Daily Analysis 17 February 2022 (10-Minute Read)

Hello there,

A terrific Thursday to you as stocks continue to blow hot and cold with conflicting reports on the situation in Ukraine and mounting concerns over a U.S. Federal Reserve tightening schedule.

In brief (TL:DR)

  • U.S. stocks were lower on Tuesday with the Dow Jones Industrial Average (-0.16%) and the Nasdaq Composite (-0.11%) down, while S&P 500 (+0.09%) was slightly up as investors sat mainly on the sidelines as the geopolitical situation in Ukraine gets murkier.

  • Asian equities were mixed Thursday as traders weighed geopolitical concerns and the likely path for U.S. Federal Reserve interest-rate increases.

  • Benchmark U.S. 10-year Treasury yields were stable at 2.03% (yields fall when bond prices rise).

  • The dollar was steady.

  • Oil slid with March 2022 contracts for WTI Crude Oil (Nymex) (-2.25%) at US$91.55 amid signs an Iranian nuclear deal is getting closer, which could pave the way for a resumption of official exports from the Persian Gulf producer.

  • Gold held a recent rally with April 2022 contracts for Gold (Comex) (-0.06%) at US$1,870.40.

  • Bitcoin (+0.05%) was more or less flat at US$44,029 with the general trend towards sideways trading in the absence of larger catalysts to take the benchmark cryptocurrency in either direction.


In today's issue...

  1. Could Chinese Tech Stocks be in for a Rally?

  2. Beijing Bets Big on the Metaverse

  3. Could Cryptocurrencies be Too Big to Fail?


Market Overview

The latest Fed minutes showed officials concluded they would start raising rates soon and were on alert for persistent inflation that would justify faster tightening.

Investors expect at least 150 basis points of Fed tightening in 2022 -- up from 75 basis points just a few weeks ago -- to fight price pressures.

The worry is whether the pivot away from pandemic-era stimulus will squeeze economic growth and inject more turbulence across assets.

Asian markets were mixed on Thursday with Sydney’s ASX 200 (+0.27%) and Seoul's Kospi Index (+0.60%) up, while Tokyo's Nikkei 225 (-0.86%) and Hong Kong's Hang Seng Index (-0.62%) were down in the morning trading session.



1. Could Chinese Tech Stocks be in for a Rally?

  • Despite the pandemic seeing U.S. tech companies soar in valuation, Chinese tech firms have seen over US$1.5 trillion in market value wiped out despite a July 202 high.

  • But there are signs that that rout may be nearing an end, with earnings estimates for China’s embattled tech sector being revised up 12% from a September bottom, while analyst target prices are implying robust returns.


From regulatory crackdowns to U.S. delistings, some of China’s biggest tech companies have had a year that many would rather soon forget.

Despite the pandemic seeing U.S. tech companies soar in valuation, Chinese tech firms have seen over US$1.5 trillion in market value wiped out despite a July 202 high.

But there are signs that that rout may be nearing an end, with earnings estimates for China’s embattled tech sector being revised up 12% from a September bottom, while analyst target prices are implying robust returns.

Moreover, the Hang Seng Tech Index, made up primarily of Chinese tech giants, is trading near its cheapest-ever valuation and outperforming offshore peers, especially U.S. tech firms.

Bloomberg data reveals that the Hang Seng Tech Index has a forward price-to-earnings ratio near a record low, over 20% below the historical average.

Other valuation metrics put Chinese tech firms in an attractive value proposition as well, including price-to-sales and price-to-free cashflow ratios hovering at historically low levels, suggesting a buying opportunity.

While the Hang Seng Tech Index has outperformed the Nasdaq 100 since the start of this year, part of the reason for that is the prospect of tighter monetary policy in the U.S. seeing less of an appetite amongst investors for rate-sensitive tech shares with rich valuations.

But that doesn’t mean that Beijing’s ever looming cloud over China’s tech sector has dissipated and while confidence over profitability has been improving in recent months, there remains the risk of renewed regulatory crackdowns.

Nevertheless, bargain hunters have been out in full force, with half of the most popular ETFs that track Hong Kong-listed stocks mirroring the performance of Chinese tech shares, while short interest in some of China’s biggest tech firms is waning.

And more accommodative monetary policy from the People’s Bank of China could provide the boost that Chinese tech firms need to lift themselves out of their current quagmire.



2. Beijing Bets Big on the Metaverse

  • On Wednesday, China’s newly formed Metaverse Industry Committee announced that 17 companies had been included to the government body to further the development of China’s version of the Metaverse.

  • Beijing’s Metaverse move has caught many by surprise, given the concept’s close association with gaming and cryptocurrency, two industries which the Chinese Communist Party has either curbed or banned

It’s not just Facebook that has gone all in on the Metaverse, renaming itself to Meta Platforms (-2.02%), but Beijing is betting big as well.

Beijing’s Metaverse strategy makes sense in light of its bet on blockchain technology and its digital yuan, with local governments and state-backed entities pumping money into companies involved in the creation of the Metaverse, to ensure China remains ahead of other countries in what could be the next frontier of the digital revolution.

On Wednesday, China’s newly formed Metaverse Industry Committee announced that 17 companies had been included to the government body to further the development of China’s version of the Metaverse.

China’s biggest tech companies, including Tencent (-0.59%), Baidu (+0.31%) and Alibaba (-0.98%) have already filed Metaverse-related trademarks in recent months, in an effort to ensure they stay at the center of the next evolution of the internet.

Beijing’s Metaverse move has caught many by surprise, given the concept’s close association with gaming and cryptocurrency, two industries which the Chinese Communist Party has either curbed or banned.

But just like the internet, Beijing is probably ensuring that it stays atop developing technologies and is consistent with its embrace of blockchain, while banning cryptocurrencies.

Beijing’s has already proved that it is able to create its own walled garden version of the internet and while it’s embraced blockchain technology, being the first major economy to trial its own central bank digital currency and managed to keep out the elements of the technology that do not favor the centralization of control, including cryptocurrencies.

Moving into the Metaverse would be consistent with Beijing’s embrace of blockchain technology and its digital yuan, before other more decentralized avenues take the lead and provide a viable alternative to Beijing’s conception of what the Metaverse should look like or how it should behave.



3. Could Cryptocurrencies be Too Big to Fail?

  • While cryptocurrencies remain a small and somewhat niche portion of the universe of investable assets, its rapid growth has led to the FSB warning that their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system could soon threaten global financial stability.

  • Given the significant role that retail investors play in the cryptocurrency sector, their rapid evolution and cross-border nature has made regulating the nascent asset class a headache for regulators.

With a global (and somewhat speculative) market cap of US$2 trillion, could cryptocurrencies really ever be considered too big to fail?

Given that on any given day, anywhere between US$6 trillion to US$8 trillion of derivatives are traded, cryptocurrencies are a drop in the ocean in the financial world.

But that hasn’t stopped the Financial Stability Board (FSB), which is comprised of regulators including the European Central Bank, the U.S. Federal Reserve and the Bank of England, from warning of the potential fallout from machinations within the cryptocurrency markets.

While cryptocurrencies remain a small and somewhat niche portion of the universe of investable assets, its rapid growth has led to the FSB warning that their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system could soon threaten global financial stability.

In a report released yesterday, the FSB cited the use of leverage, technological fragilities and liquidity shortages to be key areas of concern, especially given the low levels of investor and consumer understanding of cryptocurrencies.

Money laundering, cybercrime and ransomware were also given as some of the nefarious uses for cryptocurrencies that global regulators should pay more attention to.

Given the significant role that retail investors play in the cryptocurrency sector, their rapid evolution and cross-border nature has made regulating the nascent asset class a headache for regulators.

The FSB has recommended that regulators consider “timely and preemptive evaluation of possible policy responses” including prioritizing cross-border and cross-sectoral cooperation, including information sharing between regulatory bodies, to keep up with the rapid pace of evolution in the sector.

The Biden administration has made cryptocurrency regulation one of its key pillars and the U.S. Securities and Exchange Commission has proved far more proactive in its approach to cryptocurrencies, with a bent towards carving out a wider ambit for its jurisdiction.

But short of more comprehensive legislation, cryptocurrencies will continue to straddle multiple agencies and interest groups in government, inevitably leading to turf war and a lack of regulatory certainty with which companies that want to operate within the law have to struggle to navigate.

That cryptocurrencies are increasingly going mainstream is reflected in the FSB’s most recent report, which contrasts with a 2018 report that declared at the time cryptocurrencies did not “pose a material risk to global financial stability.”

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