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Daily Analysis 4 February 2022 (10-Minute Read)

Hello there, A fantastic Friday to you as Asia stocks responded to the stellar numbers from Amazon, after U.S. shares tumbled on Thursday in response to Meta's poor performance and outlook. In brief (TL:DR)

  • U.S. stocks tumbled on Thursday with the Dow Jones Industrial Average (-1.45%), the S&P 500 (-2.44%) and the Nasdaq Composite (-3.74%) rattled by Meta's poor performance but likely to see a bump at the open on Friday thanks to Amazon.

  • Asian markets staged aa rebound on Friday and the end of the first week of February buoyed by robust earnings report from Amazon.

  • Benchmark U.S. 10-year Treasury yields soared to 1.826% (yields rise when bond prices fall), mainly in response to policy tightening by the Bank of England and a prospective move by the European Central Bank pressuring the U.S. Federal Reserve to get more aggressive on combating inflation.

  • The dollar was flat.

  • Oil soared to a fresh 7-year high with March 2022 contracts for WTI Crude Oil (Nymex) (+1.43%) at US$91.56 over increasing geopolitical risks and the prospect of a Russian invasion of Ukraine.

  • Gold inched higher with April 2022 contracts for Gold (Comex) (+0.31%) at US$1,809.70.

  • Bitcoin (+2.92%) rebounded slightly to US$37,950, testing the US$38,000 level of resistance repeatedly as risk appetite buoyed by the after hours rally in tech shares helped to fuel sentiment.

In today's issue...

  1. Amazon Sparkles with Amazing Quarterly Results

  2. Can the European Central Bank Afford to Tighten?

  3. Solana Fix Demonstrates Self-Resilience of the Cryptocurrency Space

Market Overview

There's nothing quite as comforting as seeing the brown cardboard boxes with the signature black tick sitting at your doorstep.

Knowing that your online shopping is waiting for you before you even get home? Priceless.

Not quite, as Amazon looks to up the price of its Prime membership for the first time in four years against a stellar quarterly earnings report that has helped buoy otherwise moribund markets.

The relief for tech stock bulls could not have come sooner as the abysmal report from Meta Platforms (formerly known as Facebook) sent tech shares tumbling.

Asian markets enjoyed respite on Friday with Tokyo's Nikkei 225 (+0.73%) and Sydney’s ASX 200 (+0.60%), Seoul's Kospi Index (+1.57%) and Hong Kong's Hang Seng Index (+3.24%) all closing the week higher.

1. Amazon Sparkles with Amazing Quarterly Results

  • E-commerce giant sparkles with better-than-expected fourth quarter earnings for 2021

  • B2B divisions of tech giants are outperforming pure B2B players, with the resilience of cloud divisions in Microsoft (-3.90%), Alphabet (-3.32%) and Amazon (-7.81%) all contributing strongly to the bottom line

Instant gratification just got more expensive as Amazon raises its Prime membership against a backdrop of stellar fourth quarter earnings which beat even the most optimistic profit expectations. Helped in large part by demand for Amazon’s AWS cloud computing services, fourth quarter sales at Amazon increased 9.4% to US$137.4 billion. Amazon’s and Alphabet’s (parent company of Google) results stand in sharp contrast to those of more consumer-facing companies like Meta (owner of Facebook) (-26.39%). Amazon, Alphabet and Microsoft all reported strong earnings in the fourth quarter, helped in large part by the continuous growth of their cloud divisions and have highlighted how the growing need for remote working capabilities is likely to prove durable. Cloud revenue helped add to Amazon, Alphabet and Microsoft’s strong results last quarter, even as Meta suffered the worst single-day share plunge in history. And what’s good for cloud will be good for the companies that make the cloud possible, including Nvidia (-5.13%), which made prescient investments on improving its chips for data centers that are at the heart of the cloud. Amazon’s most profitable unit, AWS, generated sales of US$17.8 billion, a 40% increase, with an operating profit of US$5.29 billion, topping even the most bullish estimates. And while user growth may have slowed at Meta’s Facebook, advertising revenue at Amazon grew to US$9.7 billion, a 32% increase from a year earlier. The stark differences in fortunes between Meta and the other Big Tech companies reflects how important it is to control not just the platform, but the vehicle which delivers it. Changes in Apple’s (-1.67%) privacy policy has made it hard for Facebook’s ads division, whereas Amazon has far more directly relevant data for companies looking to sell more product, based on the purchase history of a captive audience. That markets cheered Amazon increasing its Prime membership, its first in four years, reflects how powerful the e-commerce platform is and how sticky its user base remains, with the price hikes widely expected to help the company deal with increasing costs.

2. Can the European Central Bank Afford to Tighten?

  • European Central Bank, the most dovish of all the major central banks and which had pledged to maintain rates for this year show signs of wavering in its conviction, against a backdrop of high inflation across the Eurozone

  • ECB may ultimately still have its hands tied because inflation has not been consistent across the Eurozone, and the implicit guarantee of the ECB to buy bonds of its straggling southern European regions is already seeing a mass selloff in these sovereign debt instruments

“You turn if you want to, the lady’s not for turning.” – Margaret Thatcher, United Kingdom Prime Minister (1979-1990) While her colleagues at other major central banks from the Bank of England to the U.S. Federal Reserve had all made their hawkish pivot, European Central Bank chief Christine Lagarde kept her steely resolve to ensure the liquidity taps flowed. The challenge for Lagarde and one not faced by her counterparts, is that the Eurozone represents different national economies at various stages of development for which the euro is used to anchor them all. Recovery from the pandemic has also not been consistent across the region, with some areas rebounding faster and better, while others have lagged and against this backdrop of disparate fortunes, each country also issues their own sovereign debt. Tightening monetary policy by the ECB is not an exercise for the faint of heart, which is why Lagarde has for the longest time preferred to err on the side of caution. But with Eurozone inflation now tipping the scales at 5.1%, there is increasing pressure on the most dovish of central banks to finally do something to reign in inflation before it starts to get out of hand. The Bank of England has been the first to move this week, raising rates for a second time, to 0.5%, on expectations that inflation will accelerate to above 7% within months. Although the ECB has not followed suit, keeping its key interest rates unchanged, President Christine Lagarde has changed her tact, leaving the door open to an interest rate increase later this year, a turnabout from her position seven weeks ago. Perhaps the lady is for turning after all. Whether it’s peer pressure from the other major central banks or that annual inflation in the Eurozone is now more than double the ECB’s target, there is increasing pressure on Lagarde and her colleagues who had intended to keep rates on hold throughout this year. That prospect has already seen a flurry of selling in European government bonds, especially those of southern European countries who were already reliant on the ECB to soak up their sovereign debt. Yields on some of the Eurozone’s weakest members economically soared, while the euro strengthened against the dollar. But all is not well in the “state” of Europe, with economic growth slowing sharply towards the end of last year, as the Omicron variant bit economies hard and forced lockdowns in many member nations. The surge in inflation is also the result of higher energy costs, not helped by Russia’s threatening moves against Ukraine and cutting off supplies to Europe. Whether the ECB can do much though remains to be seen. Inflation is not consistent across the Eurozone either, with price rises in Germany as high as 5.7% for months, whereas in Portugal it’s just 2.8%, and at the other extreme, Estonia has seen inflation hit 12%. Formulating monetary policy for a disparate region is tricky even in the best of times, but in uncertain times, it can be impossible.

3. Solana Fix Demonstrates Self-Resilience of the Cryptocurrency Space

  • Wall Street market maker Jump Trading Group ponies up to make whole the losses from the US$320 million hack of Wormhole, a "bridge" that facilitates blockchain interoperability

  • Fix demonstrates the commitment to the cryptocurrency space from market makers like Jump Trading Group, who want to ensure that they are at the crossroads of value and infrastructure in a new market paradigm

Hacks are unfortunately all too common in the world of cryptocurrencies. From unknowable smart contract vulnerabilities to exchange hacks, the cryptocurrency world has grown accustomed to the regularity of such events, albeit on the decline in recent years. But one thing that the cryptocurrency world has also demonstrated, is a willingness to make good on those hacks. For instance, when Binance was hacked and US$40 million was stolen, the cryptocurrency exchange made good on the stolen amounts immediately, no questions asked – the reputational risks and confidence in the exchange were worth far more. And when was hacked for US$35 million, the exchange that is now the title sponsor for the former Staples Center in Los Angeles, now renamed the stadium, also made good, no questions asked. Which is why one of Wall Street’s best-known market makers didn’t hesitate either when US$320 million worth of cryptocurrency was drained from a software bug in Wormhole – pilfered tokens were replace in a matter of hours. Jump Trading Group, a Wall Street market maker that ensures liquidity in a wide variety of assets through sophisticated liquidity provision algorithms helped develop Wormhole and helped to put up the money to replace the 120,000 wETH or “wrapped Ether” that the hacker was able to create and abscond with. Because blockchains are not interoperable, ensuring that tokens from one blockchain, in this case Ethereum, work on another blockchain, in this case Solana requires a “wrapping” process – a type of digital escrow service. Wormhole was created by a company called Certus One, which Jump Trading Group acquired last year and took over the development. The Wormhole protocol is known as a “bridge” that connects different blockchains, allowing tokens from one blockchain to trade on another and enable a degree of interoperability that has proved elusive in the cryptosphere. But the bridge can do far more. Given that Ethereum has a lot more vintage than Solana, it enables the possible avoidance of the infamously slow and expensive transactions on the Ethereum network during periods of peak demand, by settling transactions on another blockchain, but securing such transactions and making them immutable on another. In this case, buggy code allowed a hacker to create wETH, a token tracking Ether on the Solana blockchain and then redeem those tokens on the Ethereum blockchain. Controlling the interoperability between cryptocurrency blockchains could ultimately prove extremely valuable one day, because it could allow users to leverage the benefits of each individual blockchain.

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