Weekend Edition 15-16 January 2022 (10-Minute Read)

Hello there, A wonderful weekend to you as stocks were all over the place to mark the end of a volatile week of trading. In brief (TL:DR)

  • U.S. stocks were a mixed bag on Friday with the Dow Jones Industrial Average (-0.56%), tumbling on concerns over weaker-than-expected retail sales while the S&P 500 (+0.08%) and the Nasdaq Composite (+0.59%) saw a last minute rebound in tech stocks.

  • Asian stocks closed lower Friday after a slew of U.S. Federal Reserve officials signaled they will combat inflation aggressively and the Nasdaq 100 fell to its lowest level since October.

  • Benchmark U.S. 10-year Treasury yields soared to 1.792% (yields rise when bond prices fall) with traders betting that yields could top off as high as 2.5% on concerns over interest rate hikes.

  • The dollar inched higher.

  • Oil rebounded sharply with February 2022 contracts for WTI Crude Oil (Nymex) (+2.07%) at US$83.82 on increased inflation concerns.

  • Gold slipped with February 2022 contracts for Gold (Comex) (-0.27%) at US$1,816.50 on the back of a rising dollar.

  • Bitcoin (+0.42%) rebounded into the weekend to US$43,000 as weaker-than-expected retail numbers, poorer manufacturing data and declining consumer sentiment played into prospects that the Fed would not be too hasty to hike rates.


In today's issue...

  1. Weak U.S. Retail Sales & Sentiment Cast Doubt on Recovery

  2. U.S. Treasury Yields Soar to 2-Year High

  3. Bitcoin's Short-Term Correlation with Tech Stocks


Market Overview

At the eleventh hour of last week, a last-minute rebound in tech stocks saw investors rush to recalibrate their strategies amid growing calls by policy makers to raise interest rates.

While some of the U.S. Federal Reserve's top officials are all voicing their concerns over inflation and expressing a determination to raise rates to combat price pressures, the economic data is far more mixed, making their job of analyzing what to do that more complex.

Consumer sentiment is flagging and retail sales last month fell far more than expected.

Manufacturing is slowing amidst supply chain disruptions and labor shortages, while rising prices appear to be keeping shoppers away for now.

Key though appears to be consumer sentiment, with consumption making a full 70% of the U.S. economy, Fed policymakers will no doubt want to keep a keen eye on the outlook of the consuming public as slowing growth could feed a disastrous downward cycle at a time when the economic path ahead appears more uncertain than ever.

In Asia, markets were a sea of red on Friday with Tokyo's Nikkei 225 (-1.28%), Seoul's Kospi Index (-1.36%), Hong Kong's Hang Seng (-0.19%) and Sydney’s ASX 200 (-1.08%) all lower on U.S. interest rate hike concerns.




1. Weak U.S. Retail Sales & Sentiment Cast Doubt on Recovery

  • U.S. retail sales slumped by almost 2% in December, a seasonally robust period for shoppers

  • Declining consumer sentiment and patchy manufacturing data raises the specter that the economic recovery narrative may be somewhat overplayed

With over 70% of the U.S. economy dependent on consumption, a sharp decline in sales of 1.9% in December and weaker factory output is raising questions about the recovery. Although analysts have attributed the loss of traction for the economy as temporary, the same was said about inflation, which has since surged to its highest levels in the U.S. in four decades. Shipping challenges, labor constraints and inflation have all been blamed as causes for weighing on the sharp slide in consumer sales. Some economists have suggested that consumption may also have been pulled forward for the holiday period in anticipation of supply chain delays. And while household savings and higher wages may yet usher in a renewed round of consumption this month, rising prices, the omicron variant and declining sentiment may yet keep shoppers away, disappointing investors expecting a sharp rebound. U.S. Federal Reserve data also revealed American manufacturers saw production falling by an unexpected 0.3% as well as last month. December has traditionally been a solid month for retail sales in the U.S., in the run up to Christmas, but concerns about shipping delays may have prompted some customers to shop earlier for gifts. But consumer sentiment has declined at a pace which is no longer easy to discount to seasonal variations – according to a University of Michigan survey, the consumer sentiment index fell to the second lowest level in a decade. Twice as many U.S. households with incomes in the bottom third are also reporting worsening finances. The timing could not be worse, as pandemic-era fiscal support measures start to get pared back and monetary policy looks set to tighten, raising borrowing costs and potentially pushing many families into default. Mixed labor data out during the first week of January, which saw job growth slowing, even as unemployment numbers fell combined with weakening consumer sentiment will provide plenty of food for thought as the Fed meets later this month to map out a path to normalize monetary policy.




2. U.S. Treasury Yields Soar to 2-Year High

  • Treasury yields soar to their highest level in almost two years on heightened expectations of aggressive interest rate hikes by the U.S. Federal Reserve to combat inflation

  • Yields may yet come down as more economic data and earnings reports come out in the coming weeks

In an apparent contradiction to expectations of where U.S. interest rates are headed, calls to sell the greenback and put money into asset such as emerging market stocks and gold are being heard around trading desks as the global economic recovery gathers steam. A growing chorus of investors are betting that the world’s reserve currency has reached peak valuation in a dramatic turnaround from a month ago when positioning on the dollar was the most bullish since 2015. Some analysts are suggesting that more opportunities are available offshore as opposed to onshore and the dollar extended a slide yesterday versus major currencies, in particular the Swiss franc and the Japanese yen. Other money managers are recommending gold and even silver as an alternative to the dollar on a hypothesis that a wider U.S. deficit and broader global recovery favors assets outside of America. Although rising U.S. interest rates and the U.S. Federal Reserve’s tightening should fair well for the greenback and poorly for emerging market rates and currencies, the fundamentals for the dollar are weak with low real rates and large external negative balances. Against this backdrop, some investment experts are recommending a second look at emerging market currencies, which have languished during the pandemic, but may be poised to benefit the most from a global recovery. With much of America’s recovery already priced into the dollar, and with the U.S. economy set to slow after the post-pandemic surge has ebbed, opportunities appear more attractive in the emerging market set.




3. Bitcoin's Short-Term Correlation with Tech Stocks

  • Bitcoin demonstrates strong correlation with other risk assets like tech stocks over the past several weeks, undermining its role as a portfolio diversification tool

  • More bitcoin wallets are turning to holding, so a small amount of traders responding to macro factors are having an outsized influence on bitcoin volatility

On Friday, tech stocks staged a mini-rebound at approximately the same time that bitcoin reversed course, spotlighting the cryptocurrency’s tendency to move in lockstep with other risk assets and undermining its alleged role as a portfolio hedge. Lower-than-expected U.S. retail sales in December and declining consumer sentiment had some traders betting that the Fed would not be too hasty in hiking rates, even as benchmark Treasury yields soared to multi-year highs. But the near-term correlation between bitcoin and high-growth tech stocks may not be fully reflective of the nature of the asset class. Blockchain analysis has revealed that the amount of bitcoin that appears to be trading during these periods where markets have been roiled by everything from potential interest rate hikes to rising inflation numbers has been relatively shallow. Given that more bitcoin addresses are turning into “hodling” addresses than ever, there’s a growing view that the cryptocurrency which is traded, consists almost primarily of short-term speculators, who are more sensitive to short term macro factors. Nonetheless, the past week has seen cryptocurrencies rise and fall alongside tech stocks, with both assets coming under relentless pressure of a suddenly hawkish U.S. Federal reserve. Bitcoin now enters an unprecedented era – for much of its 13-year history, the cryptocurrency has enjoyed an environment of easy monetary policy and zero or negative interest rates, fueling its ascent and its investment case. But the prospect that the halcyon days of easy money may be at an end are roiling both cryptocurrencies and tech stocks, with volatility heightened as the Fed prepares to withdraw pandemic-era stimulus.

The information contained in this email communication and any attachments is for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals. The price and value of the digital assets and any digital asset allocations referred to in this email communication and the value of such digital asset may fluctuate, and allocators may realize losses on these digital assets, whether digital or financial including a loss of principal digital asset allocations. 

 

Past performance is not indicative nor does it guarantee future performance. We do not provide any investment, tax, accounting, or legal advice to our clients, and you are advised to consult with your tax, accounting, or legal advisers regarding any potential allocation of digital assets. The information and any opinions contained in this email communication have been obtained from sources that we consider reliable, but we do not represent such information and opinions as accurate or complete, and thus such information should not be relied upon as such. 

 

No registration statement has been filed with the United States Securities and Exchange Commission, any U.S. State Securities Authority or the Monetary Authority of Singapore. This email and/or its attachments may contain certain "forward‐looking statements", which reflect current views with respect to, among other things, future events and the performance of a digital asset allocation with the Novum Alpha Pte. Ltd. ("the Company"). Readers can identify these forward‐ looking statements by the use of forward‐looking words such as "outlook", "believes", "expects", "potential", "aim", "continues", "may", "will", "are becoming", "should", "could", "seeks", "approximately", "predicts", "intends", "plans", "estimates", "assumed", "anticipates", "positioned", "targeted" or the negative version of those words or other comparable words. 

 

In particular, this includes forward‐looking statements regarding, growth of the blockchain industry, digital assets and companies, the venture capital and crowdfunding market, as well as the potential returns of any digital asset allocation with the Company. Any forward‐looking statements contained in this email and/or its attachments are based, in part, upon historical performance and on current plans, estimates and expectations. The inclusion of forward‐looking information, should not be regarded as a representation by the Company or any other person that the future plans, estimates or expectations contemplated will be achieved. Such forward‐looking statements are subject to various risks, uncertainties and assumptions relating to the operations, results, condition, business prospects, growth strategy and liquidity of the Company, including those risks described in a separate set of documents. If one or more of these or other risks or uncertainties materialize, or if the underlying assumptions of the Company prove to be incorrect, actual results may vary materially from those indicated in this email and/or its attachments. 

 

Accordingly, you should not place undue reliance on any forward‐looking statements. All performance and risk targets contained herein are subject to change without notice.  There can be no assurance that the Company will achieve any targets or that there will be any return on a digital asset allocation with the Company.  Historical returns are not predictive of future results. The Company is intended to be a specialist digital asset allocation and trading vehicle in the early stage technology sector and digital assets. Allocation of digital assets in early stage technology carry significantly greater risks and may be considered high risk and volatile. There is a risk of total loss of all digital assets allocated with the Company – please refer to a separate set of documents for a details of risks. 

 

By accepting this communication you represent, warrant and undertake that: (i) you have read and agree to comply with the contents of this notice, and (ii) you will treat and safeguard this communication as strictly private and confidential and agree not to reproduce, redistribute or pass on this communication, directly or indirectly, to any other person or publish this communication, in whole or in part, for any purpose.