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Daily Analysis 2 February 2022 (10-Minute Read)

Hello there, A wistful Wednesday as U.S. markets continued to soar on Tuesday and the prospect of Alphabet, parent company of Google splitting its shares to make them more accessible for retail investors has added to buoyant sentiment with the U.S. Federal Reserve tamping down the rhetoric on tightening. In brief (TL:DR)

  • U.S. stocks turned into Tuesday with bulls trouncing bears and the Dow Jones Industrial Average (+0.78%), the S&P 500 (+0.69%) and the Nasdaq Composite (+0.75%) all continuing to rise as strong corporate earnings and softer language emanating from Fed officials buoyed risk-on sentiment.

  • Asian markets remain mostly closed on Wednesday for the Lunar New Year holiday.

  • Benchmark U.S. 10-year Treasury yields rose slightly to 1.797% (yields rise when bond prices fall), but not in any meaningful manner.

  • The dollar slipped.

  • Oil steadied with March 2022 contracts for WTI Crude Oil (Nymex) (+0.39%) at US$88.54 ahead of an OPEC meeting and talks of boosting output.

  • Gold was flat with April 2022 contracts for Gold (Comex) (-0.01%) at US$1,801.40.

  • Bitcoin (+0.47%) inched up to US$38,500 but otherwise traded sideways, momentarily testing the US$39,000 level of resistance before retracing, if it can breach that psychologically significant level, a sharper rally to US$42,000 may be on the cards.

In today's issue...

  1. Fed Softens Posturing on Rate Hikes to Market Cheer

  2. Worst January for U.S. Equities Since 2008 Financial Crisis

  3. In Thailand Your Cryptocurrencies are Tax Free (Sort Of)

Market Overview

On Second Day of the Lunar New Year, those who celebrate the festival in all its glory will commemorate the God of Wealth leaving for heaven by eating wontons, which resemble the shape of a gold ingot.

And if you don't have the customary accoutrements, including the relevant incense and papers for burning, maybe wonton soup for lunch may not be such a bad idea, just in case this latest rally runs out of steam.

U.S. shares were spurred by strong corporate earnings outlooks and signs that the U.S. Federal Reserve favors a more measured monetary policy tightening as officials, perhaps shocked by the brutality of the response that led to the worst January for equities since the 2008 Financial Crisis, were quick to walk back some of the tougher talk on tightening.

Asian markets that remained open during the Lunar New Year holiday continued to rise with Tokyo's Nikkei 225 (+1.40%) and Sydney’s ASX 200 (+1.26%) higher on Wednesday morning, while South Korean and Hong Kong markets remained closed for the Lunar New Year break.

1. Fed Softens Posturing on Rate Hikes to Market Cheer

  • Worst January since 2008 Financial Crisis has seen some U.S. Federal Reserve officials soften their posture on policy tightening

  • Fed policymakers are suggesting that the timing and extent of policy tightening likely to be more measured than markets may have priced in

If you’ve noticed your portfolio of tech stocks turnaround in recent days, don’t be surprised as U.S. Federal Reserve officials have declared that they want to avoid unnecessarily disrupting the U.S. economy even as they prepare to start raising interest rates. Last week, U.S. Federal Reserve Chairman Jerome Powell declared that the central bank was ready to raise rates at their next meeting, with an eye to curbing the strongest inflation in four decades, but left things open on the pace or extent of such measures. That strategic ambiguity saw markets roiled, with pundits warning investors to expect anything from monthly rate hikes to more aggressive tightening, sending U.S. Treasury yields soaring and anything with a hint of risk, tanking. But now that policymakers have seen the potential consequences at even a hint of tightening, some at least are walking back their initial hawkishness to position relatively benign moves to reign in inflation, without taking down the economy with it. Speaking at the Economic Club of Indiana, U.S. Federal Reserve President for Kansas City Esther George, who has always been one of the Fed’s more hawkish officials, noted, “You always want to go gradually, in the economy. It is in no one’s interest to try to upset the economy with unexpected adjustments. But I do think the Federal Reserve is going to have to move deliberately in its decisions to begin to withdraw accommodation.” Some analysts are interpreting George’s comments to suggest that while rate rises can be expected, policy shifts are likely to be gradual and some ways off some of the more aggressive measures that markets have priced in. Echoing her Fed colleague George, San Francisco Fed President Mary Daly, one of the central bank’s more dovish officials told Reuters in a live-streamed interview, “When you’re trying to get an economy from extraordinary support to one that’s going to just gradually put it on to a self-sustaining path, you have to be data-dependent. But you also have to be gradual and not disruptive.” Messaging from the Fed of late suggests that policymakers haven’t quite decided yet on the best course to combat inflation and are remaining an approach of “nimbleness” which has resulted in markets being whipsawed by volatility as investors take strong bets in both directions. But perhaps the approach taken by Pershing Square’s Bill Ackman may be instructive – Ackman’s hedge fund which profited through the pandemic with well-timed bets on interest rates and subsequent tightening has now shifted to going deep with tech companies. Ackman went long on Netflix, buying up 3.1 million shares of the streaming giant which was once the darling of the pandemic trade, but has now seen its shares tumble by around 40% from its high in November.

2. Worst January for U.S. Equities Since 2008 Financial Crisis

  • U.S. equities have their worst January since the 2008 Financial Crisis

  • Market reaction to just the prospect of rate hikes has seen stocks heavily battered and may shake policymakers looking to get aggressive with tightening to review all the economic circumstances carefully before committing to a course of action

The U.S. Federal Reserve is taking notice. Since suffering the worst January on record since the 2008 Financial Crisis, U.S. Federal Reserve policymakers have softened their language on policy tightening, as a repeat of 2015’s “taper tantrum” starts to rear its ugly head. The benchmark S&P 500 index fell 5.3% in January, its biggest monthly decline since the onset of the coronavirus pandemic in March 2020 and the worst January since markets plumbed the depths of the global financial crisis in 2009. And all that is despite the option for the U.S. Federal Reserve to reverse tapering asset purchases and raising interest rates. If not for the last two days of January helping to regain some ground, the past month would have been the worst on record for the S&P 500. The prospect of higher interest rates has roiled markets, with investors already skeptical about valuations. Higher rates reduce the value that investors place on future earnings (because why bet on tomorrow when you can have your returns now), hitting the prices of companies which are promising long-term growth, at the expense of immediate gratification. Call it the market’s marshmallow test if you will, where preschoolers are promised one marshmallow immediately if they eat it now, but two if they are willing to wait for twenty minutes – researchers found that those willing to delay that gratification generally tend to do better in life. Nonetheless, considering that most institutional investors need to report their returns in the present, the prospect of a non-zero real rate of return from soaring Treasury yields because of increased borrowing costs is causing many to eat the marshmallow now, rather than wait for the promise of high-growth tech firms to deliver on their aspirations. Compounding the ambiguity for investors, the threat of over a hundred thousand Russian troops on the border with Ukraine is throwing a spanner in the works for investors already having to weigh the prospect of higher interest rates and slowing earnings growth. While U.S. companies have so far reported stellar fourth-quarter results, earnings are expected to slow after last year, when they were boosted by a comparison with a weak pandemic 2020. Geopolitical risks from a potential Russian invasion of Ukraine are also difficult to price in, because even without a war, a prolonged standoff including sanctions on Russia, could push up global energy prices at a time when economies are already struggling to tame inflation. Increases in the price of oil could affect consumer sentiment and distort the full inflation picture even more than supply chain snarls. The good news is that the Fed is already starting to take notice of the complex backdrop against which it will need to set policy – preferring to preserve its “nimbleness” to respond according to an increasingly dynamic situation.

3. In Thailand Your Cryptocurrencies are Tax Free (Sort Of)

  • Thailand scraps plan to institute a 15% withholding tax on cryptocurrency transactions after responding to pressure from industry stakeholders

  • Thailand is taking a more cautious approach in regulating cryptocurrencies, especially given the experience of the 1997 Asian Financial Crisis which saw large outflows of money from the country

The land of a thousand smiles just added a few more as Thailand has scrapped plans to impose a 15% withholding tax on crypto transactions after facing a blowback from one of Southeast Asia’s biggest markets for cryptocurrencies. Blessed with white sand beaches and azure blue waters, Thailand has been a hotbed, attracting talented software developers and engineers from all over the world, to be used as a base for developing their cryptocurrency projects. But the coronavirus pandemic has punished Thailand’s tourism-dependent economy, and strained national finances, which prompted Bangkok to consider taxing its burgeoning crypto-economy to add to depleted coffers. However, given the high level of mobility of a new breed of crypto-preneurs, Thai tax officials backed down this week from a potential 15% withholding tax on crypto transactions, and instead earned income from trading or mining could be reported as capital gains on income tax. Traders will also be allowed to offset annual losses against gains made in the same year, meeting demands from those in the nascent industry who had warned that the excessive taxes would kill off a sector in its infancy. Cryptocurrency trading expanded rapidly in Thailand during the course of the pandemic, and many Thais took to play-to-earn games like Axie Infinity to supplement their incomes which had been ravaged as the pandemic all but cut off income from tourism. Before the pandemic, Bangkok was the world’s most visited city and Thailand’s many beaches and resorts were crowded with Europeans and Americans in search of their slice of tropical paradise, with tourism generating about a fifth of Thai GDP. Thai regulators still have fresh in their minds the stings of the “hot money” outflows from 1997-1998 during the Asian Financial Crisis, which saw the national currency the Thai baht, eviscerated and have adopted a cautious approach towards regulating cryptocurrency. Bangkok is understandably concerned that cryptocurrencies could be used in capital flight. The Bank of Thailand and the country’s Securities and Exchange Commission support the development of financial technologies such as blockchain, but are not of the view that using cryptocurrencies to pay for goods and services would add much benefit to consumers and businesses.

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