Daily Analysis 5 January 2022 (10-Minute Read)
A wonderful Wednesday to you as growth stocks get pummeled by a rotation into value.
In today's issue...
U.S. stocks were mixed Tuesday with the Dow Jones Industrial Average (+0.59%) up, while the S&P 500 (-0.06%) and the Nasdaq Composite (-1.33%) were down on a rotation out of high flying tech stocks.
Asian stocks were mixed Wednesday as investors fret about interest rates increases that dragged down U.S. stocks from a record and extended a decline in Treasuries.
Benchmark U.S. 10-year Treasury yields held at 1.65% after yields rose for a second day amid increasing conviction the U.S. Federal Reserve will raise rates at least three times beginning in May to counter price pressures.
The dollar was little changed, while the Japanese yen traded near its lowest since January 2017 against the greenback as Tokyo maintains an accommodative policy stance.
Oil fluctuated with February 2022 contracts for WTI Crude Oil (Nymex) (-0.21%) at US$76.83.
Gold rose with February 2022 contracts for Gold (Comex) (+0.03%) at US$1,815.10.
Bitcoin (+0.18%) traded around US$46,210 as it continues to drift listlessly while other cryptocurrencies appear to be demonstrating resilience.
In today's issue...
Dollar Traders Are Betting Bullish
Value’s Day in the Sun
Billionaires Bolstering the Investment Case for Bitcoin
Market Overview U.S. December payroll data and minutes from the Fed’s meeting last month may throw more light this week on the potential pace of rate hikes. Data Tuesday showed mixed signs on U.S. inflation. Prices paid by manufacturers in December came in sharply lower than expected. However, figures showing a record U.S. job quit rate added to concerns over wage inflation. In Asia, markets were mostly higher Tuesday with Tokyo's Nikkei 225 (+1.77%), Sydney’s ASX 200 (+1.95%) and Seoul's Kospi Index (+0.02%) all up while Hong Kong's Hang Seng (-0.10%) was slightly down.
1. Dollar Traders Are Betting Bullish
If 2021 belonged to the yen, then 2022 is shaping out to belong to the dollar, as accommodative policy from the Bank of Japan looks to ensure that the greenback will outperform if and when rates are hiked.
But traders are pricing in myriad assumptions with respect to the U.S. Federal Reserve that may not necessarily play out.
Wither wander the dollar as traders are taking bullish bets ahead of the expected interest rate hikes by the U.S. Federal Reserve in March, with the greenback jumping to a five-year high against the Japanese yen on Tuesday. If 2021 belonged to the yen, then 2022 is shaping out to belong to the dollar, as accommodative policy from the Bank of Japan looks to ensure that the greenback will outperform if and when rates are hiked. But traders are pricing in myriad assumptions with respect to the U.S. Federal Reserve that may not necessarily play out. Although the Fed has penciled in (and the stress here is “pencil”) three rate hikes in 2022, action in long-dated Treasuries suggests that traders are calling the Fed’s bluff and expecting no more than two hikes, with estimates at between 1.35% to 1.45% as rate limits. Much will still depend on data with respect to the omicron variant, with more information due out later this week. While it is true that symptoms are far less severe for the omicron variant, its transmissibility is far greater, resulting in a higher absolute number of hospitalizations in the event of serious effects of infection. If so, the Fed may slow down the rush to hike rates, bearing in mind that the acceleration of the Fed’s tapering of asset purchases was merely to increase the options available to the Fed to better manage its monetary policy. Options are not obligations and the dollar’s dominance may yet be monetary.
2. Value's Day in the Sun
2022 has opened up with the ball in value investors’ court, as software and internet stocks sold off Tuesday, driving the Russell 1000 Growth Index down 1.1%, while energy, financials and materials soared, with gains of those trading at lower multiples the most significant.
Investors will note that just as the sun is fleeting in autumn, so has been the shift to value – with episodes of value’s attempt to challenge growth’s dominance in recent years fleeting at best – including the first quarter of 2021 and December 2018.
Value investors are finally having their day in the sun after years of languishing versus their so-called “growth” counterparts, taking bets on everything from electric vehicle companies to cryptocurrencies. 2022 has opened up with the ball in value investors’ court, as software and internet stocks sold off Tuesday, driving the Russell 1000 Growth Index down 1.1%, while energy, financials and materials soared, with gains of those trading at lower multiples the most significant. The rotation into value stocks comes as U.S. Treasury yields spike on expectations that the Fed will raise rates as soon as March to tame inflation, while the prospect of higher borrowing costs has promoted traders to rethink their appetite for riskier bets, especially companies with lofty valuations. Yet companies like Tesla (-4.18%), which recently announced record fourth quarter vehicle deliveries, managed to buck the trend to dump growth. To be sure, value stocks are “value” precisely because of the perceived earnings and growth potential in the coming years. While energy and financials may appear at attractive valuations, this is precisely because their industries are most in danger of being disrupted by clean energy and renewable and fintech that threatens to eat away at profits. If nothing else, the rotation to value, regardless of what the Fed does, may prove to be temporary. Investors will note that just as the sun is fleeting in autumn, so has been the shift to value – with episodes of value’s attempt to challenge growth’s dominance in recent years fleeting at best – including the first quarter of 2021 and December 2018. And given the events of the past two years, including the unprecedented flood of liquidity in markets that will take time to clear, an assumption that valuations and company fundamentals will return to the forefront again overnight may yet prove premature.
3. Billionaires Bolstering the Investment Case for Bitcoin
Some of the world’s most prominent moneyed-men are backing the investing case for bitcoin, even as it drifts into 2022.
Given that for now at least, bitcoin is worth only what someone else will pay for it, narrative plays a key role in determining value, and by extension price.
Some of the world’s most prominent moneyed-men are backing the investing case for bitcoin, even as it drifts into 2022. The new converts include Thomas Peterffy, who as recently as 2017, took out a full-page ad in the Wall Street Journal warning of the dangers that bitcoin futures posed to capital markets and is now saying that it’s “prudent” to have 2% to 3% of one’s personal wealth in cryptocurrencies, just in case fiat currencies go to “hell.” Hungarian-born Peterffy who founded the Interactive Brokers Group that recently offered customers the ability to trade bitcoin, ether, Litecoin and bitcoin cash, has revealed that he himself owns bitcoin and his firm has moved to offer cryptocurrency trading after detecting “urgency” from customers to get in on the action. Peterffy said that while cryptocurrencies could reap extraordinary returns, the opposite could also be true, which offers little comfort or guidance to investors looking at the nascent asset class. In an interview with Bloomberg, Peterffy revealed, “I think it can go to zero, and I think it can go to a million dollars. I have no idea.” That humility with respect to the direction that bitcoin could take next represents the opportunity and perils of the cryptocurrency space. Given that for now at least, bitcoin is worth only what someone else will pay for it, narrative plays a key role in determining value, and by extension price. Nevertheless, the cryptocurrency genie may be out of the bottle and it looks like there’s no way to stuff it back in with investors large and small diving into bitcoin and ether, NFTs and DeFi tokens with reckless abandon. Another billionaire investor Ray Dalio recently revealed that he was holding at least some bitcoin and ether in his portfolio, just months after questioning the ability of cryptocurrencies to serve as a store of value. According to the Bridgewater Associates founder, Dalio views the investments into cryptocurrencies as alternative money, in a world where inflation erodes buying power. Legendary macro investor Paul Tudor Jones has long disclosed his investments in bitcoin as a hedge against inflation and almost half of all family offices served by Goldman Sachs Group claim to be interested in adding cryptocurrencies to their portfolios in a recent survey.
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