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Daily Analysis 5 July 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as stocks gained on the prospect of the world's two largest economies rolling back mutual trade barriers.

In brief (TL:DR)

  • U.S. stocks are set to open later today and closed on Friday with the Dow Jones Industrial Average (+1.05%), S&P 500 (+1.05%) and the Nasdaq Composite (+1.05%) higher into the Fourth of July weekend but with futures action suggesting that Wall Street's open may be challenging.

  • Asian stocks were mostly higher on Tuesday on the prospect of the U.S. and China entering into an agreement to roll back mutual trade barriers from the Trump administration.

  • Benchmark U.S. 10-year Treasury yields fell to 2.941% (yields fall when bond prices rise) as investors turned into a buying mood on the possibility that the U.S. and China may resolve their trade differences.

  • The dollar was flat in Asian trading ahead of Wall Street's open.

  • Oil gained with August 2022 contracts for WTI Crude Oil (Nymex) (+0.20%) at US$109.81 on optimism over a resurgent Chinese economy putting pressure on demand.

  • Gold inched higher with August 2022 contracts for Gold (Comex) (+0.44%) at US$1,809.50.

  • Bitcoin (+6.31%) rebounded to US$20,358, as global risk appetite gained ground and tracking stocks which were given a lift with Washington and Beijing discussing an end to Trump-era trade tariffs.

In today's issue...

  1. Could emerging markets weather a U.S. recession?

  2. Could the U.S. Federal Reserve blink first on rates?

  3. Argentina's Shaky Economy Provides Unexpected Boost for Tether

Market Overview

There is optimism that Beijing and Washington, whose economies are being battered by a slew of headwinds, could roll back some Trump-era trade tariffs, which has lifted sentiment.

With the U.S. already suspected to be in recession and China's economy showing green shoots of a post zero-Covid lockdown recovery, there is more optimism but whether the market shift is durable hangs in the balance.

At this point in the market cycle, investors are so bereft of good news that they may respond excessively and inappropriately to even the slightest reasons to be optimistic.

Asian markets were in the green on Tuesday with Tokyo's Nikkei 225 (+1.03%), Seoul's Kospi Index (+1.80%), Sydney’s ASX 200 (+0.25%) and Hong Kong's Hang Seng Index (+0.36%)all up in the morning trading session.

1. Could emerging markets weather a U.S. recession?

  • Emerging markets may be an unlikely destination in a U.S. recession, as most assets remain at attractive valuations and held by domestic investors.

  • Growth potential and youthful populations in emerging markets make them attractive relative to U.S. or European assets in terms of mid to long-term growth.

According to money managers at JPMorgan Chase and Deutsche Bank,

emerging markets are well positioned to face a U.S. recession head on and possibly, attract investors to them.

The adage “When in doubt, zoom out” is apt here as fund managers are looking past short-term market fluctuations and focusing on what emerging markets could bring to the table.

These managers believe that developing countries will be “cushioned by cheap valuations, higher yields, faster growth” and most importantly, a recovering Chinese economy.

Since the 2008 Financial Crisis, many emerging markets have made efforts to restructure their finances, beef up their central bank reserves and encourage innovation and growth.

Significantly, more emerging market assets sit with domestic investors than ever before, which diminishes the impact of foreign investors withdrawing funds, which was a major issue in the 1997 Asian Financial Crisis and then again in 2008.

Speaking with Bloomberg, head of emerging market debt at M&G Investments Claudia Calich suggests that if China maintains its growth, it could “partially mitigate the fears of a U.S. or Europe recession.”

Calich adds that there are still future market routs to be expected but “price and valuations have already adjusted very significantly” with most of the negative aspects already accounted for.

Whilst emerging markets are unlikely to become haven assets anytime soon, trying to time the bottom is also unrealistic and investors ought to look at them as long-term bets on the dynamism and youth of many of these economies.

Economists surveyed by Bloomberg estimate that emerging market growth will outpace developed markets by more than double to 2.5% by 2023.

And if the U.S. slips into a recession, investors with their eye on long-term growth may start to re-assess the risk-reward matrix when evaluating emerging market assets.

2. Could the U.S. Federal Reserve blink first on rates?

  • Despite the attention to the U.S. Federal Reserve's hawkishness, it's entirely possible that the central bank could blink first when it comes to tightening.

  • Legendary investor Rick Rule believes that the current constitution of the Fed does not have the stomach to repeat the Volcker-era of massive rate hikes to as high as 20%.

Although the U.S .Federal Reserve’s hawkish bent is a well-worn story, there are some who believe that central bank policymakers will eventually be forced to buckle.

In an interview with Stansberry Research, Rick Rule, former president and CEO of investment fund Sprott U.S. Holdings, suggests that the Fed will “chicken out” and discontinue its aggressive policy tightening.

Additionally, Rule believes that the Fed won’t have the same fortitude to combat inflation as compared to the past.

In the 1970s, then U.S. Federal Reserve Chairman Paul Volker upped interest rates to as high as 20% at one stage, to combat rampant inflation that had hit a high of 14%.

With U.S. headline inflation at 8.6%, the current Fed would need to raise rates to 12.2% to achieve the equivalent of the Volcker era, an unthinkable measure in an economy that is rapidly slowing.

Rule however believes that inflation won’t fundamentally be quelled until rates do “amazing damage to various balance sheets” and there’s sufficient empirical evidence to back his view.

In 2018, the Fed backed down from raising rates as markets responded almost instantaneously to the prospect of tightening.

And there are signs that June’s inflation print is likely to be more moderate, compared with May’s.

Long-term Treasuries are pricing in the annual rate of inflation at around 2.36%, far from the doomsday predictions of some inflation bulls.

Rule has hunkered suggests three main asset classes to prepare for this next period, precious metals, price inelastic producers and surprisingly, cash.

According to Rule, while the value of cash may be eroded because of inflation, it affords the advantage of liquidity to take advantage of opportunities.

3. Argentina's Shaky Economy Provides Unexpected Boost for Tether

  • Argentina is one of the world's Top 10 adopters of cryptocurrency, given years of rampant inflation.

  • Recent resignation of Argentina's Economy Minister has riled Argentines who have boosted demand for USDT as the economy looks to be even more shaky.

Prices for purchasing Tether’s stablecoin USDT skyrocketed over the weekend as Argentina’s Economy Minister Martin Guzman resigned.

The departure of Guzman marked the most high level exit from Argentine President Alberto Fernandez’s cabinet as internal tensions rise within his coalition government.

USDT prices in Argentine pesos surged on major exchanges as soon as the country’s finance minister announced his stepping down on Twitter. The stablecoin was priced at 257 Argentine pesos on Binance, an increase of 6.6%.

The spike in Argentine demand for USDT comes at a time when the ruling coalition is struggling to quell soaring inflation and though volumes are small, could signal a crisis of confidence in the economy.

Data from blockchain analytics firm Chainanalysis suggests that Argentina has one of the highest adoption rates of cryptocurrencies, owing to decades of economic mismanagement and high inflation.

While much of the world grapples with inflation for the first time in decades, Argentinians are no stranger to the rising cost of living, with inflation in the country around 60% annually.

Against this backdrop, Argentinians looking to protect the value of their pesos took to cryptocurrencies from an early stage and the recent decline in prices hasn’t dampened demand.

Argentina is one of the top ten countries globally for cryptocurrency adoption, and two-thirds of Argentines who invest in cryptocurrencies say that they do so to protect their savings, according to a study by Wunderman Thompson.

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