Daily Analysis 3 February 2022 (10-Minute Read)

Hello there, A terrific Thursday to you as U.S. equities continued to gain yesterday, and risk appetite was back on display with Bitcoin momentarily clearing US$39,000 before retracing. In brief (TL:DR)

  • U.S. stocks wound into Wednesday with continued gains and the Dow Jones Industrial Average (+0.63%), the S&P 500 (+0.94%) and the Nasdaq Composite (+0.50%) all continuing to gain but futures suggesting that things could be challenging because of Meta's poor performance.

  • Asian markets which were open plunged as after hours trading for Meta (+0.39%) saw shares of the company fall by as much as 24% due to a lack of growth in active users, the first time the social media giant has ever reported slowing user growth since it was founded.

  • Benchmark U.S. 10-year Treasury yields slipped to 1.766% (yields fall when bond prices rise), as investors sought out havens against a backdrop of tech giants like Meta stumbling.

  • The dollar snapped a three-day drop, as investors sough safety in the greenback.

  • Oil eased from a 7-year high with March 2022 contracts for WTI Crude Oil (Nymex) (-0.59%) at US$87.74.

  • Gold was flat with April 2022 contracts for Gold (Comex) (-0.17%) at US$1,807.20.

  • Bitcoin (-4.43%) had a volatile 24 hours, soaring to as high as US$39,000 at one stage before Meta's results tamped down risk appetite and the cryptocurrency fell to US$36,950.


In today's issue...

  1. Chinese Shares Enter Bear Market - Opportunity or Falling Knife?

  2. Giving Google Stock to the People

  3. All is Not Lost as Bitcoin Hits Highest Level in Two Weeks

Market Overview

It's official, Facebook really is for Grandpa and Grandma.

With the younger crowd leaning into applications like TikTok, Facebook, now known as Meta, saw user growth falter in the last quarter of 2021, stoking concern that Meta's core product and source for advertising revenue has finally plateaued after years of consistent gains.

Facebook blamed serious competition for user time and attention from short video sharing application TikTok, as well as changes in privacy policies from device manufacturers like Apple (+0.70%).

Making matters worse, Meta also gave disappointing sales forecasts for the current period, even as it ups spending, with massive investment into the Metaverse.

Meta's stumble rippled through the rest of the tech market, with Nasdaq futures trading down 2% after hours and Thursday likely to be challenging day for markets overall.

Asian markets that remained open during the Lunar New Year holiday and who were first to brace themselves from the Meta fallout, slipped on Thursday's morning trading session with Tokyo's Nikkei 225 (-1.11%) and Sydney’s ASX 200 (-0.33%) both lower, while Seoul's Kospi Index (+2.21%) was higher as it made up for the previous few days gains, and Hong Kong markets remained closed for the Lunar New Year break.




1. Chinese Shares Enter Bear Market - Opportunity or Falling Knife?

  • Bets that the Chinese markets have bottomed have failed to play out so far

  • Policy uncertainty ahead of a major leadership renewal of Chinese President Xi Jinping means that there may be more volatility before there is certainty

With Chinese equities entering their first bear market since the Trump administration’s trade war in 2018, the “smart money” has declared a bottom, saying that the country’s stocks and bonds can only go up from here. Some of Wall Street’s biggest banks are biting. Last November, Goldman Sachs snapped up Chinese real estate debt even as others shied away from the trade, concerned over a potential collapse in China’s property market. But these trades have unraveled of late, with credit-market contagion spilling over to some of China’s strongest property developers for the first time in a market that is increasingly sinking in unison. The Chinese yuan has been its most volatile since last August while mounting losses are testing the ability of Beijing to support markets with looser monetary policy. Given that much of China’s recent malaise has been a product of its own creation, Beijing’s unease over an equity market slump is starting to show, with state media appealing for calm to some of China’s largest mutual funds publicly committing to buy their own equity-focused products. The People’s Bank of China has stepped up its liquidity injections and vowed to cut interest rates to shore up moribund markets, but a backdrop of real estate sector uncertainty, that has only ever seen prices rise, is continuing to dampen consumer sentiment. Punishing zero-tolerance Covid-19 policies are not helping either, as even a smattering of cases can lead to entire urban zones being locked down. Significantly, markets, especially foreign investors are fickle, and any sign that a market, no matter how large or promising, is turning into a bit of a basket case, is enough to make even the most steely-eyed investor flinch and head for the exits. History is replete with examples of emerging markets full of potential that resulted in investors rushing to get out on the next flight once local governments mismanaged expectations or regulations. While Beijing’s moves to crackdown on foreign listings of Chinese companies, its tech sector, afterschool education and the real estate market may all make sense in the broader concept of “common prosperity” for foreign investors, they can appear arbitrary and unpredictable. And while some investors remain bullish on China, there are plenty of reasons that it’s far too early to call a bottom on some of the Middle Kingdom’s most promising companies. The slowdown in the Chinese property market is far from over and a rapid withdrawal of stimulus by other major trading partners could dent Chinese exports, a key driver of growth for the past two years. Investors also remain at risk of the vagaries of Beijing’s opaque and unpredictable policymaking, a concern reinforced by the dashed hopes the crackdown on China’s tech sector had come to an end. Hopes that Beijing’s purge of its tech giants was over were dashed when regulators vowed to curb the influence of such companies in a recent communique on corruption that singled out these firms. Calling a bottom for China is tricky. With more stimulus expected from the People’s Bank of China, which has pledged to open its monetary policy took box to stabilize markets, there’s still an outside chance for a strong 2022. And any sign that Beijing is loosening up funding restrictions for property developers would go a long way to lifting a sector that is responsible for as much as 25% of GDP and around 70% of the Chinese economy in aggregate. Plus, a weakening Chinese yuan wouldn’t be bad for exports, especially if it helps to tamp down the inflation from key importers of Chinese goods. But given the unpredictable nature of the Chinese Communist Party, its opacity in decision making that could see a sector fall from grace almost at the wave of a hand means that until Chinese President Xi Jinping is firmly enthroned for an unprecedented third term, sitting on the sidelines may be a safer bet. President Xi is set to ascend the throne for an unprecedented third term and has paved the way to remain leader for life. There is likely to be no shortage of volatility along the way as Communist Party apparatchiks clamor to win Xi’s favor, often acting on the belief that their measures are likely to please him, without knowing or fully understanding the consequences of their actions.




2. Giving Google Stock to the People

  • Google mulls 20-to-1 stock split to make its shares more accessible to retail investors

  • Stock splits have generally been favorable to other tech firms who have taken advantage of increased retail trading activity, but also puts Alphabet (parent company of Google) in a position for entry into the Dow Jones Industrial Average

After the successful stock splits of Apple (+0.70%) and Tesla (-2.75%) in 2020 rode the wave of retail investor interest into 2021, Alphabet (+7.52%), parent company of Google is looking to replicate that same success and maybe go one step further, through incorporation into the Dow Jones Industrial Average. Given that Alphabet shares are somewhere around US$3,000 at the time of writing, splitting it into bite-sized chunks would be perfect for retail investors who have long salivated for an opportunity to get a piece of America’s third largest company by market cap. Late on Tuesday Eastern Time, Alphabet said it would increase its outstanding shares by a 20-to-1 ratio, which would make each share around US$150. For most retail traders, this allows them to hold Alphabet shares outright, instead of the fractional stocks that they’ve had to settle for with brokerage firms. But the other added benefit of a bite-sized share could be entry into the prestigious Dow Jones Industrial Average, whose price-weighted measure has been a barrier for years to the likes of Alphabet and Amazon.com, which have long come to be more representative of the U.S. economy than many of the component stocks that currently make up the index. The Dow Jones Industrial Average was the first index on Wall Street and as such suffers from an archaic weighting system based on share price instead of market capitalization and in Alphabet’s pre-split incarnation would overly skew the performance of the index. Until fairly recently, share splits had all but disappeared from the U.S. equity scene, but a wave of retail interest in stocks, thanks to ease of access through zero-fee trading apps like Robinhood Markets, as well as pandemic lockdowns and stimulus checks, has made the desire to own shares of some of America’s biggest companies more insatiable than ever before. At the height of pandemic trading, retail flows made up as much as one out of four trades, with the number now settling to around one out of five, according to data from Refinitiv. The split for Alphabet shares against a backdrop of stellar quarterly earnings are almost a guarantee that the stock will continue to rise in the short term. Despite the threat of tighter U.S. Federal Reserve monetary policy, Alphabet has been a consistent earner and avoided much of the froth that marked the recent rally in supercharged tech shares that has since lost steam. With a price-to-earnings ratio of around 26, Alphabet is neither cheap nor expensive and is a decent value buy, given its potential to continue delivering solid gains from growth in its cloud computing business and its avoidance of controversy that has dogged other companies like Facebook.




3. All is Not Lost as Bitcoin Hits Highest Level in Two Weeks

  • Traders betting on Bitcoin having bottomed out sent the cryptocurrency clearing US$39,000 momentarily before retracing on the news of Meta's poor results

  • Bitcoin may still have some upside to run, but is likely to trade rangebound between US$32,000 to US$39,000 for the next few weeks short of any major catalysts to take it in either direction

Unless you’ve been in the cryptocurrency space for a long time, these past few months would be gut-wrenching. With Bitcoin now over 45% off its all-time-high, some investors are naturally concerned whether the benchmark cryptocurrency has bottomed out or if there is more pain left for bulls. Some traders are however taking a bet that the Bitcoin has bottomed out, with the cryptocurrency peeking above US$39,000 for the first time in two weeks before retracing. Not to be outdone, Ether also staged a reversal, rising over US$2,800 before dropping back again. While expectations of tighter monetary policy by the U.S. Federal Reserve was the purported catalyst for the most recent correction in cryptocurrencies, softer language from policymakers on the extent of that tightening may have tempted some traders back into the crypto waters. Over the past week, Bitcoin has also traded sideways, with unusually low levels of volatility. Given that the psychologically important US$30,000 level had never been tested in a meaningful manner, traders are now looking to see if levels of resistance such as US$40,000 can be retaken. In recent months, Bitcoin has also demonstrated the strongest correlation with U.S. stocks than at any point in the past, with correlations with the tech-heavy Nasdaq 100, rising to as high as 0.66 (1.0 being a perfect correlation) at one point. Short of any major catalysts however, Bitcoin is likely to continue to trade rangebound for the next several weeks – between US$32,000 and US$39,000. Bitcoin, which has traditionally exhibited little correlation with other asset classes, has in recent times demonstrated a greater level of sensitivity to macroeconomic factors. Against a backdrop of concern over tighter monetary policy, investors were risk-off, a move which saw a sharp decline across all risk assets, with the S&P 500 suffering its worst January since the 2008 Financial Crisis. There are plenty of other factors for investors to be concerned about as well, including geopolitical tensions between Russia and Ukraine, with the U.S. recently authorizing another 3,000 troops to be deployed to bolster Eastern European allies, and a slowing Chinese economy. The pandemic has also not fully abated, and recent job numbers out of the U.S. look likely to have suffered as a result of the Omicron variant in the last quarter of 2021. These mixed economic signals against a backdrop of robust corporate earnings are making for an environment susceptible to multiple competing narratives and depending on one’s perspective of the role that Bitcoin plays within a portfolio, could either bolster or undermine taking bullish positions in the cryptocurrency.

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