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Weekend Edition 30-01 May 2022 (10-Minute Read)

Hello there,

A wonderful weekend to you as many Asian markets break for the long weekend, a welcome reprieve from the volatility that has marred the past week for investors.

In brief (TL:DR)

  • U.S. stocks were smacked down on Friday with the Dow Jones Industrial Average (-2.77%), S&P 500 (-3.63%) and the Nasdaq Composite (-4.17%) all erasing gains made in the previous day led by steep declines in tech stocks.

  • Asian stocks managed to avoid the bulk of the rout, buoyed by pledges from Beijing to continue stimulating the economy and a rise in Chinese tech stocks.

  • Benchmark U.S. 10-year Treasury yields rose to 2.889% as the yield curve flattened on Friday and traders priced in more aggressive central bank tightening following data that showed U.S. spending was higher than expected (yields rise when bond prices fall).

  • The dollar dipped while commodity-linked currencies gained.

  • Oil was lower with June 2022 contracts for WTI Crude Oil (Nymex) (-0.64%) at US$104.69, erasing earlier gains.

  • Gold rose with June 2022 contracts for Gold (Comex) (+1.08%) at US$1,911.70 alongside commodities and as the dollar tapered off a recent rally.

  • Bitcoin (-2.47%) slipped to US$38,590 (at the time of writing) alongside tech stocks which tanked hard headed into the weekend.

Market Overview

Asian investors will welcome the respite for a long weekend as many countries in the region celebrate both the long Labor Day weekend as well as the end of Ramadan which will keep markets closed till midweek.

And that should also mean greater volatility at the open for most markets towards the midweek, when they take into account what happened on Wall Street on Friday as well as early market movements.

Volatility is expected to remain high as investors grapple with contradicting signals and the future for assets becomes increasingly driven by conflicting narratives.

On the one hand, China has continued to pledge support for its economy, vowing to do whatever it takes while keeping actual concrete actions restrained and has refrained from slashing interest rates.

Zero-Covid policies in China also do not appear to be reversing and Beijing remains determined to double down on its policies.

Meanwhile, U.S. data shows that consumption remains high, which investors are fearful will embolden the U.S. Federal Reserve to act more decisively to reign in inflation and have acted as a major drag on appetite for stocks.

Asian markets closed higher Friday with Seoul's Kospi Index (+1.03%), Tokyo's Nikkei 225 (+1.75%), Hong Kong's Hang Seng Index (+4.01%) and Sydney’s ASX 200 (+1.06%) all closing higher headed into the weekend on pledges by Beijing to shore up the Chinese economy.

1. Why does anyone buy stocks anyway?

  • Investors turn bearish on stocks despite robust earnings season as the outlook looks bleak against a slew of macro factors.

  • Volatility likely to increase because the future is narrative-driven and there are conflicting narratives between tightening monetary policy and signs that the U.S. economy remains resilient.

A well-known Bible parable oft quoted by investment bankers tells the story of a master with three servants, who goes away to a distant land and leaves some money to them to steward.

In his absence, one of those servants buries the money in the ground, while the other two use it to make more money and the one who had buried the money in the ground, returning the same, was punished for his laziness.

Whether its stocks, bonds or cryptocurrencies, the whole point of investing is in the prospect that that which is being invested in, appreciates in value.

And buying stocks is one of the most common starts in the investment world – in expectations that a booming economy will provide better for companies which will throw off dividends or attract new investors as the stock prices rise.

Which is why investors who bought the dip in stocks while the pandemic was gutting the global economy were ridiculed for catching falling knives.

But now, despite robust earnings and little in current forecasts to suggest a recession, investors are retreating from stocks at a pace akin to the early days of the pandemic.

Inflation has been cited as one concern, but historically, stocks have weathered inflation better than any other asset class, even gold.

More likely though, a significantly large number of investors are skittish that the rally in stocks was fueled by nothing more than central bank largesse and concerned that once that artificial support is removed, things like price-to-earnings ratios will once again become relevant.

Which is why an otherwise solid earnings season has proved to be a drag on the S&P 500 which marked its fourth straight week of declines despite solid earnings.

The Cboe Volatility Index, otherwise known as the VIX is back above 30, near its highest level since 2020, when the pandemic had gummed up the economy.

Investors are leaving stocks in droves – liquidity is leaving the markets and forward discounting that, and the U.S. Federal Reserve hasn’t even really begun to tighten conditions.

And ultimately, stocks are a forward-looking investment, which means that despite how good things have been, investors are more worried about how things are going to be, which is why markets are so volatile at the moment – the future is narrative driven, no one knows for sure.

2. Ark Investment Management Down but Investors Still Want It

  • Cumulative inflows into ARK Innovation ETF belie the narrative that investors have been leaving the fund in droves.

  • Investors continue to subscribe to Cathie Wood's investment thesis and may be taking the opportunity to buy the dip.

In the same way that Noah needed faith to build the ark for when the floods came, Cathie Wood, who named her Ark Investment Management after that same biblical vessel, has managed to command faith in her investment thesis.

Despite markets which have been hammered and ARK Innovation ETF letting go of a bunch of stocks which it has deemed to be the future of innovation, there’s still no shortage of investors who believe in Wood’s approach.

And even though there have been extremely publicized withdrawals from Ark Investment Management’s flagship ARK Innovation ETF, the devil is in the details and cumulative money flows have been positive so far this year, despite a flagging share price.

This seems to suggest that even though the market as a whole may have soured on growth stocks and more speculative names, for those who still see innovation as a strong long-term play, there’s no better brand than Cathie Wood’s Ark Investment Management.

If nothing else, investors may be finding that the current market conditions are even more tricky to navigate and even those who believe that innovation is on sale will be wary of trying to pick out the eventual winners, which is where Wood comes in.

Ark Investment Management has tremendous liquidity and even though it’s currently underperforming other benchmarks, may be precisely the reason why investors want to pour money in, to buy on the cheap and to benefit from innovation for the long-term.

3. Banking on Bitcoin as Goldman Sachs Offers First Loan on Cryptocurrency

  • Goldman Sachs offers Bitcoin-collateralized loan as more Wall Street heavyweights get in on cryptocurrencies.

  • Financial institutions are finding the cryptocurrency sector too lucrative to ignore and the list of Wall Street firms throwing their hat in the ring is growing.

It’s something that’s been available for the longest time in the cryptocurrency world – a loan backed by Bitcoin.

Whether it’s been through decentralized exchanges, where loans are completely managed by smart contracts and overcollateralized because of the absence of counterparty identification or credit checks, or through centralized exchanges which will loan out your Bitcoin to traders, borrowing against your Bitcoin is not new.

Borrowing against Bitcoin from a Wall Street bank however is an entirely different matter altogether and so when a name as storied as Goldman Sachs (-4.06%) launched its first Bitcoin-backed loan last week, it was a big deal.

Wall Street has long had a love-hate relationship with Bitcoin, it’s loved to hate on it and not so long ago, JPMorgan Chase CEO Jamie Dimon declaring that the cryptocurrency was a “fraud,” while simultaneously giving his clients what they wanted.

And that appears to be precisely what Goldman Sachs is determined to do, making available Bitcoin-backed loans as the ranks of the growing crypto-rich community continue to swell and Wall Street gets its own bout of FOMO for not properly catering to them.

Goldman Sachs had traded its first over-the-counter Bitcoin options in March and while it has had an abortive start-stop relationship with cryptocurrencies, appears to have finally committed to the sector, which is becoming increasingly crowded with competitors.

Like sharks smelling blood in the water, some of Wall Street’s biggest names are also diving into cryptocurrencies, to ensure they establish a beachhead should the industry continue to grow.

Last week, Jefferies Financial Group announced that it was expanding banking services to its cryptocurrency clients, a segment of the business world that had long been shunned, the way that banks don’t do business with cannabis companies.

And the world’s largest asset manager BlackRock, joined a US$400 million funding round for stablecoin firm Circle this past month, issuer of the world’s second-most favorite dollar-backed stablecoin USDC.

Away from the public though, Wall Street has long been serving the cryptocurrency sector, albeit discretely, offering everything from wealth management, to trading and investment banking and serving larger corporates appears to be the logical next step.

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