Daily Analysis 21 January 2022 (10-Minute Read)

Hello there,

A fantastic Friday to you as markets continue to flounder, with earnings missing expectations and investors turning risk-averse.

In brief (TL:DR)

  • U.S. stocks fell Thursday with the Dow Jones Industrial Average (-0.89%), the S&P 500 (-1.10%) and the Nasdaq Composite (-1.30%) after a late-day reversal on Wall Street as sentiment skidded on some shaky company earnings reports and the prospect of tighter U.S. Federal Reserve policy.

  • Asian stocks fell Friday, feeding off the negative sentiment following a tumble in U.S. shares.

  • Benchmark U.S. 10-year Treasury yields declined four basis points to 1.76% (yields fall when bond prices rise) as investors sought haven assets, putting a cap on hitherto soaring yields.

  • The dollar fluctuated.

  • Oil was lower with February 2022 contracts for WTI Crude Oil (Nymex) (-0.07%) at US$86.90 on a surprise climb in U.S. crude stockpiles.

  • Gold edged lower with February 2022 contracts for Gold (Comex) (-0.23%) at US$1,840.70.

  • Bitcoin (-4.45%) fell sharply to US$39,921 alongside as correlation with tech stocks and other risk assets soared to their highest in over a decade.


In today's issue...

  1. Tech Stocks See Eleventh Hour Slide

  2. Why should investors be watching Bank of America’s cost cutting closely?

  3. Bitcoin’s Topsy-Turvy Tumble with Tech Strengthens Correlation Story


Market Overview

Investor nerves remain frayed as the pandemic-era stimulus that bolstered a range of assets recedes.

Markets faces a one-two punch of Fed rate hikes and the possible reduction of its US$8.8 trillion balance sheet to fight price pressures.

The U.S. company reporting season so far has been uneven, highlighting the risk that it may fail to enliven animal spirits in the stock market and may serve as a double-edged sword, on the one hand wavering the Fed's resolve to hike rates too aggressively and on the other hand, suggesting that the economic recovery may not be as strong or resilient as perceived.

In the latest U.S. data, jobless claims climbed last week to a three-month high, suggesting the omicron variant could be having a bigger impact on the labor market.

In China, the regulatory push against tech companies is again in focus. The nation vowed to curb their influence on governments.


In Asia, markets fell Friday with Tokyo's Nikkei 225 (-1.58%), Seoul's Kospi Index (-0.69%), Hong Kong's Hang Seng (-0.56%) and Sydney’s ASX 200 (-1.49%) all down.



1. Tech Stocks See Eleventh Hour Slide

  • Tech stocks movements on Thursday were so swift and sudden they would have given most investors whiplash.

  • Dumping Treasuries and tech stocks, investors poured into “value” stocks more closely associated with the economic recovery, including energy, financials and other cyclical shares.

Just when you thought it was safe to buy tech again – these days it’s not clear if cryptocurrencies are correlating with tech stocks or vice versa.

The latest bout of volatility shook investors when late in the trading session on Thursday, the tech-stacked Nasdaq 100 fell into a sharp correction after a sudden surge in U.S. Treasury yields dented risk appetite.

Tech stocks movements on Thursday were so swift and sudden they would have given most investors whiplash – the Nasdaq 100 rose as much as 2% at one point before losing all those gains and posting losses of 1.3% in a single session.

Treasury yields have come down from their high on Tuesday, where the benchmark U.S. 10-year Treasury yield hit a high of 1.87%, it fell to 1.81% by Thursday (yields rise when bond prices fall).

Dumping Treasuries and tech stocks, investors poured into “value” stocks more closely associated with the economic recovery, including energy, financials and other cyclical shares.

But the volatility is precisely what U.S. Federal Reserve policymakers may be wanting to see – as markets naturally shake out some of the froth inherent in the valuation of some of the smaller tech companies that have attracted eye-watering valuations.

Some analysts are projecting that rates could rise as much as 0.50% by March, with others penciling in (on behalf of the Fed which has shown no such inclination) as many as 8 rate hikes before the end of the year.

These forecasts seem to presume that inflation in the U.S. is closer to what it was in the period between 1970 to 1980, but it’s simply not.

In 1973, U.S. inflation more than doubled to 8.8% helped in no small part by the abandonment of the gold standard and by 1974, price increases were at 12.3%.

With inflation continuing to remain in the double digits through the spring of 1975, the Fed was forced to act and raised benchmark rates to 16%.

The quality of inflation today is substantially different from the 1970s – for starters, nobody doubts that the dollar is backed by nothing more than promises – fiat currency is over half a century old in practice.

A closer examination of Consumer Price Index data also seems to suggest that the pace of price rises for items that would lead to more durable inflation appears to be slowing – including for meat and fuel, whereas durable goods like used cars continue to soar.

The reason? Supply chain disruptions and China’s continuing zero-tolerance Covid-19 policies, which is putting a damper on manufacturing activity and straining the ability to deliver goods in a timely fashion to meet the post-lockdown demand.

U.S. Federal Reserve Chairman Jerome Powell at his confirmation hearing before the Senate noted that the country was still a long way off from normal so it’s hard to see why investors are pricing in such extremes of reaction from policymakers whose pace to adjust rates has been nothing but glacial.



2. Why should investors be watching Bank of America's cost cutting closely?

  • With JPMorgan Chase (-0.85%), Goldman Sachs (+0.22%) and First Republic Bank (-1.18%) having their stocks pummeled by investors after reporting higher-than-expected costs, Bank of America shined for investors by doing more with less and cutting staff.

  • Markets may be underestimating the effect of job numbers on the Fed’s decision-making process and their appetite to raise rates – Bank of America may be the tip of the iceberg.

Bankers who had seen stocks of their company languish as tech firms, the darlings of the pandemic soared must be entering 2022 with at least a small touch of smugness.

While investors (speculators really) bet on everything from electric vehicles to electricity-hungry cryptocurrencies, the fortunes of Wall Street’s finest financial institutions languished unloved.

Enter the new year and the prospect of rising interest rates and increased borrowing costs has buoyed the fortunes for bank stocks, rising above the ebbing froth of their tech counterparts and looking set for bigger and better things this year as their fortunes turn.

Yet against the backdrop of bumper bonuses, why are some of Wall Street’s biggest banks sending staff packing?

With JPMorgan Chase, Goldman Sachs and First Republic Bank having their stocks pummeled by investors after reporting higher-than-expected costs, Bank of America shined for investors by doing more with less and cutting staff.

Of all the big banks on Wall Street, with many on a hiring spree and upping entry level salaries, Bank of America was a rare example of a big bank with less employees heading into the fourth quarter of 2021.

Higher wages across the banking industry are hurting bottom lines and eating away at earnings – JPMorgan Chase fell the most since 2020 after its fourth quarter results saw a sharp expense increase.

And with investors growing increasingly concerned over labor costs, with many companies choosing either to offshore and outsource or digitalize positions altogether – the experience of the banking industry could give some clues over how employment could be affected across America.

Although unemployment in the U.S. fell to 3.9% in December, overall job growth was well below expectations, with just 199,000 jobs created in the last month of 2021, versus the 441,000 forecast and the seasonal average of 534,000.

With maximum employment being one of the U.S. Federal Reserve’s key goals, the prospect of more companies trimming staff and headcount to cater for rising labor costs could dampen the central bank’s appetite to raise borrowing costs in a hurry.

Companies need to juggle a myriad of costs to churn out a profit of which the three biggest components are typically raw material, labor, and debt – and all three are rising at the moment.

Because companies can’t do much about raw material and debt costs, being outside of their control, they will inevitably turn to the one factor they can do something about – labor costs.

More firms are looking at labor costs and determining that either they will look towards higher levels of automation or try to do more with less.

Bank of America for instance processed fewer paper checks and increased digital adoption by customers which helped offset other expense increases.

More customers banking online means that fewer branches are needed and therefore less headcount.

But banking isn’t the only industry that could see digitalization lead to more layoffs or at the very least, a slowdown in hiring (hence the tepid job creation number) – the shift towards remote working means that a variety of jobs that used to require a dedicated inhouse staff can now be outsourced to a legion of contract or temporary workers.

From design to software creation, improved collaboration tools have made it so that a single worker could now potentially perform the services of several companies or multiple business units within the umbrella of a group of companies.

And where workers are most badly needed, in the frontline service industry, the pandemic has thus far kept them away, with the possibility that even those roles could one day be phased down.

Food preparation and service could run on skeleton staff to meet-and-greet while robots prepare and deliver the food.

Humans would only be there for where personal interaction was strictly necessary.

These broad shifts in the nature of work were already in place before the pandemic, but are looking to be increasingly durable even in a post-pandemic landscape.

For these reasons, markets may be underestimating the effect of job numbers on the Fed’s decision-making process and their appetite to raise rates – Bank of America may be the tip of the iceberg.



3. Bitcoin's Topsy-Turvy Tumble with Tech Strengthens Correlation Story

  • The benchmark cryptocurrency whipsawed investors on Thursday, tracking the swings in the tech-focused Nasdaq 100, often viewed as a proxy for risk sentiment.

  • Investors can expect volatility to increase in the coming weeks as a slew of uncertainty could see investors dive back into haven assets like Treasuries and interpreting stable yields as a sign that risk is back on the table could be misleading.

Before you can say “hold my ledger” bitcoin’s sharp rebound and then subsequent fall in the past 24 hours all but mirrored the whiplash that occurred for tech stocks, proving once again that when it comes to crypto and tech, they’re more attached at the hip than some would hope.

The benchmark cryptocurrency whipsawed investors on Thursday, tracking the swings in the tech-focused Nasdaq 100, often viewed as a proxy for risk sentiment.

Stabilizing U.S. Treasury yields provided brief respite for risk takers and the Nasdaq 100 rallied as much as 2% at one point before erasing those gains and losing 1.3%.

But this time it wasn’t even tech’s most speculative corners that contributed to the significant volatility, stalwarts of the pandemic like Amazon.com and Netflix were hammered, especially after the latter reported poorer than expected subscriber growth in the fourth quarter of 2021.

Lacking any other macro influences outside of risk sentiment, the 100-day correlation coefficient between bitcoin and the Nasdaq 100 soared to 0.40, the highest reading going back to 2011 (a correlation of 1 means that two assets move in lockstep, while -1 would show they move in perfectly proportionate but opposite directions).

Bitcoin rose momentarily above US$43,000, a key level of resistance in 2022, but the sudden turn in sentiment saw the benchmark cryptocurrency come within a hair’s breadth of penetrating the psychologically-significant US$40,000 level of support.

Ether, the smart contract cryptocurrency of choice wasn’t so restrained in its pullback and at the time of writing is trading around US$2,900, having slipped below the US$3,000 level of support.

Investors can expect volatility to increase in the coming weeks as a slew of uncertainty could see investors dive back into haven assets like Treasuries and interpreting stable yields as a sign that risk is back on the table could be misleading.

Russia, which had for the longest time been relatively open towards cryptocurrencies, has joined China in proposing a ban on bitcoin mining and trading activity, even as its troops mass menacingly on its border with Ukraine.

Nevertheless, there are some analysts who believe that Moscow’s sudden ill-will towards bitcoin will have limited effect on the cryptocurrency’s possible role as a portfolio hedge.

China’s total ban on all things cryptocurrency has seen miners flee to other countries, hashrates return to normal and trading activity in offshore exchanges unaffected appears to provide more than enough evidence of the resilience of bitcoin and cryptocurrencies to censorship and government intervention – that in and of itself may make a decent case for addition to a portfolio.

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