Daily Analysis 28 April 2022 (10-Minute Read)

Hello there,

A terrific Thursday to you as stocks take a tentative step towards stability given the encouraging response to user growth at Facebook, which saw a rise in parent Meta's stock price.

In brief (TL:DR)

  • U.S. stocks rode better on Wednesday with the Dow Jones Industrial Average (+0.19%) and S&P 500 (+0.21%) marginally higher while the Nasdaq Composite (-0.01%) was more or less flat, helped in large part by Facebook parent Meta.

  • Asian markets rose Thursday amid steadier investor sentiment following a surge in Facebook parent Meta Platforms Inc. and more pledges of economic support from China.

  • Benchmark U.S. 10-year Treasury yields were little changed at 2.83% as investors calibrated risks from the prospect of aggressive U.S. Federal Reserve monetary-policy tightening to tackle high inflation (yields rise when bond prices fall).

  • The dollar was at the highest level since 2020.

  • Oil was lower with June 2022 contracts for WTI Crude Oil (Nymex) (-1.17%) at US$100.83 as a cloud continues to hang over economic growth prospects.

  • Gold inched lower with June 2022 contracts for Gold (Comex) (-0.31%) at US$1,882.90.

  • Bitcoin (+2.70%) recovered to US$39,444 (at the time of writing) helped by Facebook parent Meta's performance in response to stronger than expected user growth despite a slowdown in revenues.


Market Overview

Volatility remains the watchword in markets, stoked by China’s struggle to suppress Covid, Russia’s war in Ukraine and worries that policy tightening may tip the world’s largest economy into a recession.

There are lingering hopes that robust U.S. corporate earnings could improve the mood, but so far the results have been patchy, with hits and misses.

In China, officials have stepped up pledges of economic support amid Covid lockdowns. The latest move was a vow to stabilize employment.

Asian markets rose Thursday with Seoul's Kospi Index (+0.61%), Tokyo's Nikkei 225 (+0.98%), Hong Kong's Hang Seng Index (+1.12%) and Sydney’s ASX 200(+0.94%) all up in the morning trading session.



1. Watch This Space for Insights into Inflation

  • Stories of ships unable to leave their berths in Chinese ports and waiting to enter ports because of strict Covid-lockdowns and a lack of workers to service them have all contributed to supply chain snarls that were barely recovering post-pandemic.

  • More importantly for investors, signs that there could be a return to more normal logistics cycles will finally help to confirm whether inflation is driven primarily by supply chain snarls.

Much has been made about supply chain bottlenecks exacerbating inflation across the globe.

And with the U.S. squaring off against the fastest pace of price increases in over four decades, there is increasing pressure on the U.S. Federal Reserve to reign in inflation with a series of aggressive rate hikes.

Stories of ships unable to leave their berths in Chinese ports and waiting to enter ports because of strict Covid-lockdowns and a lack of workers to service them have all contributed to supply chain snarls that were barely recovering post-pandemic.

But things look to be getting better.

According to Yang Ming Marine Transport, a Taiwanese shipping giant, the number of ships waiting outside of ports in Los Angeles and Long Beach have fallen to less than 40, versus over 100 earlier this year.

And the waiting time for ships at Shanghai ports has fallen to just 2 or 3 days, compared with the 10 to 14 days at American ports.

China has created lockdown bubbles to ensure that its ports continue to operate, where port workers are sequestered and must work and live on premise, to prevent any outbreaks, and has helped ease some supply chain woes.

Shipping operations are improving in Shanghai and factories in China’s industrial heartlands are gradually restarting, but containers are piling up because of a shortage of trucks.

But once backed-up cargo ships start sailing again, there’s the prospect of a flood of containers choking up U.S. and European ports.

When supply chains are rehabilitated, the flood of ships that have been built over the past several years are likely to help bring down freight rates, and with that, the impact they have on adding to costs.

More importantly for investors, signs that there could be a return to more normal logistics cycles will finally help to confirm whether inflation is driven primarily by supply chain snarls.



2. Can Europe wean itself off Russian gas?

  • Crisscrossing the European continent are massive natural gas pipelines that have been heating European homes and ovens, while the source of that gas comes from deep within Russian territory.

  • Oil and gas sales provide a whopping 40% of Russian government revenues and the European Union is Russia’s main gas market.

What happens when you run out of sugar while baking a cake at home, do you go to your neighbor and ask to borrow some, or do you get in the car and drive to the supermarket to buy a bag?

Chances are you go to your neighbor, which is what Europe has been understandably doing for decades.

Crisscrossing the European continent are massive natural gas pipelines that have been heating European homes and ovens, while the source of that gas comes from deep within Russian territory.

Like every other country that relies on resource wealth, Russia has always been susceptible to authoritarianism – because it’s far easier to control the nodes of extraction when money comes from the ground, than it is to govern an economy that relies on multiple streams of income.

Nevertheless, the Western democracies of Europe have often turned a blind eye to the risk in doing a deal with the devil, for the sake of convenience – never mind that your neighbor might be an axe murderer, as long as they don’t turn up the stereo too loud and have extra sugar for when you’re baking a cake.

But now that Moscow has turned up the volume on their belligerence, with the roar of artillery shells and missiles, their next-door neighbor, the European Union, is being forced to go to other sources for natural gas.

While Germany, Europe’s biggest economy said that it has all but overcome its need to import oil from Russia, Berlin has conceded that phasing out Russian gas will take longer.

With Moscow turning off the tap to Poland and Bulgaria as it has insisted that its oil and gas be paid for in rubles, which both countries have declined to do, the Kremlin risks cutting off its nose to spite its face.

Oil and gas sales provide a whopping 40% of Russian government revenues and the European Union is Russia’s main gas market.

Even if Moscow wants to divert supply to other customers, say China or India, pipelines take time to build and sending natural gas by ship, truck or rail is nowhere as efficient as pipeline.

The U.S. has been helping its European allies by sending liquified natural gas to cover the shortfalls needed for next winter’s heating season, and the E.U. has also dipped into sources from Norway and North Africa and aims to fill its gas storage facilities to 80%.

More importantly, the E.U. aims to slash purchases of Russian gas by two-thirds by the end of this year, which is good for diversifying the continent’s energy supplies, but also puts pressure on prices.

Moscow may have overplayed its hand by withholding natural gas from Bulgaria and Poland, especially given that Russia’s state oil company has already struggled to find buyers for its oil in recent days.

European refineries are refusing to refine Russian crude oil, even without sanctions, in solidarity with Ukraine.

Nevertheless, further gas stoppages by Russia would likely send fuel prices higher, putting more pressure on the E.U.’s rapidly slowing economy and feeding into higher energy bills worldwide as an entire continent’s demand gets hefted on global markets.

In the U.S., natural gas prices have doubled this year alone, in part because the liquified version is being shipped to Europe, adding to inflationary pressures at home.

Even though European natural gas prices are below their March peak, they are still elevated from a year ago and remain a key driver in the rising cost of living.

While many expect that Moscow’s cut of gas supplies to Poland and Bulgaria is more likely saber-rattling, in response to NATO allies continuing to send weapons to Ukraine, including Germany’s decision to send heavy weapons such as mobile anti-aircraft cannons, it could imperil Europe’s increasingly febrile post-pandemic economic recovery.

Leading German think tanks said in a report earlier in April that Germany would enter a sharp recession if Russian energy deliveries were completely cut off, needing to ration energy and suspend some industrial activity.



3. Bitcoin's Strong Correlation with Tech Stocks is Rattling Nerves

  • In the past few months, Bitcoin’s correlation with tech stocks and in particular the Nasdaq 100, has been stronger than ever, with 30-day rolling correlations with the index as high as 0.91 – meaning the two assets move practically in lockstep.

  • Nevertheless, there are some cryptocurrency investors who are hoping that Bitcoin may breakout of its correlation with traditional risk assets such as tech stocks.

For the longest time, cryptocurrency traders lived in their own metaverse, away from the bang and the clatter of Wall Street, and more importantly, insulated from macro factors that affect the price of other assets.

The way interest rates have very little effect on whether you bet on red or black at the roulette table in a casino, cryptocurrency traders were ensconced and blowing a bubble of their own making.

But that changed when more mainstream investors started pouring into the space, creating all manner of traditional wrappers for cryptocurrencies, from trust products to futures-based ETFs.

And that has meant that crypto traders have increasingly had to deal with something they would much rather avoid – macroeconomics, because the same factors that affect certain assets, are increasingly expected to affect cryptocurrencies as well.

In the past few months, Bitcoin’s correlation with tech stocks and in particular the Nasdaq 100, has been stronger than ever, with 30-day rolling correlations with the index as high as 0.91 – meaning the two assets move practically in lockstep.

That Bitcoin, which had been fiercely independent at inception, is now seemingly unable to chart its own course has been an awkward fact for managers touting the portfolio diversification value of introducing a little bit of Bitcoin into a typical investment portfolio.

As central banks globally start tightening monetary conditions to stave off inflation, both tech stocks, which are particularly rate-sensitive and Bitcoin, have seen huge swings in both directions.

Nevertheless, there are some cryptocurrency investors who are hoping that Bitcoin may breakout of its correlation with traditional risk assets such as tech stocks.

One possibility is that as inflation stabilizes at higher levels, not running away, but not running out, it could disrupt the negative correlation between haven assets like U.S. Treasuries and equities.

In such circumstances, it’s possible that cryptocurrencies could be viewed in a different light and its currently strong correlation with tech stocks, could decline.

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