Daily Analysis 4 April 2022 (10-Minute Read)

Hello there,

A magnificent Monday to you as markets continue to be mired by a myriad of headwinds that prevent a convincing rally.

In brief (TL:DR)

  • U.S. stocks closed higher on Friday with the Dow Jones Industrial Average (+0.40%), the S&P 500 (+0.34%) and the Nasdaq Composite (+0.29%) on the back of a strong jobs report and confidence in the strength of the U.S. economic recovery, but futures activity point to a challenging start this week.

  • Asian stocks got a boost Monday from a rally in Hong Kong spurred by China’s move to ease a dispute with the U.S. over audits.

  • Benchmark U.S. 10-year Treasury yields advanced about three basis points to 2.42% (yields rise when bond prices fall) on the prospect of sharp U.S. Federal Reserve interest-rate hikes to fight inflation.

  • The dollar gained.

  • Oil fell with May 2022 contracts for WTI Crude Oil (Nymex) (-0.22%) at US$99.05, extending a drop sparked by a U.S. announcement of an unprecedented release of strategic reserves to fight elevated energy costs.

  • Gold rose slightly with June 2022 contracts for Gold (Comex) (+0.09%) at US$1,925.40.

  • Bitcoin (-0.30%) fell to US$46,114 as the benchmark cryptocurrency continues to struggle rangebound with more headwinds than reasons for rally.


In today's issue...

  1. Risk is What You Make of It and You Could Do Worse Than Buy Stocks

  2. Beijing Backs Down on Audit Secrecy to Prevent U.S. Delistings

  3. Bitcoin Breakout or Fakeout?


Market Overview

The U.S. Federal Reserve minutes later this week will shape views on the odds of a half percentage-point rate increase in May and provide key details on how the central bank will shrink its balance sheet.

The U.S. Treasury yield curve is flashing more warnings that economic growth will slow as the U.S. Federal Reserve raises rates to tame inflation stoked in part by commodities.

In China, where markets are closed for a holiday, most of Shanghai’s 25 million residents are under some form of pandemic lockdown while Chinese state media reported a new subtype of the omicron variant.

Asian markets rose Monday with Seoul's Kospi Index (+0.66%), Tokyo's Nikkei 225 (+0.25%), Sydney’s ASX 200 (+0.27%) and Hong Kong's Hang Seng Index (+2.10%) were all up.



1. Risk is What You Make of It and You Could Do Worse Than Buy Stocks

  • For all intents and purposes, stocks should have tanked by now, but bears keep getting blindsided by investors buying the dip and that may be because there just aren’t that many alternatives.

  • Inflation and tighter monetary policy are seeing a run away from bonds, while price pressures are eating away at bank deposits as mortgage rates rise making real estate less attractive.

No matter where you look in the markets these days seems like there’s something new to worry about.

Russian atrocities against Ukraine’s civilian population are coming to light, solidifying resolve by hitherto fence-sitting Europeans to impose even harsher sanctions on Moscow.

Meanwhile, a yield-curve inversion suggests investors are more pessimistic on the long-term outlook of the economy while central banks are looking to put the kibosh on an era of loose monetary policy.

For all intents and purposes, stocks should have tanked by now, but bears keep getting blindsided by investors buying the dip and that may be because there just aren’t that many alternatives.

Historically, periods of high inflation have still seen stocks outperform every other asset, and with cash and bonds offering negative real yields, investors are still inclined to buy the dips in global equities, even as margins get compressed from higher commodity costs.

And the rebound in equities in March backs this view.

To be sure, global stocks are nursing losses from the worst quarter since the start of the pandemic, but March, which has typically been weak for equities, saw a rebound.

Some of the rebound no doubt can be attributed to the massive losses in a standard portfolio’s other asset class – bonds.

Inflation and tighter monetary policy are seeing a run away from bonds, while price pressures are eating away at bank deposits as mortgage rates rise making real estate less attractive.

In other words, where else is the money going to go?

Stocks just look “less bad” against a backdrop of poor choices.



2. Beijing Backs Down on Audit Secrecy to Prevent U.S. Delistings

  • The China Securities Regulatory Commission, said over the weekend that it would change confidentiality laws that had prevented its overseas-listed firms from providing sensitive financial information to foreign regulators.

  • Investors can expect more volatility in the weeks to come until a deal is finally hammered out.

With entire cities in lockdown, Beijing can ill-afford having some of its biggest companies denied access to America’s capital markets and that pragmatism has since seen a revision to audit secrecy laws that will allow 270 Chinese companies to have a shot at remaining listed.

The China Securities Regulatory Commission, said over the weekend that it would change confidentiality laws that had prevented its overseas-listed firms from providing sensitive financial information to foreign regulators.

With the Chinese economy slowing, a record US$6 billion of global investor monies sucked out of Chinese equities in the first three months of this year alone, Beijing is under significant pressure to ensure economic stability.

At stake is the fate of 270 Chinese firms listed in the U.S. with a combined market capitalization of around US$2 trillion and the last thing Beijing needs is for them to be delisted by 2024, just as Chinese President Xi Jinping looks to secure an unprecedented third term in office.

The policy U-turn, while uncharacteristic of Beijing, also reflects growing concern that the Chinese economy can only suffer so much abuse.

Ill-conceived crackdowns on China’s lucrative real estate sector and successive lockdowns of entire cities while the rest of the world opens up is creating tremendous stresses not just on the Chinese economy, but on consumer sentiment as well.

Making matters worse, Beijing’s refusal to condemn Russia’s invasion of Ukraine or to address alleged war crimes by Russian forces in Ukraine risks China becoming a pariah state as well by association, which could see more investor dollars flee the world’s second largest economy.

Washington for its part has refused to confirm that the measures adopted by Beijing over the weekend will be sufficient to guarantee that the status quo can be preserved for Chinese companies listed on Wall Street.


Investors can expect more volatility in the weeks to come until a deal is finally hammered out.



3. Bitcoin Breakout or Fakeout?

  • Bitcoin has now traded within 10% of is 50-day moving average for 51 days through March 26, the longest stretch of such tight trading since July 2020, according to data from Bloomberg.

  • Like many other risk assets, Bitcoin faces a slew of headwinds, from soaring inflation to central bank policy tightening that’s left it rangebound for most of this year.

In the last week of March, Bitcoin bulls cheered as the world’s biggest cryptocurrency by market cap finally broke out of a tight trading range and a rough start to the new year.

Since then, Bitcoin has reverted back to its original trading band and as the benchmark cryptocurrency hovers near a key trendline again, bulls are increasingly concerned whether they’re being set up for another round of disappointment.

Bitcoin has now traded within 10% of is 50-day moving average for 51 days through March 26, the longest stretch of such tight trading since July 2020, according to data from Bloomberg.

And Bitcoin is now headed close to an even more significant threshold, its 200-day moving average, where it’s sat below for 95 days, the longest streak of a bearish pattern since April 2019.

Chart watchers will note that this head-and-shoulders pattern could see Bitcoin move in either direction, but risks heavily weighted to the downside.

Like many other risk assets, Bitcoin faces a slew of headwinds, from soaring inflation to central bank policy tightening that’s left it rangebound for most of this year.

Stocks could provide clues as to where Bitcoin is headed to next, with the cryptocurrency sharing a strong correlation with the S&P 500 and a 90-day correlation coefficient with the index at 0.55, according to data from Bloomberg (a coefficient of 1 means that two assets move in lockstep).

Nevertheless, cryptocurrency products are still seeing inflows, with data compiled by UBS showing digital asset ETFs attracted around US$550 million over the past two weeks.

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