Daily Analysis 24 May 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as Asian stocks drop on growth angst while U.S. equities rose to a rousing start to begin the week on the prospect of better Sino-U.S. trade relations and easing of Trump-era tariffs.

In brief (TL:DR)

  • U.S. stocks closed higher on Monday with the Dow Jones Industrial Average (+1.98%), S&P 500 (+1.86%) and the Nasdaq Composite (+1.59%) all up.

  • Asian stocks declined Tuesday as traders weighed concerns about how companies will navigate the economic slowdown and whether fresh Chinese measures will help boost growth.

  • Benchmark U.S. 10-year Treasury yields were at 2.85% (yields fall when bond prices rise) as appetite for bonds firmed up.

  • The dollar steadied after dropping earlier.

  • Oil edged lower with July 2022 contracts for WTI Crude Oil (Nymex) (-0.73%) at US$109.48.

  • Gold was little changed with August 2022 contracts for Gold (Comex) (+0.03%) at US$1,854.50.

  • Bitcoin (-3.24%) fell to US$29,210 (at the time of writing) and has failed to profit from the move higher in tech stocks.


In today's issue...

  1. The Fed May Switch Gears in September

  2. What could a de-globalized world look like?

  3. Bitcoin Drifts Rudderless as Bots Take Over Daily Trading Volume


Market Overview

Equities have been volatile as investors assess the outlook for monetary policy, inflation and the impact of China’s strict Covid policies on the global economy.

Minutes this week of the most recent U.S. Federal Reserve rate-setting meeting will give markets insight this week into the central bank’s rate path and appetite for tightening.

European Central Bank President Christine Lagarde’s prospective timetable for two quarter-point interest-rate hikes has irked colleagues who want to keep open the option of moving faster.

Geopolitics will be closely watched after comments by U.S. President Joe Biden on America coming to the defense of Taiwan should the island be invaded, threatened to raise already heightened tensions with Beijing.

China rolled out a broad package of measures as it seeks to offset the damage from Covid lockdowns on the world’s second-largest economy, including a massive tax break, but one that favors corporates more than individuals.

Asian markets were mostly down Tuesday with Tokyo's Nikkei 225 (-0.51%), Seoul's Kospi Index (-0.78%) and Hong Kong's Hang Seng Index (-0.75%) down, while Sydney’s ASX 200 (+0.04%) was up slightly in the morning trading session.



1. The Fed May Switch Gears in September

  • U.S. Federal Reserve Bank of Atlanta President Raphael Bostic is the first to indicate a softening towards the end of the year.

  • Nevertheless, Bostic left the door open for more aggressive hikes should the inflation print continue to keep up price pressures, although he is forecasting numbers in the “high 3%” range by the end of the year.

Judging by central bank policy stances, the old adage, sell in May and go away and come back again in November may be more one of financial engineering than pure coincidence.

With U.S. Federal Reserve policymakers having to contend with a slew of challenges, including the fastest pace of inflation in four decades, a Russian invasion of Ukraine, and China’s zero-Covid policies snarling supply chains, it’s understandable that the central bank would like to keep its cards close to its chest.

And U.S. Federal Reserve Bank of Atlanta President Raphael Bostic is the first to indicate a softening towards the end of the year.

Speaking to reporters following a speech to the Rotary Club of Atlanta, Bostic noted,

“I have got a baseline view where for me I think a pause in (rate hikes in) September might make sense.”

“After we get through the summer and we think about where we are in terms of policy, I think a lot of it will depend on the on-the-ground dynamics that we are starting to see. My motto is observe and adapt.”

Investors have so far girded their loins for two half-point hikes in June and July, with the most conservative factoring in a further hike in September as well to settle rates at between 2.5% to 2.75% from the current level of 0.75% to 1.00%.

Nevertheless, Bostic left the door open for more aggressive hikes should the inflation print continue to keep up price pressures, although he is forecasting numbers in the “high 3%” range by the end of the year.

If prescient, Bostic’s inflation projection, although above the Fed’s target 2%, is a lot lower than where it currently sits.

The Fed uses the Personal Consumption Expenditures price index as opposed to the more widely-known Consumer Price Index as a gauge of inflation and in March, the PCE was 6.6%.

In other words, price pressures must come down substantially to basically halve inflation, which is perhaps leaning on the more optimistic end of the spectrum.

Bostic’s speech to the Rotary Club of Atlanta earlier noted that the recent sharp decline in equities was consistent with the Fed’s goal for tightening monetary conditions.

Unfortunately, there have been few signs that the real side of the economy is slowing since rates were hiked in March, probably because the bulk of price pressures remain outside the realm of the Fed’s control.

Bostic also put a figure on where rates could land up at the end of the year, and they appear to be in the lower range of estimates, speaking to reporters, he said,

“But I think getting us somewhere in the 2% to 2.5% range by year’s end would be a good place for us to get to.”

The bracket is below the 2.5% to 2.75% that most analysts have postulated and would still be well below the rate of inflation, providing plenty of ground for a relief rally in all manner of risk assets towards the end of the year.



2. What could a de-globalized world look like?

  • Onshoring (moving manufacturing back home), renationalization and regionalization have become the latest trends for companies, deglobalization if you will.

  • Investors who have yet to face such geopolitical and macroeconomic conditions during the arc of their investing career may find themselves like fish out of water, but there are “safe-ish” assets to take bets on as geopolitics takes front and center.

Slowly but surely, the countries of the world are erecting walls and highlighting their borders as nations draw inwards on themselves.

Old ideological lines have been redrawn, with authoritarianism on one end of the spectrum and liberal democracies rising to meet the challenge.

Earlier predictions of the “end of history” have not aged well – liberal democracy is not a foregone conclusion, and if nothing else, has been in retreat over the past three decades.

Much of this has to do with globalization and a sense of disenfranchisement as widening inequality from asset owners to those who work those assets becomes fertile ground to foment unrest.

Nowhere is the fear that globalization has come to an end more palpable than in the exclusive Swiss resort of Davos, where those who have the most to lose from an overthrow of current systems and structures by the proletariat gather to figure out how to prevent this from happening.

Onshoring (moving manufacturing back home), renationalization and regionalization have become the latest trends for companies, deglobalization if you will.

For the past three decades, stuff was designed in the U.S. and made in China, even though the two countries made for strange bedfellows, the marriage of convenience worked.

And for so long as China kept lapping up American debt (US$1.1 trillion worth of U.S. Treasuries and counting), the status quo became a comfortable compromise which enriched both nations.

But the Russian invasion of Ukraine has been a watershed moment and Beijing’s refusal to condemn Moscow, a close ally, has re-emphasized the opposing political spheres that China and the U.S. occupy.

U.S. President Joe Biden’s gaffe where he said that the U.S. military would come to the aid of Taiwan should it be invaded by China, doesn’t help matters either.

Investors who have yet to face such geopolitical and macroeconomic conditions during the arc of their investing career may find themselves like fish out of water, but there are “safe-ish” assets to take bets on as geopolitics takes front and center.

In the next phase, companies with diversified manufacturing bases are likely to fare better than those concentrated in one location, for instance China.

American companies that manufacture closer to home, say in South America, in particular Mexico, are at less risk of geopolitics putting the kybosh on their supply chains and production.

Companies that are manufacturing in Southeast Asia, in particular Vietnam, Malaysia and Indonesia, could also be better positioned to secure their means of production, than those who have thus far relied on China.

Although gold prices are depressed – the recent large sales of gold at the Bank of England appear to suggest that the precious metal still retains some luster, especially from embattled central banks having to raise hard currency quickly to defend against a rising dollar.

Pharma companies that have bases for generics in India could remain resilient, especially as New Delhi has artfully managed to chart a path that upsets not Moscow, Beijing or Washington.

Inevitably, margins will be squeezed because the increase in costs can’t be entirely passed on to consumers, so companies with already thin margins should be monitored closely and unprofitable stakes in these firms, cut early to prepare for the new dawn of deglobalization.

The investment territory may appear unfamiliar, but the world has been here before – periods of globalization have helped usher in peace and prosperity but inequality foments authoritarianism, leading to deglobalization, leading to conflict and poverty.

History charts a predictable arc in that sense and portfolios should be primed to take that into account.



3. Bitcoin Drifts Rudderless as Bots Take Over Daily Trading Volume

  • Bitcoin has now fallen for seven straight weeks, its longest losing streak since August 2011, when few even knew what cryptocurrency was.

  • Whereas in the past, crypto traders could ignore economic-data releases like U.S. nonfarm payrolls and inflation data, each of these new datapoints could change the narrative for Bitcoin and affect price.

Like an airline pilot asleep at the controls, Bitcoin is running on autopilot at the moment as it drifts rudderless, floating between US$29,000 and US$31,000, with nary a catalyst to take the cryptocurrency either way.

Since the collapse of the algorithmic stablecoin TerraUSD that triggered a selloff in cryptocurrencies and wiped out US$1 trillion in market cap, Bitcoin has been adrift, tumbling into the weekend, to recover slightly on Monday in U.S. trading and now sinking again.

Bitcoin has now fallen for seven straight weeks, its longest losing streak since August 2011, when few even knew what cryptocurrency was.

And as Bitcoin has gained more institutional interest, its declines have closely mirrored recent falls in the S&P 500, underscoring how the two asset classes remain closely aligned.

But in recent days, despite a rebound in stocks, especially given that U.S. President Joe Biden has hinted that Washington may lift some of the tariffs the Trump administration imposed on China, Bitcoin has stayed stuck in a quagmire.

Nevertheless, if stocks should take a deep dive, those who had been waiting on the sidelines to go in on Bitcoin could find an excellent buying opportunity.

For many investors who see Bitcoin as a hedge against the debasement of fiat currency, interim volatility doesn’t faze them, as they are looking over the long-term.

But those who intend to add Bitcoin to their portfolio also don’t necessarily want to pay top dollar for the cryptocurrency and so a sharp correction could be exactly the sort of window they have been looking for.

For years, cryptocurrency traders were privileged in being able to ignore macroeconomic conditions or movements in broader financial markets, but recently strong correlations with tech stocks, in particular the tech-heavy Nasdaq 100 index, has meant that traders ignore the broader market at their peril.

Whereas in the past, crypto traders could ignore economic-data releases like U.S. nonfarm payrolls and inflation data, each of these new datapoints could change the narrative for Bitcoin and affect price.

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