Daily Analysis 22 August 2022 (10-Minute Read)

Hello there,

A magnificent Monday to you as markets get mauled by growing concerns over the U.S. Federal Reserve's decidedly hawkish rhetoric that threatens to take down the nascent rebound.

In brief (TL:DR)

  • U.S. stocks closed lower on Friday with the Dow Jones Industrial Average (-0.86%), the S&P 500 (-1.29%) and the Nasdaq Composite (-2.01%) all down.

  • Asian stocks pared a slide Monday but remained in the red as the U.S. Federal Reserve’s commitment to tighter monetary settings to quell inflation restrained investor sentiment.

  • Benchmark U.S. 10-year Treasury yields were steady at 2.97% (yields rise when bond prices fall) but are inching closer to the psychologically-significant 3.00% level.

  • The dollar was firm showing investor caution in an uneven global economy.

  • Oil extended losses with September 2022 contracts for WTI Crude Oil (Nymex) (-1.26%) at US$89.63.

  • Gold fell with December 2022 contracts for Gold (Comex) (-0.27%) at US$1,758.10.

  • Bitcoin (-0.28%) continued to fall to US$21,173, falling with Asian stocks and growing concerns that the Fed will not let up on its hawkish rate hikes.


In today's issue...

  1. The Bears are Back

  2. Beijing Gets Serious on Bolstering its Battered Real Estate Sector

  3. Stablecoin Issuers hold US$80 billion of Short-Dated U.S. Treasuries


Market Overview

A jump in global shares from June’s bear-market lows has begun to cool, weighed down by repeated Fed warnings that interest rates are going higher.

Troubling global economic developments, including power shortages in a Chinese industrial heartland, are also hanging over investors.

In China, banks lowered the one-year and five-year loan prime rates on Monday in the slipstream of a decision by the nation’s central bank last week to cut a key policy rate.

Asian markets were mostly lower on Monday with Tokyo's Nikkei 225 (-0.47%), Seoul's Kospi Index (-1.21%), Sydney’s ASX 200 (-0.95%) and Hong Kong's Hang Seng Index (-0.59%) were all down.



1. The Bears are Back

  • The latest MLIV Pulse survey, ahead of the central banker conclave at Jackson Hole, Wyoming next week, saw 68% of respondents anticipating the most destabilizing era of price pressures in decades eroding margins and sending stocks lower.

  • In the meantime, survey respondents are betting that American consumers will cut spending because of persistently higher prices and unemployment is likely to rise to well over 4%.

“The Sand People are easily startled, but they’ll soon be back, and in greater numbers.”

– Obi Wan Kenobi, Star Wars Episode IV: A New Hope

It’s not just Sand People who get startled easily, so do bears, especially in a market as volatile as the present.

But just like the Sand People, bears will regroup, reorganize, and come back in greater numbers as evidenced from the hammering taken by stocks and bonds these past several weeks.

The latest MLIV Pulse survey, ahead of the central banker conclave at Jackson Hole, Wyoming next week, saw 68% of respondents anticipating the most destabilizing era of price pressures in decades eroding margins and sending stocks lower.

The MLIV Pulse survey of over 900 contributors, including professional analysts and day traders, reckon that inflation has likely topped out, but that the U.S. Federal Reserve would take as long as 2 years to bring inflation to the target 2%.

In the meantime, survey respondents are betting that American consumers will cut spending because of persistently higher prices and unemployment is likely to rise to well over 4%.

Which is why the unexpected US$7 trillion equity rebound, which has trimmed 2022 losses of the S&P 500 from 23% to just 11% looks shaky.

What markets are only just starting to price in is that although inflation isn’t likely to rise as fast, prices remain stubbornly high and that puts pressure on policymakers to continue to act, which is bad for both stocks and bonds.

To be sure, benchmark 10-year U.S. Treasury yields have settled comfortably below 3%, having peaked near 3.5% this year, and both retail and institutional investors have bought the dip in stocks.

But the rebound looks increasingly less durable, as current Fed funds futures show traders betting the central bank will raise benchmark rates to 3.7% before cutting borrowing costs sometime next year.

And while there is no shortage of risks that threatens to take down the nascent recovery in equity markets, a quickened pace of policy tightening, its resultant economic fallout, could spark a recession in substance, even if one is avoided in form.



2. Beijing Gets Serious on Bolstering its Battered Real Estate Sector

  • As the property crisis worsens in China, Beijing’s hand has been forced and Chinese banks lowered their benchmark lending rates while authorities stepped up support for the property market with additional loans.

  • It isn’t clear how effective the rate cuts will be, especially given that the outlook on the Chinese economy is bleak and the sentiment is poor.

For a while, investors were left guessing if Beijing would budge on its policy to deleverage its heavily geared real estate sector and whether the central bank would be roped in to ease monetary conditions as the property crisis deepened.

And for the longest time, Chinese government officials were long on rhetoric, but light on action to shore up China’s massive real estate sector, with some easing but nothing significant enough to demonstrate that policymakers understood the full extent of the problem.

But as the property crisis worsens in China, with hundreds of thousands of homebuyers on a mortgage strike, and more households saving up and avoiding taking on debt, Beijing’s hand has been forced and Chinese banks lowered their benchmark lending rates while authorities stepped up support for the property market with additional loans.

The rate cuts follow news late Friday of additional financing to prop up the real estate sector which said China would offer special loans through policy banks to ensure property projects are delivered to buyers, adding to signs of official support for an industry grappling with a debt crisis, slumping home sales and worsening sentiment.

The one-year loan prime rate was cut to 3.65% from 3.7%, the first reduction since January, but less than the 10 basis-point drop that economists had expected.

The five-year rate, a reference for mortgages, was reduced by 15-basis-points to 4.3% after being cut by the same amount in May.

It isn’t clear how effective the rate cuts will be, especially given that the outlook on the Chinese economy is bleak and the sentiment is poor.

The People’s Bank of China, the central bank, and two other ministries have made special loans available through policy banks to ensure stalled property projects are delivered to buyers, but completing properties doesn’t necessarily translate into improving the economic stock of the country.

Beijing is hoping that lower borrowing costs will help spur demand for loans, though it’s unlikely to reverse the sharp slump in consumer and business confidence triggered by turmoil in the property market and the stop-start reopening of the economy under the zero-Covid strategy.



3. Stablecoin Issuers hold US$80 billion of Short-Dated U.S. Treasuries

  • Tether’s USDT, Circle’s USDC and Binance’s BUSD alone have a combined market cap of roughly US$140 billion, making their movements in traditional financial markets increasingly important and significant.

  • Stablecoin issuers such as Tether and Circle now hold US$80 billion worth of short-term U.S. government debt, highlighting the expanding role of digital asset players in traditional financial markets.

Designed to act as a bridge between the cryptocurrency and fiat currency markets, stablecoins have long made it faster and easier for traders to buy and sell digital tokens, providing a brief respite from the volatility inherent in cryptocurrencies.

According to price-tracking site Coingecko, Tether’s USDT, Circle’s USDC and Binance’s BUSD alone have a combined market cap of roughly US$140 billion, making their movements in traditional financial markets increasingly important and significant.

While stablecoins are supposed to be backed at all times by reserves of actual dollars, or highly liquid mainstream financial assets, in practice, they have not been free from controversy, especially Tether, which has long been coy about what backs its USDT.

However the collapse of the TerraUSD algorithmic stablecoin, have put regulators on alert and spurred many of them to question the quality of the assets that stablecoin operators say they hold in reserve.

According to research from JPMorgan, as of May, Tether, the biggest stablecoin operator, and its peers, accounted for 2% of the market for U.S. Treasury bills – short-term debt instruments that are commonly used as a cash equivalent on corporate balance sheets.

Stablecoin issuers such as Tether and Circle now hold US$80 billion worth of short-term U.S. government debt, highlighting the expanding role of digital asset players in traditional financial markets.

And while 2% of the liquid U.S. Treasury markets may not sound like a lot, if stablecoin issuers were to dump their holdings of U.S. government debt, for instance, in the case of a slew of redemptions, their selling may have serious repercussions, especially given that liquidity is no longer a given.

U.S. Treasury markets have long been assumed to be the deepest and most liquid in the world, but the reality however is that periods of market crisis have seen liquidity evaporate and forced central banks to shore up Treasury values by becoming a buyer of last resort.

Even though a handful of the largest stablecoin issuers hold just 2% of short-term U.S. Treasuries, if a fresh market crisis were to emerge that would require issuers to sell off their holdings, it could have a material impact on Treasury prices, especially as markets become less liquid during difficult times.

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.