Daily Analysis 25 October 2022 (10-Minute Read)

A great Tuesday to you as global stocks held a small advance.


In brief (TL:DR)


  • U.S. stocks closed higher on Monday with the Dow Jones Industrial Average (+1.34), the S&P 500 (+1.19%) and the Nasdaq Composite (+0.86%) all up.

  • Asian stocks held a small advance as Chinese stocks staged a modest rebound following Monday’s historic selloff.

  • Benchmark U.S. 10-year Treasury yields declined six basis points to 4.18% (yields fall when bond prices rise). 

  • The dollar was steady.

  • Oil steadied with December 2022 contracts for WTI Crude Oil (Nymex) (-1.66%) at US$83.18 as traders assessed near-term supply tightness in the crude market and broad appetite for risk assets including commodities. 

  • Gold was lower with December 2022 contracts for Gold (Comex) (-0.67%) at US$1,643.00.

  • Bitcoin (-0.48) fell to US$19,290, continuing to track sideways and holding above $19,000.


In today's issue...


  1. China Stocks get Hammered as Investors Digest Xi’s Grip on Power

  2. Japanese Yields Rise Ending an Era of Negative Rates 

  3. Cryptocurrencies Were Once Notorious for Volatility, Not Anymore


Market Overview


A fifth of S&P 500 companies have now posted third-quarter earnings, with more than half outperforming estimates, though investors are concerned the effects of a slowing economy will be felt further down the line. 

 

Fed officials have entered a blackout period ahead of the central bank’s meeting next week, where it’s expected to raise rates 75 basis points. 

 

Investors are starting to speculate that the central bank may be approaching the end of its aggressive tightening campaign.

 

Analysts are also expecting a jumbo hike of 75 basis points from the ECB on Thursday, even as many economists now reckon a recession has begun in the euro region.

 

Asian markets were mixed on Tuesday with Tokyo's Nikkei 225 (+1.02%) and Sydney’s ASX 200 (+0.28%) up, while Seoul's Kospi Index (-0.05%) and Hong Kong's Hang Seng Index (-0.10%) down.



1. China Stocks get Hammered as Investors Digest Xi’s Grip on Power


  • Chinese equities continue to get hammered on Tuesday as investors digested the effect of Chinese President Xi Jinping’s leadership changes that would give him unbridled power. 

  • Traders remained unsettled by the prospect of policies under President Xi Jinping’s third term that would undermine the capitalist reforms undertaken since Deng Xiaoping. 

 

Even as U.S. and European stocks staged an astounding rebound to start the week, Chinese equities continue to get hammered on Tuesday as investors digested the effect of Chinese President Xi Jinping’s leadership changes that would give him unbridled power. 

 

Xi has shown scant interest in maintaining the status quo or upholding the principles of engagement that facilitated China’s ascent to become the world’s second largest economy. 

 

In a speech peppered with references to “security” and with limited assurances to the economy or putting growth as a priority, there is little evidence that Xi intends to loosen up on his zero-Covid policies or reflate the moribund real estate and technology sectors.

 

Now surrounded by a cadre of “yes men,” Xi has almost free rein to implement his socialist vision for China and implement his goal of “common prosperity,” and investors have grown more skittish than ever when it comes to investing in the Middle Kingdom. 

 

The Hang Seng China Enterprises Index extended Monday’s 7.3% plunge that pushed the gauge to the lowest since 2008 and China’s benchmark CSI 300 Index also slipped. 

 

Traders remained unsettled by the prospect of policies under President Xi Jinping’s third term that would undermine the capitalist reforms undertaken since Deng Xiaoping. 

 

China’s yuan continued to tumble to its lowest level since 2007 after the People’s Bank of China loosened its grip on its tightly-controlled currency fixing by setting the rate at a 14-year low. 

 

After record selloff Monday, foreign investors offloaded a net 17.9 billion yuan (US$2.5 billion) of shares in mainland Chinese firms via trading links with Hong Kong. 

 

If the selloff rattled nerves in Beijing, that was not apparent from state media and should provide plenty of food for thought for China bulls, especially as typical sectors that were as good as sure-bets on the Chinese economy, including tech and real estate, lurch rudderless against an increasingly hostile regulatory climate. 

 

Bargain-hunting foreign investors may also be in for a rude shock and could be catching falling knives as China’s economic path looks increasingly uncertain and the market reforms of the past several decades look at risk of unraveling, with a return to prominence of state-owned firms as the center of the Chinese economy. 



2. Japanese Yields Rise Ending an Era of Negative Rates 


  • The era of negative-yielding bonds looks tantalizingly close to an end with Japan’s two-year yield on the cusp of breaking above zero for the first time since 2015.

  • In Japan, inflation has hit 3% for the first time in over three decades excluding the impact of tax hikes, an acceleration that adds to the doubts over the need for continued central bank stimulus.

 

As the last holdout among developed central banks to maintain its ultralow rate policy to support the pandemic-hit economy, the Bank of Japan shows no signs of losing its nerve, sticking to a dovish stance despite the yen's sharp decline in a global policy-tightening wave triggered by surging inflation.

 

Nevertheless, the era of negative-yielding bonds looks tantalizingly close to an end with Japan’s two-year yield on the cusp of breaking above zero for the first time since 2015.

 

With the yen slumping to a 32-year low and short-dated yield climbing to -0.005% on Monday, there are growing bets that the Bank of Japan may be forced to follow global peers and tighten policy as price pressures increase. 

 

The Japanese central bank has thus far stuck to rock-bottom rates to boost the economy and its short-term policy rate remains at -0.1% with Governor Haruhiko Kuroda making clear that the Bank of Japan had no intention to change policy. 

 

Under the the return of sky-high inflation, the European Central Bank exited negative rates in July and Denmark - the first to go sub-zero back in 2012 - took its benchmark rate into positive territory in September. 

 

In Japan, inflation has hit 3% for the first time in over three decades excluding the impact of tax hikes, an acceleration that adds to the doubts over the need for continued central bank stimulus.

 

But inflation in Japan is still relatively low compared to its peers in the developed world, with the United Kingdom experiencing double-digit inflation and the U.S. seeing prices increase by 8.3% from last year. 

 

Nevertheless, the era of negative-yielding government debt may well and truly be over and dramatically change the risk-reward matrix for investors who had taken on more risk in an era of negative bond yields, searching for any form of return to work their money harder. 

 

Some of Japan’s largest swashbuckling funds like those out of Softbank, may find it increasingly difficult to raise funds against a backdrop of rising yields that put less pressure on savers to work their money harder.



3. Cryptocurrencies Were Once Notorious for Volatility, Not Anymore 


  • The average spread between the past month’s peak and trough across the 10 largest cryptocurrencies has only been around 23%, comparable with equities. 

  • Straddling the US$20,000 level, Bitcoin’s volatility has dipped below that of the S&P 500, something that’s only happened on four other occasions in the cryptocurrency’s history. 

 

Having long been synonymous with volatility, Bitcoin and other cryptocurrencies are now confounding market-watchers with narrow moves and languishing volatility, trading with tight ranges that are thinning margins for market makers and volatility traders. 

 

According to data compiled by Bespoke Investment Group, the average spread between the past month’s peak and trough across the 10 largest cryptocurrencies has only been around 23%, comparable with equities. 

 

Since late 2017, no other period has seen this level of serenity in the cryptocurrency markets. 

 

Activity in cryptocurrency markets has also slowed markedly from its usual near-daily wild swings with the T3i Bitcoin volatility index at 62, down from a 2022 high of 140 in May.

 

Straddling the US$20,000 level, Bitcoin’s volatility has dipped below that of the S&P 500, something that’s only happened on four other occasions in the cryptocurrency’s history. 

 

Bitcoin’s calming might not necessarily be great news as it is coinciding with lower volumes meaning that it will not take much to crash in the event of a downturn or other unforeseen economic shocks. 

 

Some investors are viewing the lack of volatility as a negative as they entered the space precisely because of the wild swings, which provide plenty of opportunity.

 

As cryptocurrencies become less “casino-like” in nature, it could nevertheless provide an opportunity for institutional investors or family offices who had been sitting on the sidelines to gain a more stable point of entry. 

 

The correlation between stocks and cryptocurrencies has lessened in recent days although they have traded in tandem for most of the year. 

 

The 60-day correlation coefficient of Bitcoin and the S&P 500 currently stands around 0.61, down from 0.70 earlier this month.

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