Daily Analysis 18 May 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as stocks wind higher despite hawkish comments to stop at nothing to deal with inflation by U.S. Federal Reserve Chairman Jerome Powell.

In brief (TL:DR)

  • U.S. stocks were higher Tuesday with the Dow Jones Industrial Average (+1.34%), S&P 500 (+2.02%) and the Nasdaq Composite (+2.76%) all up.

  • Asian stocks cooled off the rally as investors weighed the latest China data as well as hawkish comments from U.S. Federal Reserve Chairman Jerome Powell.

  • Benchmark U.S. 10-year Treasury yields fell two basis points to 2.97% (yields fall when bond prices rise) as bonds slipped.

  • The dollar steadied.

  • Oil was trading around US$113 a barrel with June 2022 contracts for WTI Crude Oil (Nymex)(+0.86%) at US$113.37 as energy prices continue to contribute to heightened inflation.

  • Gold edged lower with June 2022 contracts for Gold (Comex) (-0.48%) at US$1,810.10.

  • Bitcoin (+0.77%) rose to US$30,210 (at the time of writing) as "whales" were seen to buy the dip on the benchmark cryptocurrency.


In today's issue...

  1. Chinese Crackdown on Tech Gives way to Support

  2. U.S. Federal Reserve will Do What It takes on Inflation

  3. China Continues to Clamor for Crown as Cryptocurrency Capital


Market Overview

Investor sentiment improved a little on robust U.S. retail sales and factory output data, as well as stronger-than-expected Eurozone expansion.

The worry is that tougher times lie ahead as monetary settings tighten, Russia continues the war in Ukraine and China grapples with Covid-zero lockdowns.

U.S. Federal Reserve Chairman Jerome Powell said that the central bank will raise interest rates until there is “clear and convincing” evidence that inflation is in retreat, the remarks at a Wall Street Journal live event were some of his most hawkish so far.

Asian markets were mostly higher Wednesday with Tokyo's Nikkei 225 (+0.66%), Sydney’s ASX 200 (+0.89%) and Seoul's Kospi Index (+0.16%) up, while Hong Kong's Hang Seng Index (-0.42%) was down in the morning trading session.



1. Chinese Crackdown on Tech Gives way to Support

  • Investors are about to find out as China’s top economic tsar, Vice Premier Liu He, voices a rare public display of support for the country’s tech platforms.

  • But the efforts may be too little too late given that rolling urban lockdowns have hit Chinese consumption and caused supply-chain bottlenecks.

Fool me once, shame on you, but fool me twice? Investors are about to find out as China’s top economic tsar, Vice Premier Liu He, voices a rare public display of support for the country’s tech platforms.

Investors have seen their Chinese tech portfolios hammered by Beijing’s crackdown on the sector, which started over a year ago and has included such high profile takedowns such as the U.S. de-listing of ride hailing app Didi Global as well as the scuttled IPO of Ant Financial.

Liu He, who is Chinese President Xi Jinping’s most senior economic aide said after a symposium with the heads of the country’s largest private firms that Beijing will support the development of digital economy companies and their listings.

Chinese state media reported Liu He’s remarks which were long on rhetoric but short on detail, but nonetheless investors took them as an opportunity to buy back into the Chinese tech sector, on optimism that Beijing intends to dial back some restrictions.

With Chinese President Xi Jinping continuing to double down on his zero-Covid policies which have ravaged the economy, the government is enlisting the tech industry, its biggest growth driver of the past decade, to hopefully revitalize fortunes.

But the efforts may be too little too late given that rolling urban lockdowns have hit Chinese consumption and caused supply-chain bottlenecks.

China’s tech industry also doesn’t live in its own silo, it depends very much on the urban industrial complex for its fortunes and with citizens holed up and delivery services disrupted, as well as manufacturing activity slowing, it’s hard to see how loosening restrictions at this juncture can act as a salve for the country’s economic woes.

Economic activity in the world’s second largest economy hit a virtual standstill last month, with industrial output and consumer spending sliding to the worst levels since the pandemic began and economists warning that recovery is not in sight.

Investors looking for bargains in Chinese tech shares should be concerned that while valuations are attractive, concerns over Beijing’s cozying up with Moscow has made it off limits for many global investors.

Worries over who to pass Chinese assets on to should they recover should also keep investors up at night, especially given Beijing’s propensity towards arbitrary and unpredictable policy shifts.



2. U.S. Federal Reserve will Do What It takes on Inflation

  • On Tuesday, Powell sought to affirm the Fed’s commitment to taming price pressures, vowing to raise interest rates to a level that actively constrains demand, if necessary, until “clear and convincing” evidence that inflation was coming back to 2% was seen.

  • Central bankers are having to contend with a swathe of variables that make policymaking particularly difficult, many of which are out of their control and that lack of clarity will continue contributing to market volatility.

Inflation is a hot-button political issue.

With the cost of living soaring in the United States and midterm elections looming which could see the House and the Senate handed back to the Republicans, U.S. President Joe Biden risks becoming a lame duck for the latter half of his term.

Although the U.S. Federal Reserve is intended to be non-partisan, political appointees won’t soon forget the hand that rocks the cradle.

And while U.S. Federal Reserve Chairman Jerome Powell is a Trump-era appointee, his second term as head of the central bank was blessed by Biden.

Which explains Powell’s steely-eyed resolve to do everything Fed can to reign in price pressures.

On Tuesday, Powell sought to affirm the Fed’s commitment to taming price pressures, vowing to raise interest rates to a level that actively constrains demand, if necessary, until “clear and convincing” evidence that inflation was coming back to 2% was seen.

So far, the Fed has raised interest rates by 0.25% and 0.5%, pledging to keep the pace of hikes at 0.5% at the next two meetings, but a fourth 0.5% raise may be on the cards if inflation does not come to heel.

Headline inflation data from April suggests that the pace of price increases may be slowing, having risen to 8.3% from 8.5% previously, but it’s still too early to call a turnaround.

Markets have priced in a federal funds rate of around 2.8% by the end this year, a sizeable jump from current levels of between 0.75% to 1%.

Anything between 2% to 2.5% is seen as the “neutral path” for the Fed, not so high that it risks causing a recession, but not so low as to stoke the fires of inflation.

The Fed is caught in a bind because it’s not at all clear that post-pandemic demand is the sole cause of price pressures, but unprecedented supply-side issues.

China’s zero-Covid policies have snapped already stretched supply chains, at a time when retailers will be looking to slowly build up inventories ahead of the summer shopping season and year-end sales.

The Russian invasion of Ukraine has also roiled commodity markets, affecting the price of everything from food to fuel.

None of these inflationary pressures can necessarily be fixed through interest rates alone, but the Fed must seem to at least be doing something.

On the sidelines of a Wall Street Journal event, even Powell himself conceded that the war in Ukraine has “added to the degree of difficulty to what was already a challenging project.”

Central bankers are having to contend with a swathe of variables that make policymaking particularly difficult, many of which are out of their control and that lack of clarity will continue contributing to market volatility.



3. China Continues to Clamor for Crown as Cryptocurrency Capital

  • According to a report released by the Cambridge Center for Alternative Finance on Tuesday, China now accounts for 21.11% of global hashrate for Bitcoin mining, behind the U.S. at 37.84%.

  • It’s more likely that Chinese miners simply shifted the equipment to more covert operations, away from prying eyes.

The stories of Bitcoin mining’s decline in China have been greatly exaggerated, at least according to a Cambridge Center for Alternative Finance report that shows the practice has come back in full force to levels higher than before Beijing’s crackdown on the practice.

Although the U.S. still holds the crown as the world’s top spot for Bitcoin miners, China, which suffered a slump in Bitcoin mining activity thanks to a countrywide crackdown, is fast catching up and has reemerged as the second-largest base for mining.

According to a report released by the Cambridge Center for Alternative Finance on Tuesday, China now accounts for 21.11% of global hashrate for Bitcoin mining, behind the U.S. at 37.84%.

Hashrate measures the amount of computing power dedicated to securing the blockchain of a cryptocurrency.

China’s resurgence as a hub for Bitcoin mining suggests that highly-publicized moves by miners to decamp to other countries such as Laos, Kazakhstan and the U.S. may have been nothing more than smoke and mirrors.

Instead, it’s more likely that Chinese miners simply shifted the equipment to more covert operations, away from prying eyes.

According to the Cambridge Center for Alternative Finance report,

“This strongly suggests that significant underground mining activity has formed in the country, which empirically confirms what industry insiders have long been assuming.”

Last May, Beijing intensified efforts to crackdown on the cryptocurrency industry, amidst a broad sweep of other economic activities as well, including tech, real estate and afterschool education.

The true extent of Bitcoin mining in China may never be fully known, especially as much of the traffic of Chinese miners is likely routed through virtual private networks that obfuscate the location that mining activity is emanating from.

At its peak in 2018, China accounted for almost 75% of all Bitcoin mining operations, including through the organization of mining pools.

Mining pools allow both hobbyist and professional miners to come together to improve the odds of successfully adding to the blockchain and receiving the block reward, which is typically the cryptocurrency of that particular blockchain being secured.

Chinese mining pools continue to dominate the landscape, even as the U.S. catches up.

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