Daily Analysis 25 August 2022 (10-Minute Read)

Hello there,

A wonderful Thursday to you as stocks up amid countdown to Powell, China stimulus.

In brief (TL:DR)

  • U.S. stocks were higher on Wednesday with the Dow Jones Industrial Average (+0.18%), the S&P 500 (+0.29%) and the Nasdaq Composite (+0.41%) all up slightly.

  • Asian stocks edged up on Thursday amid China’s pledge of more steps to shore up its economy and as traders await a key speech by Federal Reserve Chair Jerome Powell about the policy outlook.

  • Benchmark U.S. 10-year Treasury yields were steady at 3.11% (yields rise when bond prices fall).

  • The dollar drifted lower.

  • Oil added to a rally with October 2022 contracts for WTI Crude Oil (Nymex) (+0.71%) at US$95.56.

  • Gold edged higher with December 2022 contracts for Gold (Comex) (+0.24%) at US$1,765.80.

  • Bitcoin (+1.37%) rose to US$21,691.


In today's issue...

  1. Americans Aren’t in the Mood to Shop

  2. Investors Brace Themselves for US$130 billion Loss on Chinese Bonds

  3. Voyager Digital Dishes out US$1.6 Million in Bonuses Despite Bankruptcy


Market Overview

Market anxiety ahead of Powell’s comments is centered on whether he will rebut expectations that slowing growth will temper monetary tightening in the next phase of the campaign against high inflation.

Fed officials in the run-up to Jackson Hole have been clear they see more monetary tightening ahead, a message that’s eroded a bounce in stocks and bonds from mid-June troughs.

The tension in markets is whether those assets will continue to head back toward the lows of the year.

Asian markets rose on Thursday with Tokyo's Nikkei 225 (+0.58%), Hong Kong's Hang Seng Index (+2.75%), Seoul's Kospi Index (+1.22%) and Sydney’s ASX 200 (+0.71%) all up.



1. Americans Aren't in the Mood for Shop

  • With many up-coming holidays such as Halloween, Thanksgiving and Christmas around the corner, some of the country’s largest chain stores have reported robust back-to-school sales in recent days.

  • Consumer prices moderated year-on-year to 8.5% in July, while retail sales held steady despite weak consumer sentiment.

Shopping is as American as hamburgers but soaring prices are prompting those earning less than US$100,000 a year to cut back, even as wealthier consumers appear to be taking inflation in their stride.

Among the most affected are clothing retailers, with shares of upmarket department store Nordstrom falling over 13% on Tuesday after it said it had seen “significantly” lower demand from its lowest-income customers since June.

However, with many up-coming holidays such as Halloween, Thanksgiving and Christmas around the corner, some of the country’s largest chain stores have reported robust back-to-school sales in recent days.

Whether or not that trend to shop will be durable and translate into profits though is less clear.

U.S. retailers are gearing up for a more price-sensitive customer ahead of the critical holiday shopping season and optimism has been tempered by the recognition that low-income consumers are struggling with higher food and gas prices and cutting back on discretionary items.

Walmart (+0.72%), the largest U.S. retailer, is responding by offering entire Thanksgiving meals that cost less than US$50 for a family of four while expecting inflation to continue to influence the choices that families make.

Meanwhile, Macy’s, a higher-end department store group, also said that a “competitive promotional climate” was intensifying as discretionary spending weakened.

Foot Locker (-0.71%), which last week predicted a 3.2% to 3.3% hit to its full-year margins as a result of having to sell its sneakers at a lower price point, added that the promotional environment had become more intense, especially in apparel.

In recent weeks, retailers have been encouraged by signs of slight relief for the U.S. consumer.

Consumer prices moderated year-on-year to 8.5% in July, while retail sales held steady despite weak consumer sentiment.

Most of the moderation in headline inflation in July can be pinned down to a drop in the price of gasoline, which went from a high of US$5 a gallon in June, to just over US$4 in July, even as the prices of other goods crept up.

Markets have been on edge this past week as a conclave of central bankers are due to meet at Jackson Hole, Wyoming and bets are increasing that the U.S. Federal Reserve will reiterate its position on cracking down on inflation with super-sized rate hikes.



2. Investors Brace Themselves for US$130 billion Loss on Chinese Bonds

  • According to Bloomberg data, two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for “distressed” status.

  • Almost all Chinese real estate groups have been frozen out of the international bond market, further constraining their ability to refinance and increasing the risk of default, which weighs on demand for existing bonds as well.

There was a time when investors couldn’t get enough of Chinese bonds.

A booming economy, a growing middle class and the world’s second largest economy that was coming into its own, China’s ascendency was almost a given and investors were lining up to cash in on the opportunity.

But a year after China’s Evergrande Group, the world’s most heavily indebted developer, began spiralling into default, contagion has spread to the broader market and many Chinese developer bonds are now priced at levels that imply a very high risk of default.

With mounting worries China's housing market will face a protracted crisis unless Beijing steps in with a large-scale bailout, markets have priced in almost US$130 billion in losses on Chinese property developer dollar-denominated debt.

Not helping matters is that when some Chinese developers headed towards default, there appeared to be a preference to pay onshore debt ahead of offshore, dollar-denominated debt.

According to Bloomberg data, two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for “distressed” status.

And even at these prices, it’s not that easy to find buyers.

While some Wall Street banks and hedge funds have been picking up Chinese developer debt, the trade isn’t for the faint-hearted.

Rising geopolitical tensions between Beijing and Washington, a worsening property crisis and zero-Covid lockdowns which have stymied consumer confidence and demand are all raising prickly questions as to how China emerges from a crisis of its own making.

Data from Dealogic suggests that issuance of dollar bonds by developers has fallen 80 per cent during the year to date to just US$7.2 billion, on track towards the lowest level of annual sales in a decade.

Almost all Chinese real estate groups have been frozen out of the international bond market, further constraining their ability to refinance and increasing the risk of default, which weighs on demand for existing bonds as well.

Official figures show China’s home sales fell nearly 30% in the first half of the year to about US$960 million, and the recent wave of homebuyers withholding payment on their mortgages for uncompleted properties means that investors snapping up Chinese real estate developer bonds at pennies on the dollar risk catching falling knives.

This week, Chinese policymakers cut the key mortgage lending rate, to demonstrate their seriousness when it comes to dealing with the crisis, a major move considering that previous measures had been incremental.

But Beijing’s refusal to launch a comprehensive bailout may only add to the ultimate cost of rescuing the real estate industry and could worsen the fallout for global markets and trade as Chinese growth grinds slower.

China’s real estate market contributes 29% to the country’s GDP and responsible for around 70% of the economy through its ancillary effect across a slew of industries.

Everything from furniture manufacture to construction materials, durable goods and plastics, all indirectly rely on demand to furnish and fit out new homes in China’s massive cities.



3. Voyager Digital Dishes out US$1.6 Million in Bonuses Despite Bankruptcy

  • Voyager Digital asked a federal judge to approve US$1.6 million of its funds for a "Key Employee Retention Plan", including bonuses to 34 employees that the company claimed were vital to its continued operation and restructuring.

  • U.S. Bankruptcy Judge Michael Wiles approved the bonuses and said that preventing key employees from quitting will help Voyager Digital maximize the value of its business and, in turn, maximize creditor recoveries.

In a throwback to the 2008 Financial Crisis, where embattled U.S. insurance giant AIG took government bailout money and proceeded to lavish it on employee bonuses, troubled crypto lender Voyager Digital, which is in bankruptcy proceedings, has received approval to pay out some US$1.6 million in employee bonuses.

Voyager Digital, which is currently undergoing bankruptcy proceedings in the U.S. Bankruptcy Court for the Southern District of New York, asked a federal judge to approve US$1.6 million of its funds for a "Key Employee Retention Plan", including bonuses to 34 employees that the company claimed were vital to its continued operation and restructuring.

The bonuses are equal to 22.5% of each employee’s annual salary.

U.S. Bankruptcy Judge Michael Wiles approved the bonuses and said that preventing key employees from quitting will help Voyager Digital maximize the value of its business and, in turn, maximize creditor recoveries.

The U.S. court’s ruling will leave a bitter taste in the mouths of Voyager Digital’s customers whose cryptocurrency remains stuck on the platform and haven’t recovered any of their holdings, even as prices sink.

In a double whammy to Voyager Digital’s customers, the current rout in cryptocurrency prices against the backdrop of an increasingly hostile macro environment with rising interest rates, inflation and slowing economic growth, has meant that even those who wanted to sell out, haven’t been able to do so because their crypto remains unreachable.

But those who stashed cash with Voyager Digital have fared much better, as the firm had about US$270 million in cash in its accounts when it filed for bankruptcy, of which around 80% or US$219 million has been returned.


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