Daily Analysis 19 April 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as stocks continue to drift untethered with the ongoing showdown between Russia and Ukraine in the Donbas, continued price pressures and central bank policy that looks set to tighten dramatically.

In brief (TL:DR)

  • U.S. stocks ended lower on Monday with the Dow Jones Industrial Average (-0.11%), the S&P 500 (-0.02%) and the Nasdaq Composite (-0.14%) all down slightly after the Easter break on significantly lower volumes.

  • Asian markets were mixed Tuesday with investors weighing Chinese measures to support the economy and the prospect of faster U.S. Federal Reserve policy tightening to fight inflation.

  • Benchmark U.S. 10-year Treasury yields fell one basis point to 2.84% as rapid U.S. Federal Reserve monetary tightening to curb price pressures (yields rise when bond prices fall) continues to weigh appetite for bonds when markets reopen on Tuesday.

  • The dollar held an advance.

  • Oil was little changed with May 2022 contracts for WTI Crude Oil (Nymex) (-0.08%) at US$108.12.

  • Gold was lower with June 2022 contracts for Gold (Comex) (-0.38%) at US$1,978.90 after hitting a high of close to US$2,000.

  • Bitcoin (+2.13%) recovered to US$40,664 in Asian trading as investors took to buying the dip again on the benchmark cryptocurrency


In today's issue...

  1. The U.S. Housing Market is Ringing Alarm Bells in Certain Places

  2. China GDP Beats Estimates If You Believe the Data

  3. If Bitcoin is an Inflation Hedge, It Isn’t Behaving Like One


Market Overview

U.S. Treasury yields are around the highest in more than three years as investors debate whether inflation is peaking.

A jump in energy costs highlighted price concerns, as U.S. natural gas prices surged to the highest intraday level in more than 13 years.

Disruptions to supply chains from China’s lockdowns and to commodity flows from the Russian invasion of Ukraine are keeping upward pressures on prices at a time when global growth is tipped to slow.

Asian markets were mixed on Tuesday with Seoul's Kospi Index (+0.91%), Tokyo's Nikkei 225 (+0.12%)and Sydney’s ASX 200(+0.54%) up, while Hong Kong's Hang Seng Index (-2.43%) was down in the morning trading session.



1. The U.S. Housing Market is Ringing Alarm Bells in Certain Places

  • Last month, typical home values in Boise rose by just 0.4%, down from a stomping 4.1% monthly pace in June.

  • Rising mortgage rates, expected to increase substantially over the next several years against a backdrop of soaring housing prices have also dampened demand for new homes.

U.S. homebuyer sentiment is starting to show signs of weakness in the most unlikely of places.

Take Boise, Idaho for instance, a location known more for its potatoes than its role as a bellwether for the U.S. housing market.

The pandemic work-from-home revolution saw home values in places like Boise soar on demand for larger spaces away from urban centers.

But last month, typical home values in Boise rose by just 0.4%, down from a stomping 4.1% monthly pace in June, according to data from Zillow and making it the first of America’s top 100 housing markets to flirt with falling prices this year.

Rising mortgage rates, expected to increase substantially over the next several years against a backdrop of soaring housing prices have also dampened demand for new homes.

Typical U.S. 30-year mortgage rates are soaring this year and topped 5% this month for the first time in over a decade, according to mortgage giant Freddie Mac.

Rates are expected to keep climbing as the U.S. Federal Reserve tightens monetary policy to deal with the hottest inflation in four decades, but American homebuyers still expect home prices to keep rising even as borrowing costs increase.

To be sure, the incredible pace of housing price gains was never going to be sustainable but current conditions are pricing first-time home buyers out of the market.

While slowing price growth doesn’t necessarily mean that prices will start to drop, the last time housing prices actually declined year-on-year was in 2019 in San Francisco, when mortgage rates were relatively high and Americans were worried the country was dipping into recession.

Could Boise be the canary in the coal mine?

Probably not, unlike the 2008 Financial Crisis, household finances are a lot stronger this time round and many homebuyers have locked in long-term mortgage rates below 3%, giving them little incentive to sell in a rush.

But Boise’s wobble, where the median house price is 70% of average income, may be a sign that the more speculative ends of the market, where prices outstripped fundamentals, may be in for a dose of correction.

Whether this spreads across the rest of America is less clear.



2. China GDP Beats Estimates If You Believe the Data

  • China’s latest economic data suggesting that it expanded faster than expected in the first quarter needs to be taken with a pound of salt.

  • Official data conceded that consumer activity has recently begun to contract as a dogged adherence to a zero-Covid policy continues to take its toll on China’s growth.

In the dying days of the Soviet Union, Communist apparatchiks didn’t even bother to make any attempt to gather real data to report back to their bosses at the politburo, instead just making up everything from industrial production data to raw material inventories.

If an alien landed on earth and looked only at the data of the Soviet Union during the late 1980s, without looking at the streets of its cities, they would have been convinced that the U.S.S.R was the richest country in the whole world and that Communism was a far more superior form of government.

Which is why China’s latest economic data suggesting that it expanded faster than expected in the first quarter needs to be taken with a pound of salt.

Factories, cities and ports under lockdown do not a strong economy make.

Official data conceded that consumer activity has recently begun to contract as a dogged adherence to a zero-Covid policy continues to take its toll on China’s growth.

Despite the potential economic damage, Chinese President Xi Jinping has doubled down on his zero-Covid policies, and forced the bitter medicine of lockdowns on hundreds of millions in cities, towns and villages across the country.

Although Beijing is continuing to target 5.5% growth for this year, it’s as yet unclear what the impact of locking down Shanghai, the country’s financial hub for weeks, will have on the overall economy, or similar restrictions on the manufacturing hub of Shenzhen.

Some economists suggest that the growth reflected momentum in January and February, before the weakening of economic activities in March.

Unemployment in China has risen to 5.8%, its highest level since May 2020, when the pandemic was at its nadir.

Making matters worse, global investors are fleeing from Chinese assets at an alarming clip, over concerns that Beijing’s cozying with Russian President Vladimir Putin may put it at risk of being subject to the same sort of economic backlash that Western allies imposed on Russia.

China’s willingness to lockdown whole cities has also alarmed investors who fear what Beijing could do to foreign investors’ assets should the Communist Party deem it so necessary.

Even blue-chip Chinese companies are being shunned by global investors, despite attractive valuations.



3. If Bitcoin is an Inflation Hedge, It Isn't Behaving Like One

  • Bitcoin’s correlation with tech stocks represented by the Nasdaq 100 is at 0.60, it’s highest level in recent months.

  • While its correlation with traditional inflation hedges such as gold and commodities has turned negative.

Even as some investors tout Bitcoin’s role as a hedge against inflation, its most recent performance belies such assertions.

If nothing else, Bitcoin’s correlation with tech stocks represented by the Nasdaq 100 is at 0.60, it’s highest level in recent months, while its correlation with traditional inflation hedges such as gold and commodities has turned negative.

A 50-day correlation coefficient for Bitcoin and gold now stands at -0.4, the lowest since 2018, while it is also negatively correlated against the Bloomberg Commodity Spot Index – both which are expected to do well in inflationary times.

Correlation of 1 means that two assets move in lockstep, whereas a correlation of -1, means that they move perfectly in opposite directions.

The past weekend saw Bitcoin dip below US$40,000 again before since recovering alongside tech stocks this week.

And while demand for portfolio buffers amidst soaring inflation has seen commodities race ahead in performance, Bitcoin has moved in the opposite direction, undermining its value as an inflation hedge, at least in the short-term.

But looking at immediate correlations in short timeframes can also be misleading.

Inflation hedges are as much a function of expectations as they are a function of actual performance.

Even gold, which has long been touted as a hedge against inflation, has had a patchy track record when it’s come to serving the role as a hedge against rising prices.

Historically, gold’s performance as an inflation hedge has only been valid over periods spanning many times beyond the typical investment horizon, whereas stocks have ironically been show to consistently outperform inflation.

Therein lies the difficulty with judging an asset’s efficacy to hedge against inflation by looking at momentary and instantaneous data.

Looking through the data, that Bitcoin is a deflationary asset and has growing institutional acceptance and interest may put it in good stead over the longer-term quite apart from any assertions that it is a functional inflation hedge.

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