Daily Analysis 20 June 2022 (10-Minute Read)

Hello there,

A magnificent Monday to you as stocks continue to get manhandled into yet another week of volatility.

In brief (TL:DR)

  • U.S. stocks ended a mixed bag last Friday and ahead of the Juneteeth long weekend with the Dow Jones Industrial Average (-0.13%), as blue chips pulled back, while the S&P 500 (+0.22%) and the Nasdaq Composite (+1.43%) were higher thanks to a rebound in tech stocks.

  • Asian stocks fluctuated on Monday as persistently high energy prices weighed on sentiment with Hong Kong the only bright spot on expectations of continued policy measures by Beijing to shore up the economy.

  • Benchmark U.S. 10-year Treasury yields were relatively flat last Friday inching higher to 3.236% (yields rise when bond prices fall) and appear to have settled at current levels in the immediate term.

  • The dollar gained.

  • Oil rebounded with July 2022 contracts for WTI Crude Oil (Nymex) (+0.26%) at US$109.85 after pulling back sharply on recession and demand concerns.

  • Gold gained with August 2022 contracts for Gold (Comex) (+0.15%) at US$1,843.30.

  • Bitcoin (+9.89%) rebounded after falling as low as US$17,500 over the weekend to recover to US$19,979.


In today's issue...

  1. Oil Regains Footing as Demand Side Strong

  2. China's Central Bank Pauses Rate Cuts in Disappointing Blow to Bulls

  3. When the last Crypto Bull Becomes a Bear


Market Overview

There are few reasons for investors to be optimistic at the moment and not least of which is that many of the issues that have caused the current market malaise remain as relevant as ever.

From war to inflation, policy tightening to slowing demand, markets are headed into a perfect storm with investors better off taking profit where available without necessarily trying to call a bottom.

There are signs that demand is slowing in China, and that has weighed on global commodity prices while U.S. policy tightening, including the prospect of another fresh 0.75% rate hike in July threaten to push the economy ever close into recession.

Asian markets were mostly lower on Monday with Tokyo's Nikkei 225 (-0.74%), Seoul's Kospi Index (-2.04%) and Sydney’s ASX 200 (-0.64%) down in the morning trading session, while Hong Kong's Hang Seng Index (+0.35%) was up marginally as Chinese tech companies led the rebound.



1. Oil Regains Footing as Demand Side Strong

  • Oil remained resilient in Asian trading as traders focused on renewed demand from the region which is progressively opening up to travelers.

  • Continued supply disruption from the ongoing war in Ukraine likely to have more of an impact than the prospect of a recession in the U.S. from central bank policy tightening.

After a dive of 7% the past Friday, oil has regained its footing in Asia with traders considering the possibility of greater short-term demand as more economies in the region open up to travel, overshadowing concerns that U.S. monetary tightening and fears of an impending recession.

West Texas Intermediate (WTI) traded north of US$109 a barrel, with ‘worry’ being the pervasive sentiment amidst fears of the Fed raising rates which will derange the financial markets.

Oil prices skyrocketed this year stemming from the war on Ukraine, disrupting supplies just after a surge in consumption as pandemic restrictions get lifted. Notwithstanding the turbulence of the market after the recent Fed hike, high oil prices are likely here to stay if the war persists and keeps Russian crude off global markets.

Moreover, the oil market is currently parked in backwardation (where short-term prices trade higher than longer-dated ones), suggesting tight supplies, but expectations that in the long-term, either a recession will dent demand, or Russian supply rejoins global markets.



2. China's Central Bank Pauses Rate Cuts in Disappointing Blow to Bulls

  • The People's Bank of China (PBoC) pauses rate cuts in a blow to China bulls expecting more proactive measures to loosen monetary conditions.

  • Global investors became net sellers of Chinese assets, with arbitrary and unpredictable policy shifts presenting a major challenge for upside as well as diverging monetary policy between the U.S. and China.

In a blow to China bulls, the People’s Bank of China has paused policy rate cuts, as Beijing expects the economy to recover with strict zero-Covid policies likely to be eased in the coming weeks and months.

China’s CSI 300 Index dipped 0.2%, going against an earlier rally of 0.6% stemming from foreign investors net selling of shares. Moreover, debate still looms in the air on whether the PBoC still has headroom to decrease interest rates even with the Fed’s tightening as the monetary policies of the world’s two largest economies diverges.

The Chinese economy is taking a breather as it recovers slowly from the worst of its pandemic

disruptions earlier this year, but consumer sentiment remains sour and retail investor appetite for shares is muted.

Adopting a measured approach, China’s central bank places more emphasis on targeted stimulus for the sectors of small businesses and property to reduce banks’ funding costs and placing pressure on banks to heighten loans, without adopting heavy-handed policy measures.

The disappointing pullback reflects yet again the dangers of going in on China too early, given the arbitrary and unpredictable policy measures that are often two steps forward and one step back.



3. When the last Crypto Bull Becomes a Bear

  • Possibility of further selling in cryptocurrencies even as the last bull looks to become a bear as leverage and interdependence in decentralized finance has yet to fully run its course.

  • Signs that even long-term holders of cryptocurrencies are now selling means that the selling pressure will have some ways to run before coming to an end.

It’s been said that markets have bottomed out when the last bull becomes a bear and signs of capitulation are showing up everywhere in the cryptocurrency markets.

While short-term speculators may have been the first to show up their “paper hands,” even so-called “diamond hands” haven’t been immune to the latest market machinations.

Data from blockchain analytics provider Glassnode, suggests that the spent output profit ration (a measure which tracks profit realized from cryptocurrency market activity per day) has sunk to its lowest level within a year, suggesting that even the most die-hard cryptocurrency investors are starting to feel some pressure to sell.

Long-term investors typically store cryptocurrencies on cold wallets, expecting to hold it there for a long time, but recent blockchain activity has seen large inflows of cryptocurrencies onto exchanges as a sign of selling pressure, and especially from older wallet addresses commonly associated with long-term holders.

While tighter monetary policy has been provided as a primary reason for the selloff in risk assets, and cryptocurrencies have been no exception, the recent steep plunge has had to do with cascading defaults from a handful of major players in the cryptocurrency sector.

Massive centralized lenders like Celsius Network, BlockFi and Babel Finance have either frozen withdrawals (a sure sign of trouble) or are rumored to be facing liquidity issues, while even marquee cryptocurrency hedge funds like Three Arrows Capital are now facing insolvency.

The deleveraging of the cryptocurrency sector has rattled even the staunchest supporters, including investors who have been holding on to their bags for years.

Bitcoin is now down about 50% this year alone, with the token powering the majority of blockchains, Ether, falling 70%.

Despite optimism over Ether’s impending shift to a more energy efficient Proof-of-Stake blockchain, its intimate tie with decentralized finance has seen the token’s price whacked through the cascading and interlinked liquidations.

As it turns out, much of DeFi’s yield was generated from a seemingly endless revolving line of credit from interlinked lending pools where speculators supercharged their bets on cryptocurrency prices going one way only.

The current deleveraging cycle isn’t complete as it’s as yet unclear the extent of the impact of unwinding of interlinked synthetic derivatives in the DeFi space and which lenders have become insolvent as a result.

In the coming weeks and months, more centralized lenders can be expected to show signs of strain and liquidity issues, which will have an impact on the DeFi pools that they operate in.

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