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Daily Analysis 23 June 2022 (10-Minute Read)

Hello there,

A terrific Thursday to you as U.S. stocks tick lower while Asian markets were mixed at the open, with increasing concern about global growth.

In brief (TL:DR)

  • U.S. stocks slipped on Wednesday with the Dow Jones Industrial Average (-0.15%), S&P 500 (-0.13%) and the Nasdaq Composite (-0.15%) all lower amidst a backdrop of growing concern that a recession is on the horizon.

  • Asian stocks were mostly higher at the open on Thursday as growth fears lifted bonds and saw better appetite for Asian assets.

  • Benchmark U.S. 10-year Treasury yields slipped to 3.159% (yields fall when bond prices rise) as the threat of a recession improved appetite for bonds.

  • The dollar was steady.

  • Oil fell with July 2022 contracts for WTI Crude Oil (Nymex) (-2.29%) at US$103.76 as recession fears in the U.S. gained ground.

  • Gold was flat with August 2022 contracts for Gold (Comex) (+0.04%) at US$1,839.20.

  • Bitcoin (-0.36%) fell slightly to US$20,454, as the benchmark cryptocurrency continues to hew closely to the US$20,000 level, with both opportunistic buyers and bearish sellers straddling both sides of the divide and neither bears nor bulls taking control of price action.

In today's issue...

  1. Bank of Japan Pulls Off a Last-Minute Miracle to Cap Bond Yields

  2. Normalizing Central Bank Policy Hurts Those Who Can Least Afford It

  3. Celsius Network Takes Its Own Temperature

Market Overview

Sovereign bonds rallied as global investors parsed the economic and monetary policy outlook and grew increasingly concerned about economic growth with U.S. Federal Reserve Chairman Jerome Powell acknowledging the risk of recession on the horizon.

Key industrial commodities took a beating, with crude oil coming its closest to the psychologically-important US$100 level for the first time in weeks on demand concern.

With the U.S. Federal Reserve in full-on inflation-fighting mode, the odds of a "soft landing" for the U.S. economy appear to be unlikely and in a testimony to the Senate on Wednesday, Powell conceded that it was "very challenging" to architect such an outcome.

Asian markets were higher on Thursday's open with Tokyo's Nikkei 225 (+0.39%), Seoul's Kospi Index (+0.21%), Hong Kong's Hang Seng Index (+0.71%), and Sydney’s ASX 200 (+0.40%) all up.

1. Bank of Japan Pulls Off a Last-Minute Miracle to Cap Bond Yields

  • Bank of Japan goes on an incredible US$81 billion bond-buying spree to put a lid on soaring Japanese sovereign bond yields, which appears to have worked for now.

  • It's unclear how many rounds of unprecedented buying of bonds the Bank of Japan will need to engage in before global investors call its bluff with each subsequent round raising the stakes and the odds of collapse.

Amidst the market madness of recent weeks, some relief was seen as Tokyo’s bond market stabilized thanks in no small part to the Bank of Japan. Traders pondered over unparalleled intervention by the BOJ, which by sheer brute force managed to force benchmark yields off of a keenly watched and psychologically-important ceiling.

The start of the week saw Japanese 10-year yields climbing higher to 0.23% on Monday, in the wake of the BOJ’s record 10.9 trillion-yen (US$81 billion) purchase of bonds last week.

The BOJ mounted bond purchases as benchmark yields shot past its tolerated limit of 0.25% amidst a worldwide debt selloff and for now at least, things appear to have stabilized.

Adopting a bond purchase strategy is integral as it aids in keeping a limit on medium-term costs (also known as yield-curve control) in Japan, that has been in effect from 2016, especially given the slow growth of the economy over the past decade.

But the actions of the BOJ can’t easily be replicated by other economies.

Japan has seen years of negative or slow growth, with things picking up only in recent years and Tokyo is keen to make hay while the sun shines, and Japan’s yen as well as its sovereign debt has been a safe haven in troubled times.

But with yields soaring in the U.S. thanks to central bank tightening and a divergent monetary policy in Japan, pressure is rising on Japanese debt amidst a widespread selloff by investors.

The Bank of Japan remains the biggest buyers of Japanese government debt, but how long this resolve can be maintained before something breaks is unclear.

For the BOJ to seamlessly egress from the mammoth bond purchases, it needs to work closely with Japan’s finance ministry, but only time will tell if that exit will be graceful or economically catastrophic.

2. Normalizing Central Bank Policy Hurts Those Who Can Least Afford It

  • Normalizing central bank policy will hit the lower and middle classes hardest, as they grapple with inflation while borrowing costs for mortgages and auto loans soars.

  • Decades of loose liquidity means that asset-rich members of society will always be in a better position to deal with both tighter monetary policy as well as inflation.

Normalizing central bank policy is hard to do.

Even in the best of times, policymakers have to contend with a myriad of issues and competing policy priorities, but having to juggle all the balls at once while trying to wrestle monetary policy back to more normal times is proving to be one ball too many, at least according to markets and investor sentiment.

After a prolonged interval of resistance, the U.S. Federal Reserve has conceded that it has been pushed to a corner, indicating the fervent need to tackle inflation more aggressively notwithstanding the implications on the market.

While the climate of constricting financial conditions is self-perpetuating – sentiment wanes so demand drops and prices (hopefully) retreat, there is no guarantee of mean-reversion (an assumption that asset prices will converge to the average price over time) under these pressures.

Which explains much of the volatility of late – increasingly, prices are being dictated by narrative as opposed to valuation models and this has been reflected in a surge in tech on one day, only to meet a sharp decline the next.

Instead, central bank policymakers could usher in a secular systemic shift where inequality is worsened, livelihoods are jeopardized, and unintended consequences are rampant.

This ‘wakeup call’ of sorts is imperative in treading through the volatility of the economy.

To be fair, the Fed could not have predicted the Russian invasion of Ukraine nor the effect that would have on commodity markets and in the absence of that Black Swan event, inflation could have been “transient” to use their lingo, but even then, the odds of that were unlikely.

Unprecedented injections of liquidity have inflated every manner of asset and created new ones which otherwise could not have existed – when the money’s free, the consequences are of no matter.

But the ones who really hurt are the middle class and the poor as liquidity injections have almost always tended to favor asset holders and not the working class.

Now as the tide of liquidity recedes, it’s once again the middle and working class, those who are stretched by their mortgages and auto loans, who are being hit hardest.

The onus lies on policymakers to take the initiative to curb the damage across the board, as well as to safeguard the most vulnerable sections of our society.

3. Celsius Network Takes Its Own Temperature

  • Celsius Network suggests that it will need more time to normalize withdrawals and operations.

  • Embattled centralized cryptocurrency lender will require some kind of bailout or backstop, or risk collapse and in the event it does free up withdrawals, could suffer from a fresh run.

Halting withdrawals and roiling markets, cryptocurrency lender Celsius Network has cautioned that it will require time to regain its footing and normalise its operations.

In a blog post Monday, Celsius indicated that since its company’s establishment, ‘open dialogue with regulators and officials’ has taken precedence, much to the chagrin of depositors desperate to access their assets.

Additionally, Celsius plans to work closely with ‘regulators and officials’ to formulate a solution to restart operations and normalize withdrawals.

The crypto lending firm has also halted its Twitter Spaces and AMAs (Ask Me Anything) allegedly to focus on fixing the issues that it is currently facing.

But restarting normal operations may not even be possible for Celsius.

For starters, once the floodgates open, it’s almost a given that depositors and those with assets on Celsius Network, will flood in with redemption requests, the equivalent of a bank run.

In the wake of the TerraUSD and Luna implosion, counterparties are still wary, unsure of which will be the next shoe to fall.

Three Arrows Capital, which is rumored to be insolvent as well has led to a crisis of confidence in a market that has already struggled amidst tightening monetary policy

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