Weekend Edition 28-29 May 2022 (10-Minute Read)

Hello there,

A wonderful weekend to you as asset across the board rebounded sharply to end the week in a relief for investors having had to contend with weeks of weakness.

In brief (TL:DR)

  • U.S. stocks marked a second consecutive day of gains on Friday and ahead of the Memorial Day long weekend with the Dow Jones Industrial Average (+1.76%), S&P 500 (+2.47%) and the Nasdaq Composite (+3.33%) all higher.

  • Asian stocks finished well on Friday following a rebound on Wall Street and more measures to shore up the Chinese economy being revealed by Beijing.

  • Benchmark U.S. 10-year Treasury yields slipped to 2.745% (yields fall when bond prices rise) as demand for bonds rose in line with the rebound in other assets.

  • The dollar held losses.

  • Oil inched higher with July 2022 contracts for WTI Crude Oil (Nymex) (+0.98%) at US$115.07 in line with a rise across all asset classes including commodities.

  • Gold was higher with August 2022 contracts for Gold (Comex) (+0.18%) at US$1,857.30 against a weakening dollar and thanks to a rebound in commodities.

  • Bitcoin (-0.44%) held at US$29,000 at the midpoint of the weekend, with cryptocurrencies decoupling from tech stocks and failing to enjoy the resurgence in risk appetite across other asset classes.


In today's issue...

  1. Sharp Rebound in Equities Just the Latest Twist for Investors

  2. Beijing Wants Global Investors to Bet on Chinese Bonds

  3. Crypto's Decoupling Has Investors Longing for "Before Times"


Market Overview

Investors got a respite from weeks of red as global stocks marked a strong rebound into the weekend with the U.S. headed off to a long Memorial Day weekend.

Asian stocks rallied, boosted by gains from Wall Street on Thursday and signs that Beijing is getting more serious about ensuring a rebound in its economy by taking more aggressive measures to shore up its markets.

Despite the end week rally, risks continue to abound, especially because many of the macro factors that caused the recent rout have not abated, including the Russian invasion of Ukraine, high commodity prices, inflation, supply chain snarls and tightening central bank policy.

Much of last week's rally could have been attributed to short squeezes and cheaper valuations tempting investors to come into the market again, but the rally may ultimately be short lived.

Investors are betting that the U.S. Federal Reserve won't be as aggressive in its tightening towards the end of the year and that's being manifested in markets.

Asian markets closed higher Friday with Tokyo's Nikkei 225 (+0.66%), Seoul's Kospi Index (+0.98%), Hong Kong's Hang Seng Index (+2.89%) and Sydney’s ASX 200 (+1.08%) all up into the weekend.



1. Sharp Rebound in Equities Just the Latest Twist for Investors

  • Investors are being swung in different directions as volatility looks set to increase and with key stock indices reversing course on the final two days of last week before a long weekend in the U.S.

  • Too early to call a bottom as much of the rebound could have been due to short covering from overly excessive bearish bets and as macro economic conditions have not changed. The war in Ukraine, China lockdowns, high commodity prices and tightening monetary policy remain risks.

Like sands through the hourglass, so are the days of our lives.


Whereas investors may look at their portfolios in years, traders are having a field day given the sheer amount of volatility, twists, and turns in markets of late.


With sentiment bearish and concerns over a recession higher than ever, delving into the minutes of the U.S. Federal Reserve’s last meeting reveal a central bank that may not be as hawkish as first advertised, emboldening investors to take bets on risk again.


Reversing weeks when everything came down, the past week saw everything rebound, from blue chips to tech stocks, the riskiest to the riskless, junk bonds to Treasuries and the benchmark S&P 500 clocking its best rally since 2020.


The only losers were the dollar and cryptocurrencies.


But calling a bottom may be premature.


Materially, nothing has changed from previous weeks.


The Russian invasion of Ukraine continues in earnest and supply chains remain snarled.


China is insistent on its zero-Covid lockdown policy and inflation is high globally.


Perhaps investors are so starved of any sense of positive news that they’ll cling on any sign the U.S. Federal Reserve won’t spark a recession through aggressive tightening.


Profits at America’s companies are coming under pressure through a combination of higher labor and material costs and there are signs that higher borrowing costs will soon slow consumption and business investment.


If nothing else, the recent relief rally could also be attributed to short covering as short sellers were forced to cover an abundance of bearish wagers that led to overshoot.



2. Beijing Wants Global Investors to Bet on Chinese Bonds

  • China opens access to last 10% of its yuan-denominated bond market in what appears to be an attempt to stoke interest in Chinese assets.

  • Risk-reward for global investors considering yuan-denominated assets look unfavorable given geopolitical issues, a strengthening dollar and a possible Chinese recession.

As China grapples with the economic effects of its zero-Covid lockdown policy, Beijing is finally opening up a corner of its offshore bond market to foreign financial institutions, in an attempt to stoke global interest in yuan-denominated debt.

But will (or should) investors even bite?

On Friday evening, China’s central bank, the People’s Bank of China announced that overseas investors would be granted access to onshore exchange-based bond markets in Shanghai and Shenzhen starting from June 30.

For years, global investors wanting to bet on the growth story of China had lobbied Beijing for access to the highly coveted yuan-denominated bond markets of Shanghai and Shenzhen, only to be denied entry.

Global investors sought yuan-denominated bonds because for decades, the yuan was viewed as heavily devalued to keep exports cheap and yields were seen as far more favorable than onshore U.S. equivalents.

Growth prospects given China’s large market also meant that the risks for default were limited, especially as investors assumed that for China’s biggest companies, Beijing would backstop any liquidity events should they occur.

But that was then, this is now and a whole lot has changed the decision-making matrix for global investors looking at China.

Sadly, foreign institutional investors are increasingly souring on Chinese assets for a variety of reasons.

A strengthening dollar, tightening U.S. Federal Reserve monetary policy and geopolitics are all making Chinese assets look less attractive.

Not to mention that recent defaults in offshore dollar-denominated bonds of some of China’s biggest real estate companies has shaken even the biggest China bulls who now have to wonder which will be the next shoe to drop.

A prospective economic slowdown in China also doesn’t factor well for Chinese debt, yuan denominated or otherwise.

Beijing’s cozying up with Moscow and its refusal to condemn Russia’s unprovoked invasion of Ukraine also means that many mutual and pension fund managers are having a hard time justifying any further investments into Chinese assets.

To be fair, the reforms are just opening up the last sliver of China’s bond market to global investors, something that they have been lobbying for, but it also smells somewhat of desperation and for investors already bearish on China, isn’t likely to attract them in.



3. Crypto's Decoupling Has Investors Longing for "Before Times"

  • Cryptocurrencies have decoupled with tech stocks as a rebound in all manner of equities has seen no such similar move for the digital asset class.

  • Cryptocurrencies may have further to fall as the fallout from the TerraUSD collapse continues to ripple through the decentralized finance or DeFi sector, hitting Solana, Avalanche, Polkadot and Ether particularly hard.

Trawling through Crypto Twitter for the longest time and one hashtag that was trending was

#decoupling.


In 2018, when cryptocurrency prices tanked, the malaise was confined largely to the digital asset sector, with little (if any) correlation with what was going on in financial markets.


Since then however, growing institutional participation in cryptocurrencies has seen correlations between the digital asset class and major indices like the Nasdaq 100 and S&P 500 stronger than at any point in history.


Until fairly recently, cryptocurrencies moved practically in lockstep with tech stocks, with rolling 30-day correlations between Bitcoin and the Nasdaq 100 hitting as high as 0.76 at one stage (a correlation of 1 means that two assets move in the same direction and magnitude).


Cryptocurrency investors have been hoping for a decoupling for the longest time, so that the malaise in financial markets wouldn’t take Bitcoin and other cryptocurrencies down with them.


But investors should be careful what they wish for, they just might get it.


In an ironic twist, cryptocurrencies have been stuffed with all of the fat and none of the flavor as last week, even with everything else in financial markets rebounding, cryptocurrencies continued to bleed.


The benchmark cryptocurrency Bitcoin led a broad decline across the entire cryptocurrency spectrum, marking its eight straight weekly loss in its longest such slump since August 2011.


In May alone, cryptocurrencies have lost a whopping US$500 billion in market cap.


Last Friday marked the second straight day that cryptocurrencies declined even as tech stocks and other speculative corners of the financial market rallied – a sign of shaky conviction in the sector that may portend a worrisome trend.


Could cryptocurrencies have gotten ahead of themselves?


In the aftermath of the dotcom bubble bursting in 2001, many once high-flying tech stocks never recovered after their Superbowl moment.


Cryptocurrencies also had their Superbowl moment when some of the world’s largest exchanges advertised during the coveted advertising slots and it’s entirely possible that what investors are witnessing is the decline of some cryptocurrencies never to be revived.


Most badly hit have been cryptocurrencies closely associated with decentralized finance or DeFi, especially Ether, Solana, Avalanche and Polkadot, as sentiment towards the sector cooled in the aftermath of the TerraUSD collapse.


Decoupling is great when it works in an asset’s favor, but it would be unfortunate if the only time cryptocurrencies show a strong correlation with tech stocks is on the way down.

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