Daily Analysis 30 May 2022 (10-Minute Read)

Hello there,

A magnificent Monday to you as Asian stocks rise as China curbs eased, while the worst of market machinations were avoided in the U.S. with the Memorial Day long weekend.

In brief (TL:DR)

  • U.S. stocks marked a second consecutive day of gains on Friday and ahead of the Memorial Day long weekend with the Dow Jones Industrial Average (+1.76%), S&P 500 (+2.47%) and the Nasdaq Composite (+3.33%) all higher.

  • Asian stocks advanced Monday after China eased some virus curbs and Wall Street had its best week since November 2020.

  • Benchmark U.S. 10-year Treasury yields declined one basis point to 2.74% Friday (yields fall when bond prices rise) as demand for bonds rose in line with the rebound in other assets.

  • The dollar was steady.

  • Oil inched higher with July 2022 contracts for WTI Crude Oil (Nymex) (+0.83%) at US$116.02 in line with a rise across all asset classes including commodities.

  • Gold rose with August 2022 contracts for Gold (Comex) (+0.33%) at US$1,863.40 against a weakening dollar and thanks to a rebound in commodities.

  • Bitcoin (+4.45%) rose to US$30,182, with U.S. markets closed and some signs of a weak recovery in demand for the benchmark cryptocurrency.


In today's issue...

  1. There’s Nothing to Indicate a Fed Pivot

  2. How much of last week’s stock rebound was rebalancing?

  3. Remittances Could be Taken Over by Stablecoins, Just Maybe Not Algorithmic


Market Overview

Traders are pondering whether the bottom of the selloff is near as investors have been buying the dip after one of the worst starts to the year for equities.

However, a wall of worries remains from hawkish central banks underscoring fears of a recession, escalating food inflation from the war in Ukraine, and China’s lockdowns stunting economic activity.

Traders will be looking to U.S. payroll numbers later this week to gauge the U.S. Federal Reserve’s tightening path as it strives to rein in inflation.

Meanwhile, the U.S. Federal Reserve is set to start shrinking its US$8.9 trillion balance sheet starting Wednesday, which could ripple through markets.

Asian markets opened higher Monday with Tokyo's Nikkei 225 (+1.97%), Seoul's Kospi Index (+1.09%), Hong Kong's Hang Seng Index (+2.06%) and Sydney’s ASX 200 (+0.92%) all up into the week.



1. There's Nothing to Indicate a Fed Pivot

  • In a market starved of good news, investors took the Fed’s meeting minutes as the signal to head back into the markets, especially since valuations had taken a beating.

  • But investors may be in for a surprise, especially if an already tight labor market delivers some strong numbers.

Judging by the strength of the rebound in stocks last week, investors would be forgiven for believing that the U.S. Federal Reserve had taken a dovish pivot.

Pouring through the minutes of the last U.S. Federal Reserve meeting, there were signs that policymakers may not be as aggressive in their rate hikes as thought, concerned that yanking the cord too fast could risk spurring unemployment.

In a market starved of good news, investors took the Fed’s meeting minutes as the signal to head back into the markets, especially since valuations had taken a beating.

Signs of weakness in U.S. economic data published this week have also lowered expectations over how high the Fed will rate rates this year.

But investors may be in for a surprise, especially if an already tight labor market delivers some strong numbers.

Although the unemployment rate is expected to have fallen to its lowest in the U.S. since the start of the pandemic, the U.S. Department of Labor is expected to report on Friday that just 318,000 jobs were added in May, a slowdown from 428,000 from the previous month, according to a FactSet poll of economists.

Economist forecasts for employment over the past three of four months have been well below the reported number, in other words, a tight U.S. labor market has often surprised on the upside and could see a sharp correction in stocks if that were the case.

Evidence that there continues to be upwards pressure on wages could reignite inflation fears that had only just begun to cool, with market measures of inflation falling in recent weeks and growth in consumer prices in April slowing.

Which is why investors buying strongly last week may be in for a bit of a reality check, especially if a strong jobs report on Friday emboldens the Fed to take stronger action to crack down on inflation, in the belief that the U.S. economy can weather such measures.



2. How much of last week's stock rebound was rebalancing?

  • Upbeat earnings released last week from some of America’s biggest and most important retailers helped to ease concerns that U.S. consumers, the lynchpin of the global economy, were dialing back consumption.

  • While that data in and of itself probably provided the narrative that fueled stocks higher by the end of the week, it could also well have been far more technical factors that drove recent gains in global stocks, such as rebalancing.

As much as investors would like to believe last week’s rebound in equities was a secular rally, there is some evidence to suggest that not all is what it seems.

Despite the recent letdown of typical 60/40 stock and bond allocations, they still remain very much par for the course of many an investment portfolio.

Upbeat earnings released last week from some of America’s biggest and most important retailers, including Macy’s (+2.27%), Dollar Tree (+1.35%) and Dollar General (+2.81%), helped to ease concerns that U.S. consumers, the lynchpin of the global economy, were dialing back consumption.

A Friday report showed that U.S. consumer spending rose more than expected in April, cementing the view that American consumption remains alive and well.

While that data in and of itself probably provided the narrative that fueled stocks higher by the end of the week, it could also well have been far more technical factors that drove recent gains in global stocks, such as rebalancing.

Because equities were hammered earlier this month, funds that target particular allocations to their portfolios, like a standard 60/40, would have been thrown off balance and would have been holding on to far more bonds (as evidenced by the reason drop off in yields).

As the month draws to a close, managers would have had to buy-up equities to rebalance portfolios, just as the U.S. was heading into the Memorial Day long weekend – managers wouldn’t want to be buying on the last day of the month, especially as prices were rising.

Those managers who did leave the buying to the last minute will continue to flood into the market by Tuesday, so stocks could see another bump up, for no other reason than re-balancing and whether that rally proves to be durable is anyone’s guess.



3. Remittances Could be Taken Over by Stablecoins, Just Maybe Not Algorithmic

  • MoneyGram International, the largest remittance provider in the U.S. is attempting to broaden the adoption of cryptocurrencies.

  • MoneyGram International has opted to go with USDC, where reserves are somewhat more transparent and attested and its move to facilitate stablecoin remittances could also help spread cryptocurrency adoption in emerging markets.

Even in the aftermath of the TerraUSD algorithmic stablecoin collapse, there are some in the traditional remittance sector whose entire business models stand to be upended by cryptocurrencies, who are nonetheless embracing the technology.

MoneyGram International, the largest remittance provider in the U.S. is attempting to broaden the adoption of cryptocurrencies and is preparing to launch a service in partnership with the Stellar blockchain that would allow users to send stablecoins easily, converting them to fiat currency.

Speaking at an interview with Bloomberg News, MoneyGram International CEO Alex Holmes noted,

“The world of crypto and the world of fiat are not really compatible today. We’re trying to be a bridge from the crypto world to the fiat world.”

Once MoneyGram International’s service launches, users with digital wallets on the Stellar blockchain will be able to convert their holdings into Circle Internet Financial’s USDC stablecoin, which is backed by the dollar, and then cash out the stablecoins through MoneyGram’s network.

Stablecoins have come under increased regulatory scrutiny of late, in the wake of the spectacular de-pegging of algorithmic stablecoin TerraUSD or UST, which had been advertised and many assumed, to be as good as 1-to-1 with the dollar.

In the wake of the TerraUSD collapse, concern remains that other stablecoins, even those which are not algorithmic, such as USDC or Tether, could also be susceptible to runs.

USDC is backed by dollar deposits as well as liquid assets such as U.S. Treasuries, but that’s not quite the same as having a dollar in the bank for every USDC in circulation out there – there’s still a non-zero risk from U.S. Treasuries.

Tether, which issues USDT, is even more cagey about the nature of its reserves and regulators have raised questions over the riskiness of the stablecoin’s alleged assets that back USDT, including commercial paper, a type of short-term debt.

Commercial paper markets can gum up during periods of market volatility and financial crisis and should a run on USDT happen at such a time, there’s no guarantee that the assets of Tether are sufficient to fulfil redemptions for USDT to fiat currency.

MoneyGram International has opted to go with USDC instead, where reserves are somewhat more transparent and attested and its move to facilitate stablecoin remittances could also help spread cryptocurrency adoption in emerging markets.

Remittances to low and middle-income countries soared last year to US$589 billion, as borders re-opened and workers sent more money home, and World Bank projections suggest that the number could increase even more this year.


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