Daily Analysis 26 May 2022 (10-Minute Read)

Hello there,

A terrific Thursday to you as Asian stocks fall with China's premier warning that the economy is not doing well, while U.S. stocks edged higher yesterday.

In brief (TL:DR)

  • U.S. stocks rose on Wednesday with the Dow Jones Industrial Average (+0.60%), S&P 500 (+0.95%) and the Nasdaq Composite (+1.51%) all up on inspection of the last U.S. Federal Reserve meeting minutes which suggest that policymakers are cautious about being too aggressive in rate hikes for fear of sparking a recession.

  • Asian stocks slipped as traders weighed downbeat remarks on China’s economy by Chinese Premier Li Keqiang with U.S. Federal Reserve minutes that struck a less hawkish note than markets had expected.

  • Benchmark U.S. 10-year Treasury yields rose about one basis point to 2.76% (yields fall when bond prices rise).

  • The dollar slipped.

  • Oil was higher with July 2022 contracts for WTI Crude Oil (Nymex) (+0.73%) at US$111.14.

  • Gold edged lower with August 2022 contracts for Gold (Comex) (+0.02%) at US$1,852.10.

  • Bitcoin (+0.20%) fell to US$29,690 (at the time of writing), with both sentiment and trading volumes remaining weak.


In today's issue...

  1. Can Beijing Fix the Property Market it Broke?

  2. You Raise Rates if You Want to, the Fed’s Not for Raising

  3. The Golden Age of Cryptocurrencies May be Upon Us


Market Overview

Investors took some comfort from the minutes of the last U.S. Federal Reserve meeting that didn’t show an even more aggressive path being mapped to tackle elevated prices.

Nevertheless, volatility has spiked as the risk of a U.S. recession, the impact from China’s lockdowns and the Ukraine war continue to simmer.

Chinese stocks fell as investors remain watchful of measures to combat an economic malaise from strict Covid curbs.

China’s economy is in some respects faring worse than in 2020 when the pandemic first emerged, China's Premier Li Keqiang said, urging efforts to reduce a soaring unemployment rate.

Asian markets slipped Thursday with Tokyo's Nikkei 225 (+0.27%), Seoul's Kospi Index (+0.18%), Hong Kong's Hang Seng Index (+0.29%) and Sydney’s ASX 200 (+0.69%) all down in the morning trading session.



1. Can Beijing Fix the Property Market it Broke?

  • Now with the Chinese economy thoroughly ravaged by zero-Covid policies, Beijing is trying to salvage matters by restarting the very sector that it brought down, real estate.

  • Beijing is urging banks to lend more, easing mortgage costs and partially relaxing rules on owning multiple properties, even as over a dozen developers default on their bonds and house prices continue to plummet.

Given how central the real estate sector is to the Chinese economy, with some estimates putting the value of the industry at 70% of the economy, inclusive of its spillover effects and with property making up around a third of GDP, breaking it was costly, but Beijing did it anyway.

In a misguided attempt to deleverage its economy and with real estate prices soaring, Chinse Communist Party apparatchiks cracked down on the property sector with an iron fist, not realizing that that fist would punch right through the floorboards.

But now with the Chinese economy thoroughly ravaged by zero-Covid policies, Beijing is trying to salvage matters by restarting the very sector that it brought down, real estate.

Beijing is urging banks to lend more, easing mortgage costs and partially relaxing rules on owning multiple properties, even as over a dozen developers default on their bonds and house prices continue to plummet.

The social compact that the Chinese Communist Party has with the people is also unraveling – property prices have been falling since last September, undermining a previously “guaranteed” way for ordinary Chinese to grow their wealth and climb the social ladder.

But now that social compact, where Chinese look the other way on limitations to their freedom in exchange for economic goodies, looks set to be undone.

Consumer sentiment was poor even before the latest string of zero-Covid lockdowns, with consumption well below national targets – people living under lockdown aren’t likely to go out and buy more properties that others can get locked down in.

If Beijing can’t turnaround the real estate market, there are serious risks that it won’t be able to meet its growth target of 5.5% this year either, especially as lockdowns continue to be rolled out.



2. You Raised Rates if You Want to, the Fed's Not for Raising

  • While policymakers were agreed on “expeditiously” ramping up rates to a more neutral setting, neither stimulating nor stunting the economy, they were divided on the aggressiveness of tightening.

  • The goods news for investors of course is that if interest rates aren’t raised as aggressively, there’s a chance that stocks which have been hammered so far, may see a relief rally – but the durability of any such rally is suspect.

Concerns that the Fed will tighten too much have been assuaged with minutes from the last rate-setting meeting that appear to reveal a central bank trying to navigate between the Scylla of inflation and the Charybdis of causing a recession.

Meeting minutes reveal that policymakers discussed the possibility of moving the Fed to a “restrictive” policy stance through more aggressive interest rate increases, but worried that this could undermine the recent strong recovery in the jobs market.

While policymakers were agreed on “expeditiously” ramping up rates to a more neutral setting, neither stimulating nor stunting the economy, they were divided on the aggressiveness of tightening.

In fact, central bankers even considered that less aggressive tightening (loosening?) or even a pause in rate hikes may be on the table later in the year if the U.S. economy started to slow down dramatically, although that was not the Fed’s main assumption.

U.S. new home sales plunged to their lowest since the start of the pandemic with purchases of new single-family homes falling by 16.6%, the weakest since April 2020 according to government data and adding to growth worries.

The housing sector makes up around 17% of U.S. GDP, split between construction and remodeling which makes up around 5% and housing services, which includes rental payments, at 12%.

Earlier this week on the sidelines of a speech to the Atlanta Rotary Club, Atlanta Federal Reserve President Raphael Bostic revealed that a Fed rate-hike pause might “make sense” in September, suggesting that the economic outlook is not as sanguine as hoped for.

Major U.S. retailers are cutting back earnings outlooks and orders for capital goods, an important proxy for future U.S. manufacturing output slowed, missing economist forecasts.

The goods news for investors of course is that if interest rates aren’t raised as aggressively, there’s a chance that stocks which have been hammered so far, may see a relief rally – but the durability of any such rally is suspect.



3. The Golden Age of Cryptocurrencies May be Upon Us

  • The recent market malaise has not dampened appetite for investments in the cryptocurrency space and marquee venture capital firm Andreesen Horowitz has just launched a US$4.5 billion fund to bet big on the future of blockchain technology.

  • Despite the recent market crash, investors are still convinced in the long-term value of blockchain and cryptocurrencies but have grown more discerning of where that next leg of growth will come from.

Cryptocurrency prices may be continuing to slide but on the venture capital side of things, there appears to be no shortage of desire to bet on the next big thing in the Web3 space.

The recent market malaise has not dampened appetite for investments in the cryptocurrency space and marquee venture capital firm Andreesen Horowitz has just launched a US$4.5 billion fund to bet big on the future of blockchain technology.

According to Andreesen Horowitz, around US$1.5 billion will be set aside to seed investments, while the remaining US$3 billion has been earmarked for venture investments and is the largest cryptocurrency-focused fund to date.

Speaking with the Financial Times, Chris Dixon, managing partner and founder of Andreesen Horowitz’s cryptocurrency arm said the venture capital firm believed the space was entering a new “golden era” in which “new talent, viable infrastructure, and community knowledge” would spur rapid innovation, adding,

“We believe blockchains will power the next major computing cycle. That’s why we’ve decided to go big.”

Over in Singapore, that theme was echoed in the recent concluded successful US$100 million fund raise by crypto-focused venture capital firm NGC Ventures, which will be eyeing early stage Web3 projects, specifically those in DeFi, GameFi and NFTs.

Perhaps echoing the sage wisdom of legendary investor Warren Buffett, to “be greedy when others are fearful,” venture capital firms continue to find success in raising to double down on bets in the sector, but are also more selective in the specific sectors.

Despite the recent market crash, brought on by a combination of higher interest rates and the failure of algorithmic stablecoin TerraUSD, investors are still convinced in the long-term value of blockchain and cryptocurrencies but have grown more discerning of where that next leg of growth will come from.

Cryptocurrencies dovetail nicely with Metaverse applications and blockchain games, in particular play-to-earn, which surged in popularity during the pandemic and venture capital firms have demonstrated an eagerness to back such projects, hoping to find the next Axie Infinity.

Axie Infinity arguably birthed the play-to-earn revolution in the blockchain space by providing an income to hundreds of thousands of players, particularly in emerging markets, who found that their income sources had dried up because of the pandemic.

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