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Daily Analysis 3 June 2022 (10-Minute Read)

Hello there,

A fantastic Friday to you as stocks continue to get hammered on a stronger-than-expected hiring report in the U.S. fueled rate hike bets.

In brief (TL:DR)

  • U.S. stocks opened lower on Friday with the Dow Jones Industrial Average (-0.95%), S&P 500 (-1.16%) and the Nasdaq Composite (-2.29%) all down in the morning trading session as better-than-expected jobs report fueled fears of stronger rate hikes by the U.S. Federal Reserve.

  • Asian stocks closed mostly higher on Friday as global investors started to dip their toes back into Chinese equities.

  • Benchmark U.S. 10-year Treasury yields rose to 2.942% (yields rise when bond prices fall) as a robust jobs report fueled concerns over tightening monetary policy.

  • The dollar gained.

  • Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+1.22%) at US$118.30 over concerns that OPEC+ supply increases would be insufficient to cope with demand.

  • Gold slipped with August 2022 contracts for Gold (Comex) (-0.48%) at US$1,862.40 on the back of a rising dollar.

  • Bitcoin (-1.85%) fell to US$39,442 in U.S. trading hours alongside stocks.

In today's issue...

  1. As Tesla Goes, so Goes the New-Old Economy

  2. Global Investors Lured Back to Chinese Stocks

  3. Bitcoin Bangs up Against Resistance at US$30,000

Market Overview

On the one hand the strong U.S. jobs report suggests a resilient economy, but on the other hand, investors are fretting that robust employment figures will embolden the U.S. Federal Reserve to get even more aggressive on rates this month at its policy meeting.

While markets have factored in a rate hike of around 0.50% at this month's U.S. Federal Reserve policy meeting, the potential for a wage-price inflationary spiral sparked off by a tight labor market remains a key concern.

Asian markets were mostly higher at Friday's close with Tokyo's Nikkei 225 (+1.27%), Seoul's Kospi Index (+0.25%) and Sydney’s ASX 200 (+0.46%) higher, while and Hong Kong's Hang Seng Index (-1.00%) was down.

1. As Tesla Goes, so Goes the New-Old Economy

  • Tesla (-7.46%) hiring freeze and job cuts are reflective of the new and more challenging economic operating environment.

  • Tesla CEO Elon Musk warns that he has a "super bad feeling" about the economy, raising the specter that the central bank will tighten policy just as the U.S. is heading into a recession.

If ExxonMobil’s (+1.15%) ejection from the venerable Dow Jones Industrial Average marked the end of an era – that of the dominance of oil and gas, then the unceremonious removal of electric vehicle maker Tesla from the S&P 500 could also be seen as a watershed moment.

With the U.S. Federal Reserve tightening monetary conditions at the fastest pace in over two decades, Tesla is having to operate in a far more challenging environment and cutting jobs by as much as 10% for the first time ever.

For a company that has only known growth, defying the odds and regularly defeating analyst expectations for vehicle deliveries, Tesla is the first victim of rapidly shifting macroeconomic headwinds, but unlikely to be the last.

In an internal email, Tesla CEO Elon Musk revealed that he had a “super bad feeling” about the economy and the company was seeking to cut its over 99,000 staff by around 10%.

Tesla has done exceedingly well despite the expectations and odds, delivering 936,222 cars last year despite a global chip shortage and supply chain snarls.

But economic growth in the U.S. appears to be slowing, with the twin headwinds of rising interest rates and inflation.

And while price gains may be moderating, it’s likely that recession will become reality before the U.S. Federal Reserve regresses on its policy of tightening.

Although shares in Tesla are down 27% this year, they gained 50% in 2021 and a massive 743% in 2020.

Nevertheless, the halcyon days for Tesla and possibly the U.S. economy may be over for now, as are the heady valuations of electric vehicle makers and other high-growth low-profit companies.

2. Global Investors Lured Back to Chinese Stocks

  • Global investors are lured back into Chinese stocks, drawn in by the attractive valuations and bets that the worst is over.

  • Beijing has demonstrated that it's lifted a broad crackdown on a variety of sectors that have been major drivers of the Chinese economy, whether that's enough to repair damaged sentiment is less clear.

Fool me once, shame on you, fool me twice, well, why not, go ahead and fool me twice.

At least that’s what global investors appear to be communicating by plunging back into the Chinese stock market yet again.

In 2015, global investors were stung when Beijing’s intervention in the Chinese stock market saw sharp falls.

But a widespread selloff earlier this year, triggered by China’s draconian zero-Covid lockdowns of entire cities, that saw some US$6 billion of outflows from Chinese assets, has lured some intrepid investors hunting for bargains in a market that JPMorgan Chase (-1.08%) at one point declared “uninvestable.”

Chinese stocks have lagged global counterparts, but some are betting that the worst is over.

Offshore investors using Hong Kong’s Stock Connect trading scheme soaked up US$4.2 billion of Chinese equities over the past week and the benchmark CSI 300 has gained almost 9% since its low in April.

But are investors simply catching falling knives?

To be sure, Beijing’s regulatory crackdown on everything from afterschool education to gaming and real estate has cooled off.

And speculation that China will be next in line to suffer the stings of Washington’s sanctions appear to be alarmist, even as Beijing has cozied up to its neighbor Moscow, in the wake of the latter’s unprovoked invasion of Ukraine.

Regardless of geopolitics, the bigger concern is whether China’s moribund real estate sector can be revived under the pressure of recurring lockdowns.

Making us as much as 70% of the Chinese economy (through ancillary products and services) and 29% of GDP, the real estate sector is crucial to China’s economic fortunes.

So far, global investors have deigned it sufficiently safe to start betting on China again, whether those bets will pay off is less certain.

3. Bitcoin Bangs up Against Resistance at US$30,000

  • Bitcoin struggles to get past US$30,000 and stays stuck within a relatively tight range that it's been held to for months.

  • Few catalysts to fuel an interim rally for Bitcoin and technical analysts suggest that the benchmark cryptocurrency will need a sustained push towards US$40,000 for any durable rebound.

When cryptocurrencies were being dragged down by equities, investors called out for “decoupling,” and when stocks rebounded at the end of last week, those same investors hoped that the two would correlate once again.

And investors are getting whatever they wish for it seems, just not in the way that they had hoped as once again, Bitcoin and other cryptocurrencies get dragged down by the wave of macro uncertainty that is embroiling all manner of risk assets.

After rebounding on Thursday to over US$30,000, Bitcoin slumped below the key level of resistance yet again, to hover around a level where it’s been trading at for most of the past month.

Since the collapse of the TerraUSD algorithmic stablecoin, Bitcoin has only briefly deviated from the US$30,000 level, coasting to as low as US$28,000 at one stage and meeting stiff resistance at levels over US$32,000.

And now technical chart analysts are suggesting that Bitcoin could be forming a cyclical low in the second half of this year, based on previous market cycles, with some suggesting that Bitcoin is neutral, and any bullish turn will require the benchmark cryptocurrency to sustain a rally over US$40,000.

In the early part of this week and after the U.S. Memorial Day long weekend, Bitcoin staged a “catch-up” rally to hit a 3-week high of US$32,300 on Tuesday, giving some hope that it might yet gain upward momentum, only to disappoint as stocks sank into the week against a slew of worries from rate hikes to inflation and the ongoing war in Ukraine.

Analysts are noting yet again that cryptocurrencies and stocks have reverted back to their typically strong correlation, with Bitcoin particularly joined at the hip with tech stocks, both of which can be viewed as more speculative corners of the investing universe.

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