Daily Analysis 26 October 2022 (10-Minute Read)

A terrific Wednesday to you as sentiment was subdued after earnings from megacap companies.


In brief (TL:DR) 


  • U.S. stocks closed higher on Tuesday with the Dow Jones Industrial Average (+1.07), the S&P 500 (+1.63%) and the Nasdaq Composite (+2.25%) all up.

  • Asian stocks advanced on Wednesday.

  • Benchmark U.S. 10-year Treasury yields declined three basis points to 4.07% (yields fall when bond prices rise). 

  • The dollar declined for a second day to its lowest level in three weeks.

  • Oil fluctuated with December 2022 contracts for WTI Crude Oil (Nymex) (+0.95%) at US$86.13 as an industry report showed a rise in US crude stockpiles and investors fretted about weaker demand amid slowing growth. 

  • Gold rose with December 2022 contracts for Gold (Comex) (+0.67%) at US$1,669.10 as lower Treasury yields supported the precious metal. 

  • Bitcoin (+6.36) climbed to US$20,550, heading toward $21,000.


In today's issue...


  1. Tech Weakness Could Portend Darker Times Ahead for the Global Economy

  2. Leverage is Leaving the Building 

  3. Asian Family Offices Never Gave Up on Cryptocurrencies 


Market Overview


Stocks have been buoyed in recent days by mostly solid earnings and speculation the Federal Reserve may curb the pace of rate increases as evidence mounts that its aggressive tightening is starting to weigh on the economy. 

 

About a quarter of S&P 500 companies have reported third-quarter results, with more than two-thirds beating analysts’ estimates despite the big-tech setback. But concern is mounting that slowing output will dent corporate profits in coming months.

 

Asian markets rose on Wednesday with Tokyo's Nikkei 225 (+0.67%), Sydney’s ASX 200 (+0.18%), Seoul's Kospi Index (+0.65%) and Hong Kong's Hang Seng Index (+1.00%) all up.



1. Tech Weakness Could Portend Darker Times Ahead for the Global Economy


  • U.S. tech stocks continued to buckle after some of the industry’s biggest names turned in disappointing third quarter results. 

  • If the tech sector is a bellwether for the broader economy, then slumping chip demand, slowing e-commerce and advertising growth all point towards a possible recession at worst, or a slowdown at best.  

 

While some wager that this year’s US$5.5 trillion selloff had finally bottomed out, U.S. tech stocks continued to buckle after some of the industry’s biggest names turned in disappointing third quarter results. 

 

Alphabet fell as much as 7.4% after third-quarter revenue came in well below expectations with sales far short of analyst estimates as spiraling inflation crimped growth in digital advertising and constrained marketing budgets.

 

Software giant Microsoft lost 8.1% after posting its weakest quarterly sales growth in five years, throttled by a surging dollar, slumping personal computer demand post-pandemic and faltering advertising revenue.

 

E-commerce juggernaut Amazon fell 4.9% while companies that derive sales from online advertising were dragged lower with Alphabet, as Meta Platforms and Pinterest dropped more than 4% each.

 

The selloff in extended trading was broad-based. 

 

Texas Instruments, a bellwether for the semiconductor industry, tumbled 6.1% after providing a forecast that was weaker than analyst estimates while chip firms, including Analog Devices, ON Semiconductor and Marvell Technology also slipped. 

 

Nevertheless, although pessimism is growing in the semiconductor industry, the world’s biggest chipmakers rose with Samsung Electronics up 2.6% and Taiwan Semiconductor Manufacturing adding 0.9%. 

 

Chip shares are seen to be rising in response to actions from memory makers to cut output that could keep inventories lean. 

 

But if the tech sector is a bellwether for the broader economy, then slumping chip demand, slowing e-commerce and advertising growth all point towards a possible recession at worst, or a slowdown at best.  



2. Leverage is Leaving the Building 


  • Net leverage, a measure of industry risk appetite that measures the difference between long and short positions, has fallen almost 20% to a year low of 66%. 

  • Long-short funds have been hammered of late because their long positions have been hit by declining markets while stocks haven’t capitulated, limiting the upside from short positions. 

 

According to data earlier this month from Goldman Sachs Group’s prime brokerage, net leverage, a measure of industry risk appetite that measures the difference between long and short positions, has fallen almost 20% to a year low of 66%. 

 

Showing a simlar decline, separate figures from Morgan Stanley’s prime brokerage fell to 41% among U.S. long-short equity funds, a level reached on only a small number of occasions over the past decade.  

 

Long-short funds have been hammered of late because their long positions have been hit by declining markets while stocks haven’t capitulated, limiting the upside from short positions. 

 

Goldman Sachs and Morgan Stanley have the world’s two largest prime brokerages, serving around 5,000 hedge funds each, according to the latest ranking by Convergence.

 

These figures show that hedge funds have cut portfolio leverage this year in a conservative turn that has sucked borrowed money from global markets, adding selling pressure to stocks and bonds. 

 

The drop in leverage is believed to be driven by defensive positioning among funds as interest rates have climbed and markets have fallen. 

 

Rising interest rates, persistent inflation and geopolitical instability had heightened the risks facing investors. 

 

Hedge funds want to make sure they are not getting too close to levels that would force them to sell and leverage can quickly accelerate forced sales through cascading margin calls. 

 

The decline in leverage also reflects belt-tightening among investment banks as interest rates rise and the outlook for the global economy dims.

 

Overall, stock bulls may have to accept that markets are going to remain moribund for a little while longer as leverage is typically associated with rallies.



3. Asian Family Offices Never Gave Up on Cryptocurrencies 


  • According to a survey of 30 family offices and wealthy investors in Hong Kong and Singapore, published by KPMG China and Aspen Digital, 92% of respondents were interested in digital assets, with 58% already invested and 34% planning to do so.

  • Family offices may also see digital assets as diversification and a separate asset class, and also an appealing hedge against wider market ructions.

 

Despite months of market turmoil with Bitcoin down about 70% from its peak and Ether down about 60% year to date, Asian family offices are still buying into cryptocurrencies as weak returns from their traditional portfolios make digital assets attractive. 

 

Many Asian family offices sat on the sidelines as cryptocurrencies soared last year and have been waiting for buying opportunities this year as a wave of monetary policy tightening has hammered risk assets. 

 

According to a survey of 30 family offices and wealthy investors in Hong Kong and Singapore, published by KPMG China and Aspen Digital, 92% of respondents were interested in digital assets, with 58% already invested and 34% planning to do so.

 

More than 60% of the respondents were family offices or individuals managing assets worth between US$10 million and US$500 million. 

 

This year’s decline in digital asset prices had to be set against the poor performance of many Asian equity and real estate markets, making cryptocurrencies somewhat appealing, especially as they are often measured against the dollar which has pummeled Asian currencies. 

 

Family offices may also see digital assets as diversification and a separate asset class, and also an appealing hedge against wider market ructions.

 

At the Raffles Family Office forum held in Singapore recently, the multi-family office unveiled REVO, a family office dedicated to digital assets and helping wealthy families access them with institutional protections. 

 

Hong Kong’s traditional asset classes have suffered this year with the Hang Seng down more than 30% hammered by geopolitical tensions and repeated Covid-19 lockdowns in mainland China, the city’s equities are underperforming U.S. and European stocks. 

 

Against this backdrop, many family offices have shifted into cryptocurrencies and private equity in an effort to find shelter from the storm. 

 

The focus on family offices comes as cryptocurrency companies in Hong Kong are actively lobbying regulators on licensing requirements that will come into effect in March, but given China’s overarching influence over the territory, it remains to be seen what will become of the push.

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