Daily Analysis 30 March 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as stocks wind their way higher on the prospect of peace (or at least a ceasefire) in Ukraine.

In brief (TL:DR)

  • U.S. stocks continued to rise on Tuesday with the Dow Jones Industrial Average (+0.97%), the S&P 500 (+1.23%) and the Nasdaq Composite (+1.84%) all up on the prospect of a ceasefire in Ukraine and a slide in oil prices.

  • Asian stocks rose Wednesday as investors weighed prospects for a de-escalation in the war in Ukraine that sent U.S. Treasury yields lower.

  • Benchmark U.S. 10-year Treasury yields fell three basis points to 2.36% (yields fall when bond prices rise in a broad rally that saw both equities and bonds rise.

  • The dollar slipped.

  • Oil modestly reversed some of its slide with May 2022 contracts for WTI Crude Oil (Nymex) (+0.91%) at US$105.19 as investors remained circumspect about the chances of the war being defused.

  • Gold rose with Jun 2022 contracts for Gold (Comex) (+0.54%) at US$1,928.40.

  • Bitcoin (-1.62%) fell to US$46,780 as traders nursing losses from buying near to the all-time-high took the opportunity to cut losses, while the overall momentum and flows seem to suggest that a stronger rally in the coming weeks and months may be in the offing.


In today's issue...

  1. Beijing Battles Growing Mistrust from Global Investors

  2. U.S. Wages Are Rising, But It’s Only Making Things Worse

  3. Bitcoin Taking a Breather, Time to Buy?


Market Overview

The rally in global equities remains fragile as the war in Ukraine drags on, and analysts are skeptical of Russia’s intentions despite pullbacks from the Kyiv region.

The U.S. Treasury yield curve’s inversion is now fanning debate over the risks of a growth downturn as central banks globally begin to withdraw stimulus.

Money markets in the U.S. are pricing in two percentage points of additional interest-rate hikes this year but long-dated Treasuries suggest that traders are betting on poorer economic conditions in the coming period.

Consumer sentiment appears resilient, as the latest U.S. confidence data suggest solid job growth has offset Americans’ concerns over accelerating inflation for now.

Asian markets were mostly higher Wednesday with Seoul's Kospi Index (+0.32%), Sydney’s ASX 200 (+0.69%) and Hong Kong's Hang Seng Index (+1.16%) up, while Tokyo's Nikkei 225 (-1.27%) was down in the morning trading session.



1. Beijing Battles Growing Mistrust from Global Investors

  • In the first three months of this year alone, exchange data suggests that some US$6 billion in flows from global investors have left Chinese stocks via Shanghai and Hong Kong.

  • Chinese President Xi Jinping’s attempts to regain trust of international investors appears to be failing, and Beijing is doing everything it can to reverse financial outflows.

Fool me once, shame on you, fool me twice, well, that’s a shame.

At least that’s what global investors appear to be saying when it comes to Chinese assets.

In the first three months of this year alone, exchange data suggests that some US$6 billion in flows from global investors have left Chinese stocks via Shanghai and Hong Kong, and while some Wall Street firms are buying the dip, the vast majority are not.

Chinese President Xi Jinping’s attempts to regain trust of international investors appears to be failing, and Beijing is doing everything it can to reverse financial outflows.

Last week, redemptions from China equity funds were their highest since early 2021, while outflows from Chinese bond funds exceeded US$1 billion for the first time ever, according to data from EPFR Global.

And that’s despite regulators and top Chinese economic tzars have pledged to ensure greater policy predictability and transparency.

But investors looking to buy the dip on Chinese assets will remember that last year, Xi’s regime showed blatant disregard for the global investing community when it unleased a series of crackdowns on some of China’s most profitable companies and sectors.

Coming down with both an iron and a ham fist, listed companies in the highly lucrative afterschool education market were suddenly told that they couldn’t turn a profit.

Food delivery services were told that they had to share a greater portion of their fees to both the drivers and the restaurants that supplied the food, squeezing margins.

China’s booming real estate sector was suddenly told to lower leverage and liquidity dried up overnight, with housing prices coming down and demand flagging.

And these are just some of the examples of measures, most ill-advised and meted out with little or no warning, that left global investors confused and stuck with punishing losses.

Making matters worse, Beijing has refused to condemn Russia’s unprovoked invasion of Ukraine, abstaining a crucial United Nations Security Council vote on the matter as well as at the United Nations General Assembly.

U.S. officials have suggested that not only has China refused to condemn Russia’s invasion of a sovereign country, but it is also open to providing its close ally with military and financial support.

All of which are increasing wariness towards Chinese assets, and increasing fears that if Beijing doesn’t pick a side, the Biden administration could eventually lower the same sanctions on China as it has on Russia.

From a public relations perspective as well, large institutional investors can’t be seen as cozying up to Chinese assets, no matter how cheap, for fear of the backlash.

But perhaps most disconcerting, for decades, many had assumed China would eventually become more like Hong Kong, inching closer towards the rule of law and ushering in an era of economic prosperity and investor protections.

Instead, the territory of Hong Kong now resembles China more than anything else and global investors are looking to the world’s second largest economy as exactly what Russia had been in the 1990s, another flaky emerging market economy where the risks now surpass the potential rewards.

Still licking their wounds from the trauma of investing in Russia, where a combination of Western sanctions and capital controls have made internationally-held Russian assets effectively worthless, global investors are now being forced to look at Chinese assets from a different lens.

Political risk is particularly difficult to model for and global investors are most concerned that Beijing could again act in arbitrary and unpredictable ways, which could cause immediate liquidity issues for Chinese assets.



2. U.S. Wages Are Rising, But It's Only Making Things Worse

  • Businesses across the U.S. are broadening pay hikes as inflation continues at its fastest pace in 40 years, but employees are still struggling to match their wages with rising prices.

  • Nevertheless, wage hikes and a strong labor market may embolden U.S. Federal Reserve policymakers to get more aggressive on rate hikes, with a 0.50% interest rate increase at the next policy meeting on the cards, to tackle inflation.

One of the biggest risks when it comes to rising inflation is a wage-price spiral that goes out of control.

Prices go up so workers demand higher wages, which leads to higher prices ad infinitum.

For now, there are no signs that such a spiral is U.S. wages and prices is happening, but the trajectory is not good.

Businesses across the U.S. are broadening pay hikes as inflation continues at its fastest pace in 40 years, but employees are still struggling to match their wages with rising prices.

From retailers to airlines, hotels to food services, companies are boosting starting pay to attract recruits and offering company-wide pay increases to base pay to retain workers.

According to U.S. compensation analysis firm PayScale, 92% of U.S. businesses plan to increase employee pay this year, up from around 85% in 2021.

On Friday, a monthly payrolls report will provide fresh insight on the strength of the U.S. labor market, as well as the bargaining power of workers.

In the U.S., a high savings rate has seen workers slow to return to the labor force, since the start of the pandemic and those who are willing to go back to work, have been demanding higher salaries and better benefits.

Despite being badly battered by the pandemic, American airlines, already struggling under heavy debt loads, have been forced to announce pay increases for their employees after staff shortages forced thousands of flight cancelations especially during the peak holiday travel seasons.

Some companies like Starbucks (+3.22%) and Chipotle (+0.97%), where demand is relatively inelastic, have passed on the higher cost of labor to customers as justification to increase prices.

Whereas other companies have simply absorbed the increase in wages to squeeze margins.

But while wage increases are being touted, data from PayScale suggests that only 44% of companies are planning to give their employees wage hikes of over 4%, well below current U.S. inflation rate of 7.9%.

Wages are also starting from a relatively low base – with many U.S. firms barely paying their employees a living wage.

Nevertheless, wage hikes and a strong labor market may embolden U.S. Federal Reserve policymakers to get more aggressive on rate hikes, with a 0.50% interest rate increase at the next policy meeting on the cards, to tackle inflation.



3. Bitcoin Taking a Breather, Time to Buy?

  • Now that the major technical resistance for Bitcoin at US$45,300 has been convincingly breached, the cryptocurrency has been taking a breather, as investors who bought near last November’s all-time-high look to recover some of their losses and swear off the asset class entirely.

  • Some traders believe that earlier selloffs in Bitcoin were overdone, and that those who saw little in the technology of the cryptocurrency or its value proposition, have all but been shaken out.

So you sat on the sidelines last November as Bitcoin pumped to an all-time-high, then dismissed it as an asset class as it fell by almost half earlier this year and now that the animal spirits in the benchmark cryptocurrency are stirring again, you’re wondering if it’s time to get in.

Almost every newbie investor to Bitcoin specifically or cryptocurrencies in general would have gone through the same thought process, trying to time their entry into the nascent asset class and being swept up by conflicting narratives.

Many who understand the value and technology of Bitcoin have never sold a single token in their lives, and live relatively simply (no Lambos here).

Whereas abject speculators who are chasing the next high, simply buy the dips and sell the rallies (plenty of Lambos here).

Now that the major technical resistance for Bitcoin at US$45,300 has been convincingly breached, the cryptocurrency has been taking a breather, as investors who bought near last November’s all-time-high look to recover some of their losses and swear off the asset class entirely.

Meanwhile, dip buyers have been bidding up Bitcoin, but not so much that it has set off a rally towards the next resistance, US$52,000.

To be fair, Bitcoin has risen by around a fifth since mid-March, wiping out all of this year’s losses and accumulating gains of around 2%.

That rally has since slowed, ironically at a time when equities, which Bitcoin shares a strong correlation with, are rallying on the prospect of a ceasefire in Ukraine.

Nevertheless, Bitcoin bulls remain, well, bullish, on the prospect of the benchmark cryptocurrency, with long-term Bitcoin maximalist MicroStrategy taking out more debt to buy more Bitcoin.

Some traders believe that earlier selloffs in Bitcoin were overdone, and that those who saw little in the technology of the cryptocurrency or its value proposition, have all but been shaken out.

Since Monday, over US$230 million worth of short positions (bets that Bitcoin’s price would fall) were liquidated, according to data from Coinglass, as Bitcoin moved briefly over US$48,000.

And what Bitcoin is being purchased, looks like it might be intended for more long term holding – with spot volume rising faster than futures volume, an important development as spot holders of Bitcoin are less likely to be short-term traders and could portend higher prices.

The amount of Bitcoin on centralized exchanges has fallen from 2.556 million to 2.499 million since March 10, according to data from Glassnode – typically having more Bitcoin on-exchange is an indication that traders have an intention to sell and having less suggests they are looking to hold.

Glassnode data also reveals that the amount of dollar-based stablecoins sitting on centralized exchanges has gone up sharply between January and February – the dry powder needed to set off another cryptocurrency rally.

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