spaces to cope with the lockdown conditions.

According to Freddie Mac’s weekly survey, the average 30-year fixed-rate mortgage rose to 6.02%, up from 5.89% a week ago and 2.86% in the same week last year.

The home borrowing benchmark has nearly doubled since January in the steepest and fastest increase in interest rate in more than 50 years.

Although home price increases have decelerated in recent months, they continue to grow at a double-digit pace driven by tight supply and cash-rich, determined buyers.

Historically, higher interest rates have been associated with slower home price increases and home sales.

According to the National Association of Realtors, existing home sales in July fell 5.9% compared with the previous month and 20% from a year ago and consumer sentiment has declined at a rapid pace, to levels not seen in more than a decade.

Some lenders, including Rocket, have begun offering special incentives to borrowers in attempt to jump-start demand.

The Fed has lifted its benchmark interest rate in a drive to damp surging inflation, that saw a surprising slowdown in the decline of price pressures in July.

U.S. Consumer Price Index data in August was at 8.3%, down from 8.5% in July, but well off economist estimates of 8.1% for last month, triggering heightened concerns that the Fed will be even more aggressive in its rate hikes.

Futures markets predict the central bank will raise rates by 0.75% for the third consecutive month when it meets next week.



2. Massive Stimulus Bumps China’s Economy Ever So Slightly

  • China’s economy showed signs of recovery in August with industrial production growth up 4.2%, beating forecasts of a 3.8% rise.

  • Despite signs of improvement, China’s recovery remains fragile as Covid outbreaks spread to more parts of the country while Beijing’s Covid Zero strategy remains the biggest threat to a rebound.

Beijing continued to roll out stimulus measures to counter a slowdown amid the property market slump and Covid outbreaks, with some green shoots of recovery sprouting.

China’s economy showed signs of recovery in August with industrial production growth up 4.2%, beating forecasts of a 3.8% rise.

Retail sales, a key indicator of consumer sentiment, rose 5.4% from a year earlier, higher than the mexpected pace of 3.3%, and up from 2.7% in July, according to the National Bureau of Statistics.

Fixed-asset investment gained 5.8% in the first eight months of the year, also better than the 5.5% rise projected, largely due to stimulus measures and easier lending conditions pushed by the People’s Bank of China.

China’s urban jobless rate slid to 5.3% from 5.4% in July.

Some economists believe that although domestic demand remains weak, China’s annual growth may still be able to reach 3.5% this year although more policy action to help the economy is needed.

Beijing has taken steps to support the housing and construction industries, including cutting interest rates to spur growth and ramping up government spending on infrastructur, but whether such measures will result in durable, and quality economic growth is less clear.

Despite signs of improvement, China’s recovery remains fragile as Covid outbreaks spread to more parts of the country while Beijing’s Covid Zero strategy remains the biggest threat to a rebound.

Recent data showed home prices in China declined for a 12th consecutive month in August.



3. Ether Falls Victim to the Expected “Sell the News”

  • Ether is trading around US$1,475 at the time of writing, the first time it’s dropped below US$1,500 in over a week.

  • As the excitement around the Merge subsides, it would be natural to expect a bit of rotation back.

The software upgrade of Ethereum, from a purely technological standpoint, is a massive turning point in the evolution of cryptocurrencies and a landmark achievement that has been years in the making.

But traders aren’t into crypto for the history, they’re here for the money, which is why, Ether, the native token of the Ethereum blockchain saw a sharp sell off in a “sell the news” trade that became especially crowded.

Paring a rally since mid-June that was sparked in part by optimism about the Ethereum update called the Merge to slash the network’s energy use, Ether fell sharply on news of the successful software upgrade, dropping as much as 3% on Friday, following a more than 6% slide Thursday.

Ether is trading around US$1,475 at the time of writing, the first time it’s dropped below US$1,500 in over a week.

According to data from CoinGecko, Ether’s drop is more than the rest of the crypto market right now, which is down about 3% on the whole, with Bitcoin down about 2%.

As the excitement around the Merge subsides, it would be natural to expect a bit of rotation back.

The hype around the Merge appeared to be generating bullish sentiment around Ether in July, but sophisticated derivatives traders were already hedging their bets, expecting the price of the token to drop after the event, according to Glassnode data.

Ethereum’s revamp makes it vastly more energy efficient and paves the way for it to scale up and become quicker.

The move to a so-called proof-of-stake approach from proof-of-work was years in the making and seems to have gone smoothly, though hiccups remain possible.

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