top of page
Daily Analysis 19 May 2022 (10-Minute Read)

Hello there,

A terrific Thursday to you as stocks tank on an abundance of worries, none of which seem solvable in the immediate term.

In brief (TL:DR)

  • U.S. stocks fell sharply Wednesday with the Dow Jones Industrial Average (-3.57%), S&P 500 (-4.04%) and the Nasdaq Composite (-4.73%) all down.

  • Asian stocks extended a selloff Thursday as fears of an economic downturn frayed sentiment and spurred a flight to havens including bonds.

  • Benchmark U.S. 10-year Treasury yields were at 2.89% (yields fall when bond prices rise).

  • The dollar remained firm.

  • Oil rose with June 2022 contracts for WTI Crude Oil (Nymex) (+0.77%) at US$110.43.

  • Gold was little changed with June 2022 contracts for Gold (Comex) (-0.09%) at US$1,820.80.

  • Bitcoin (-3.73%) fell to US$29,069 (at the time of writing) but otherwise maintaining ground as other asset classes slipped harder.


In today's issue...

  1. Foreign Investors for Chinese Debt are Dumping it at Record Pace

  2. Central Banks Appear to be Selling Gold

  3. Bitcoin Flexes as Altcoins Shrivel


Market Overview

The challenge from inflation for bellwether retailers weakens the argument that corporate earnings can help stem this year’s rout in stocks.

Instead, global equities are sliding toward a bear market as recession fears mount.

Earnings reports from U.S. consumer stalwarts stoked worries that high inflation is weighing on margins and consumer spending.

U.S. Federal Reserve officials reaffirmed that sharply tighter monetary policy lies ahead to cool economic activity and get price pressures under control.

Asian markets fell Thursday with Tokyo's Nikkei 225 (-1.72%), Sydney’s ASX 200 (-1.56%), Seoul's Kospi Index (-1.15%) and Hong Kong's Hang Seng Index (-2.36%) all down in the morning trading session



1. Foreign Investors for Chinese Debt are Dumping it at Record Pace

  • In the first found months of 2022, foreign investors dumped a staggering US$35 billion worth of yuan-denominated bonds, as China’s falling currency and soaring U.S. yields reduced appetite for Chinese debt.

  • Making matters worse, real estate companies, which are heavily leveraged, have found it difficult to raise money in the global bond markets.

Given how there increasingly appear to be “different rules” for onshore and offshore creditors for Chinese companies and the growing number that are in need of liquidity quickly, the rate at which foreign investors are dumping Chinese debt has reached breakneck pace.

In the first found months of 2022, foreign investors dumped a staggering US$35 billion worth of yuan-denominated bonds, as China’s falling currency and soaring U.S. yields reduced appetite for Chinese debt.

Some of China’s biggest real estate developers have also defaulted on their offshore dollar-denominated bonds as well, shaking investor confidence.

In April alone, some US$16 billion worth of yuan-denominated debt has been dumped by global investors, according to data from Hong Kong’s Bond Connect investment program and marking the third straight month of net sales.

Chinese borrowers, especially embattled real estate companies are facing a multitude of headwinds, from Covid-zero lockdowns sapping appetite to purchase property, to the soaring costs of dollar-denominated bonds that are now more expensive to service.

In the past, global investors used to turn to Chinese bonds for higher fixed-income returns as the ultra-loose monetary policy of the European Central Bank and U.S. Federal Reserve kept yields low.

But now with rising interest rates, soaring yields and a strengthening dollar, global investors are understandably being drawn to American assets.

Investors looking to pick up Chinese debt at pennies on the dollar are also having to contend with the prospect of non-payment, default and sudden policy moves that could see their investments upended.

Making matters worse, real estate companies, which are heavily leveraged, have found it difficult to raise money in the global bond markets.



2. Central Banks Appear to be Selling Gold

  • Gold stored at the Bank of England has been trading at an unusually low price, typically a sign that central banks are shedding some of their holdings.

  • Central banks have long been expanding their gold holdings, according to the latest World Gold Council data, almost 456 tons was added in 2021 alone, to diversify reserves away from foreign currencies.

All the gold in the world may not be able to buy happiness, but it sure can buy a whole bunch of currency, dollars specifically.

And as the greenback continues to grow against other currencies, a peculiar spread in the tightly managed gold market has started to open up.

Gold stored at the Bank of England has been trading at an unusually low price, typically a sign that central banks are shedding some of their holdings.

The Bank of England contains 5,676 tons of gold, one of the largest stockpiles in the world, which it holds on behalf of other central and commercial banks.

In normal gold trades, spreads are usually quite tight, bought and sold between large institutions in bilateral trades at prices typically within just a few cents of the market rate, but in recent days, gold at the Bank of England has traded at spreads of as much as a dollar an ounce beneath benchmark London prices.

Such spreads typically occur when there is strong selling pressure for gold, for instance a central bank selling a sizeable amount of gold reserves to raise dollars or other currencies.

Central banks have long been expanding their gold holdings, according to the latest World Gold Council data, almost 456 tons was added in 2021 alone, to diversify reserves away from foreign currencies.

The Russian invasion of Ukraine and the freezing of Russian foreign assets has also made more central banks eager to ensure they have a base of foreign reserves outside of the dollar.

But the recent strength of the greenback has put many central banks in a Catch-22 as they need the dollar to shore up their own currencies to prevent imported inflation from making domestic price pressures worse.

With the dollar on track for its biggest annual increase in seven years, many emerging economies whose governments were big buyers of gold are now having to unwind those holdings to shore up their national currencies.

Gold prices have slipped by more than 12% since peaking in March and could be set to keep decreasing so long as the dollar remains strong and yields are elevated.



3. Bitcoin Flexes as Altcoins Shrivel

  • In a sign that even the most “degenerate” cryptocurrency traders are looking for relative safety, Bitcoin is emerging as the dominant digital asset in these uncertain times.

  • Investors who had been sitting on the sidelines for some time may be seeing the recent pullback for Bitcoin as an opportunity to get in on the asset class.

Even in the rough-and-tumble world of cryptocurrencies, there are “safer” and “more speculative” choices that are available across the spectrum.

In a sign that even the most “degenerate” cryptocurrency traders are looking for relative safety, Bitcoin is emerging as the dominant digital asset in these uncertain times.

After the recent selloff in cryptocurrencies, Bitcoin dominance soared to 45%, the highest level this year, according to data compiled by cryptocurrency company Babel Finance and the firm’s strategists advise that so-called altcoins (anything other than Bitcoin) have struggled.

Despite the fallout of TerraUSD taking down most of the cryptocurrency market along with it, investors poured in some US$299 million to Bitcoin-focused products, as evidence of buying the dip, or diversifying out of bonds and stocks.

Investors who had been sitting on the sidelines for some time may be seeing the recent pullback for Bitcoin as an opportunity to get in on the asset class.

With both bonds and stocks getting hammered by tightening central bank policy, and typical 60/40 stock and bond portfolios that had worked so well for the past two decades no longer providing relief, investors are understandably looking beyond the traditional.

Although products like the listed ProShares Bitcoin Strategy ETF don’t actually have any underlying Bitcoin, exchange traded products in Europe do and they may also be proving to be a source of underlying demand for Bitcoin and contributing to its dominance.

Traders within the cryptocurrency space may also be swapping their stablecoins for Bitcoin over concerns that the contagion from the TerraUSD collapse will spread to other stablecoins.

With demand for the transparent and regulated stablecoin USDC, issued by Circle, rising, some traders may be opting not to pay for the premium in stablecoins and instead buying direct to Bitcoin from other cryptocurrencies, contributing to the dominance.

The information contained in this email communication and any attachments is for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals. The price and value of the digital assets and any digital asset allocations referred to in this email communication and the value of such digital asset may fluctuate, and allocators may realize losses on these digital assets, whether digital or financial including a loss of principal digital asset allocations. 

 

Past performance is not indicative nor does it guarantee future performance. We do not provide any investment, tax, accounting, or legal advice to our clients, and you are advised to consult with your tax, accounting, or legal advisers regarding any potential allocation of digital assets. The information and any opinions contained in this email communication have been obtained from sources that we consider reliable, but we do not represent such information and opinions as accurate or complete, and thus such information should not be relied upon as such. 

 

No registration statement has been filed with the United States Securities and Exchange Commission, any U.S. State Securities Authority or the Monetary Authority of Singapore. This email and/or its attachments may contain certain "forward‐looking statements", which reflect current views with respect to, among other things, future events and the performance of a digital asset allocation with the Novum Alpha Pte. Ltd. ("the Company"). Readers can identify these forward‐ looking statements by the use of forward‐looking words such as "outlook", "believes", "expects", "potential", "aim", "continues", "may", "will", "are becoming", "should", "could", "seeks", "approximately", "predicts", "intends", "plans", "estimates", "assumed", "anticipates", "positioned", "targeted" or the negative version of those words or other comparable words. 

 

In particular, this includes forward‐looking statements regarding, growth of the blockchain industry, digital assets and companies, the venture capital and crowdfunding market, as well as the potential returns of any digital asset allocation with the Company. Any forward‐looking statements contained in this email and/or its attachments are based, in part, upon historical performance and on current plans, estimates and expectations. The inclusion of forward‐looking information, should not be regarded as a representation by the Company or any other person that the future plans, estimates or expectations contemplated will be achieved. Such forward‐looking statements are subject to various risks, uncertainties and assumptions relating to the operations, results, condition, business prospects, growth strategy and liquidity of the Company, including those risks described in a separate set of documents. If one or more of these or other risks or uncertainties materialize, or if the underlying assumptions of the Company prove to be incorrect, actual results may vary materially from those indicated in this email and/or its attachments. 

 

Accordingly, you should not place undue reliance on any forward‐looking statements. All performance and risk targets contained herein are subject to change without notice.  There can be no assurance that the Company will achieve any targets or that there will be any return on a digital asset allocation with the Company.  Historical returns are not predictive of future results. The Company is intended to be a specialist digital asset allocation and trading vehicle in the early stage technology sector and digital assets. Allocation of digital assets in early stage technology carry significantly greater risks and may be considered high risk and volatile. There is a risk of total loss of all digital assets allocated with the Company – please refer to a separate set of documents for a details of risks. 

 

By accepting this communication you represent, warrant and undertake that: (i) you have read and agree to comply with the contents of this notice, and (ii) you will treat and safeguard this communication as strictly private and confidential and agree not to reproduce, redistribute or pass on this communication, directly or indirectly, to any other person or publish this communication, in whole or in part, for any purpose.

bottom of page