Daily Analysis 19 October 2022 (10-Minute Read)

A magnificent Wednesday to you as corporate-earnings season in focus across equity markets.


In brief (TL:DR) 


  • U.S. stocks closed higher on Tuesday with the Dow Jones Industrial Average (+1.12), the S&P 500 (+1.14%) and the Nasdaq Composite (+0.09%) all in the green. 

  • Asian stocks fell Wednesday as traders assessed prospects for earnings growth against a backdrop of rising interest rates. 

  • Benchmark U.S. 10-year Treasury yields advanced three basis points to 4.04% (yields rise when bond prices fall). 

  • The dollar inched higher.

  • Oil climbed from a two-week low with November 2022 contracts for WTI Crude Oil (Nymex) (+0.86%) at US$83.53 on concern that the European Union’s latest sanctions on Russian fuel could exacerbate the market tightness that the US is trying to alleviate with additional sales.

  • Gold was lower with December 2022 contracts for Gold (Comex) (-0.28%) at US$1,651.20.

  • Bitcoin (-1.55) fell to US$19,267. 


In today's issue...


  1. Gilts are Not Out of the Woods Yet

  2. Supply Shocks are Bringing Europe Closer Together

  3. Failure of Facebook’s Blockchain Ambitions Spawns Fresh Chains


Market Overview


Upbeat company results, cheaper valuations and UK policy reversals have helped buoy risk appetite. 

 

The sentiment on stocks and global growth among fund managers surveyed by Bank of America Corp. shows full capitulation, opening the way for equities to bottom in the first half of 2023.

 

In Japan, authorities continued their jawboning of the yen, with Finance Minister Shunichi Suzuki saying he is increasing the frequency of monitoring foreign-exchange markets. 



1. Gilts are Not Out of the Woods Yet 

 

  • Double-digit inflation is set to return in the UK and linger through the end of this year despite the government’s effort to cap energy bills and buying bonds to stabilize the market will run counter to raising interest rates, blunting the effect of the latter. 

  • While the massive moves seen in gilt yields over recent weeks eased Tuesday, the market remains choppy due to the high levels of uncertainty surrounding the pound and the gilt markets. 

 

The extraordinary collapse in British sovereign debt was enough to make the Bank of England buckle, retreating on its tightening measures by entering the market to buy gilts, even as it raises interest rates. 

 

Double-digit inflation is set to return in the UK and linger through the end of this year despite the government’s effort to cap energy bills and buying bonds to stabilize the market will run counter to raising interest rates, blunting the effect of the latter. 

 

Expectations are high that consumer price data Wednesday will show annual consumer prices accelerated to 10% in September after slowing marginally a month earlier, in line with the experience in the U.S. 

 

Turmoil over the British government’s plans for unfunded tax cuts, now abandoned, appears to be subsiding but if inflation shows no signs of cooling, gilts are still vulnerable to the prospect of tighter monetary policy making it doubly challenging for the Bank of England. 

 

 

By most conventional measures, the UK economy is already in a recession that will likely last until the second half of 2023 and the Bank of England’s benchmark rate will almost double to 4.25% by early next year. 

 

With traders still juggling the risk of a looming recession against a potential deluge of supply as the central bank prepares to sell gilts at the start of next month, the repricing could spur more volatility for a fragile market. 

 

While the massive moves seen in gilt yields over recent weeks eased Tuesday, the market remains choppy due to the high levels of uncertainty surrounding the pound and the gilt markets. 

 

On Tuesday, the Bank of England confirmed that its delayed program to sell government bonds from its portfolio and will begin only in November, but even that pledge is tentative given the recent turmoil in the gilt markets that threatens to unravel British pension funds. 

 

Only short and medium term bonds will be sold for the remainder of this year, leaving out the long-dated notes at the center of the recent rout but it remains to be seen if the Bank of England will have the stomach to follow through with the sales. 

 

Although the pace of planned sales is slow at just US$10.3 billion per quarter, policy makers will still be fearful of triggering yet another selloff in the bond market, particularly given sovereign issuance is set to rise sharply even after the near-total reversal of the government’s unfunded tax cuts and traders could push gilts lower and send yields soaring. 



2. Supply Shocks are Bringing Europe Closer Together 

 

  • Eurozone economies are facing far more difficult challenges than those facing the U.S. as the the supply shock buffeting the eurozone is far bigger.

  • The survival of the European Union and the eurozone, its economic core, is in the overriding national and collective interest of its members and fortunately this crisis has kept members working together despite ramshackle and incomplete structures of the grouping. 

 

Crisis can bring out the best or the worst in people and when it comes to nation states, it can either divide or unit them. 

 

Fortunately for the countries of the eurozone, they have chosen the latter, with the Russian invasion of Ukraine uniting the continent in a manner that Moscow could not have foreseen and leading to a unity in dealing with supply shocks that has brought the oftentimes bickering and conflicting interests of the region to the cooperating table. 

 

Eurozone economies are facing far more difficult challenges than those facing the U.S. as the the supply shock buffeting the eurozone is far bigger, and the continent lacks the energy resources that America is blessed with, with a huge rise in the price of energy, especially gas, after Russia’s invasion of Ukraine making matters particularly challenging for the eurozone.

 

To be sure, the U.S. is doing what it can to get gas across to the continent, but years of complacency and the assumption that Russian gas would always be available on tap has led to underinvestment in offloading and storage facilities, meaning that the U.S. can send, but Europe can only afford to receive so much.  

 

The eurozone shock is both inflationary and deflationary, which means it has raised price levels sharply, but soaring energy prices has lowered real incomes for households and the terms of trade for countries, leading to diminished consumption and investment.

 

With diverse national economies at varying stages of development and relatively undeveloped cross-border insurance mechanisms, the eurozone is thought to be more fragile than the U.S. heading into what could possibly be a global recession because of policy tightening.  

 

However, the eurozone does have advantages in handling the Covid and energy shocks compared with the financial crises of a decade ago. 

 

While the global financial crisis split the eurozone between domineering creditors and humiliated debtors, recent shocks have affected members in quite similar ways which has helped to foster eurozone unity in a way hitherto considered impossible. 

 

Consumer price inflation was 9.1%  in the eurozone and 8.3% in the U.S. in the year to August 2022, core inflation (without energy and food prices) was only 4.3% in the eurozone against 6.3% in the U.S. and data on labor markets also indicate substantially less overheating in the eurozone than in the U.S.

 

This data explains why the European Central Bank has tightened far later and far less than the U.S. Federal Reserve. 

 

The European Central Bank started normalising monetary policy partly because policy had been so aggressive and partly because it needed to prevent the price effects of the shocks from being embedded and exacerbated by expectations.

 

As recession risks loom in the eurozone, the European Central Bank is likely to turn cautious about how quickly and how far it moves with the energy shock a powerful recessionary input to the economy. 

 

Another concern is the rising spreads on eurozone government bonds, which would then be transmitted to borrowers in the region’s most vulnerable economies. 

 

So far, these spreads are far smaller than during the eurozone crisis or the 2008 Financial Crisis, but the situation could change rapidly.

 

The survival of the European Union and the eurozone, its economic core, is in the overriding national and collective interest of its members and fortunately this crisis has kept members working together despite ramshackle and incomplete structures of the grouping.



3. Failure of Facebook’s Blockchain Ambitions Spawns Fresh Chains 

 

  • Using a programming language called Move, Aptos Labs seeks to make transactions quicker, cheaper and more secure – as is the case with . 

  • With the goal of becoming the home for Web3, Aptos Labs has taken direct aim at other faster and cheaper alternatives to Ethereum, perhaps most notably Solana, another blockchain in the Rust language family.

 

Aptos Labs blockchain, a startup with its roots in Meta’s failed cryptocurrency ambitions, launched its mainnet on Monday, becoming the first of the Facebook spin-off networks to premier and putting to test its multibillion-dollar valuation.

 

Using a programming language called Move, Aptos Labs seeks to make transactions quicker, cheaper and more secure – as is the case with . 

 

Move also powered the network of Meta’s cryptocurrency project Diem, which faced strong resistance from regulators and eventually sold its assets as its attempt at a stablecoin was met with strong regulatory blowback. 

 

In a Medium blog post, Aptos Labs said the launch is “step one in a long journey to create universal and fair access to decentralised applications for billions of people through a safe, scalable, and upgradable blockchain.” 

 

Whether Aptos Labs’ blockchain can rival the likes of Ethereum, Solana, Polygon or the legions of other blockchains all vying for decentralized applications, developers and users, remains to be seen.

 

Nevertheless, Aptos Labs has received backing from a string of notable investors having closed a US$200m funding round back in March led by a16z, with participation from Tiger Global, FTX Ventures, Coinbase Ventures, Binance Labs and PayPal Ventures. 

 

According to the Aptos Explorer website, the Aptos Labs blockchain processed about four transactions per second on Tuesday and is designed to be able to execute over 160,000 “non-trivial” Move transactions per second. 

 

By way of comparison, major card issuers like Visa and Mastercard process something in the region of 75,000 transactions per second. 

 

With the goal of becoming the home for Web3, Aptos Labs has taken direct aim at other faster and cheaper alternatives to Ethereum, perhaps most notably Solana, another blockchain in the Rust language family.

 

But cheaper and faster alone do not a heavily utilized blockchain make. 

 

While Ethereum remains one of the most expensive blockchains to transact on, with gas fees still high relative to competitors, it is still the most heavily utilized blockchain for a slew of decentralized applications. 

 

Solidity developers, are also much easier to find given the similarity of the language with Javascript, a commonly used programming language for which talent is relatively easier to find, making programmers on Ethereum’s blockchain more readily available and accessible.

 

The bulk of stablecoins are also transacted on Ethereum’s blockchain as well, especially Tether, the world’s most widely used stablecoin, and the sheer volume of tokens and transactions on Ethereum remains head and shoulders above other blockchains. 

 

Aptos Labs will have its work cut out for it, in an increasingly crowded space for which network and incumbency effects continue to provide early leaders such as Ethereum a significant first-mover advantage. 

 

Solana, Polygon, Polkadot and Avalanche were all touted at “Ethereum killers” but have so far barely put a dent in Ethereum’s formidable lead. 

 

Ethereum has also successfully transitioned to a Proof-of-Stake method to secure its blockchain, dramatically reducing energy requirements for transactions and paving the way for further upgrades that could significantly reduce transaction fees.

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