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Weekend Edition 29-30 January 2022 (10-Minute Read)

Hello there, A magnificent Monday to you as Asian markets start to head off for the Lunar New Year holiday break while U.S. markets closed up last week in a remarkable rebound. In brief (TL:DR)

  • U.S. stocks staged a dramatic reversal on Friday with the Dow Jones Industrial Average (+01.65%), the S&P 500 (+2.43%) and the Nasdaq Composite (+3.13%) all sharply higher as traders were whipsawed by a volatile intraday session that saw swings of as much as 15% in some individual stocks.

  • Asian stocks were mostly higher on Monday ahead of the Lunar New Year holiday.

  • Benchmark U.S. 10-year Treasury yields inched up to 1.794% (yields rise when bond prices fall) as the yield curve remains flat and traders likely to take cues from this week's Bank of England's response to rising inflation.

  • The dollar held gains in Asian trading.

  • Oil gained with March 2022 contracts for WTI Crude Oil (Nymex) (+1.38%) at US$88.02 as tensions simmer in Ukraine on the prospect of a Russian invasion and Moscow cutting gas supply to Europe.

  • Gold firmed up with April 2022 contracts for Gold (Comex) (+0.11%) at US$1,788.60.

  • Bitcoin (-2.63%) slipped to US$36,986 in Monday's Asia trading on the back of lower volumes ahead of the long Lunar New Year holiday which typically sees more Asian traders take a break from the frenetic cryptocurrency markets.

In today's issue...

  1. The Fed May Have Overplayed its Hand as Public Markets Gum Up

  2. Cathie Wood is Buying the Dip, Should You?

  3. NFTs as Collateral for Loans?

Market Overview

Chinese growth is slowing, U.S. Treasury yields are ticking up and Russia has amassed around 100,000 troops on tis border with Ukraine.

So...just another Monday in the markets?

Not helping matters, U.S. Federal Reserve Atlanta President Raphael Bostic told the Financial Times that a 0.50% interest rate hike or even a hike at each policy meeting this year remain possible to fight the highest level of inflation in four decades.

And let's not forget that there's still a pandemic going on.

Is it any wonder then that market continue to be roiled in volatility?

With so many conflicting narratives over what happens next, have seen everything from the dollar holding gains to the yield curve flattening even as stocks get whipsawed intraday between incredible corporate earnings and bearishness over policy tightening.

Asian stocks were a mixed bag as many head into the Lunar New Year holiday with Tokyo's Nikkei 225 (+0.99%) and Hong Kong's Hang Seng (+0.84%) higher while Sydney’s ASX 200 (-0.21%) dipped slightly on Monday morning. South Korean markets are closed for the Lunar New Year break.

1. The Fed May Have Overplayed its Hand as Public Markets Gum Up

  • U.S. companies are shying away from public markets to raise capital whether through IPOs or public share sales

  • Corporate credit markets appear stable for now, but matter of time before borrowing costs increase and affect ability of companies to get loans for growth and investment

Just as an engine needs grease to run smoothly, the credit markets have long counted on the largesse of the U.S. Federal Reserve to ensure that money flows freely, acting as a lender of last resort in all sorts of circumstances. But with U.S. inflation hitting its highest levels in four decades and increasing political pressure on the Fed to do something about it, the prospect of both rate hikes and runoff are resulting in tighter financial conditions and companies now starting to face headwinds in raising cash. According to one popular index calculated by Goldman Sachs, it is becoming slightly harder and more expensive for companies to raise money in the stock market through public share sales. Dealogic data reveals that publicly-listed tech companies saw an average 34% fall in their offering price in 2021, a trend that has discouraged other companies from heading into public markets hat in hand. Several companies have already postponed planned listings, including human resources software company JustWorks (no relation to WeWork) and bitcoin mining firm Rhodium. But these conditions are unlikely to faze the Fed, which appears resolute in its determination to combat the ills of inflation. Nonetheless, if the ability for companies to raise cash for growth and expansion continues to persist, the Fed may be forced to do something eventually. And right now, market participants are pricing in the Fed’s moves based on expectation, without even so much as a single rate hike, an observation echoed by U.S. Federal Reserve Chairman Jerome Powell who noted after last Wednesday’s policy meeting, “We feel like the communications we have with market participants and with the general public are working and that financial conditions are reflecting in advance the decisions that we make.” In that respect, Powell’s comments reflect his long-held view that policymaking happens in real time because markets generally tend not to wait until rates have risen to respond accordingly. With traders pricing in as many as five 25 basis-point rate increases this year from March onwards, any undershoot could bring some degree of cheer to battered risk assets. And while the recent selloff in the US$22 trillion Treasury market will see Washington have to pay millions of dollars more for its borrowings, that hasn’t yet spilled over into credit markets, which may be why the Fed remains unfazed. Yet that is more a matter of “when” rather than “if.” High yield corporate debt, the riskiest corner of the credit market is already showing signs of strain and the premium that investors are demanding to hold riskier corporate bonds has risen. But credit and equity markets are likely to have to correct far more sharply for the Fed to blink, either that or surprise data suggesting inflationary pressures are starting to subside.

2. Cathie Wood is Buying the Dip, Should You?

  • Cathie Wood of Ark Investment Management is buying the dip as shares of some of the most disruptive companies are hitting record lows, move is echoed by other high-profile fund managers including Bill Ackman of Pershing Square who has upped the ante with Netflix (-0.61%)

  • Investors looking to replicate the likely-to-be phenomenal returns in bets on disruptive technology will need a long-term time horizon to see multiples on their investment

Viewed in isolation, Cathie Wood’s recent move to declare “innovation on sale” and the continued moves by her US$14.4 billion ARK Innovation ETF to soak up shares of innovative companies thumped down by the prospect of policy tightening appear almost bigoted. But take a closer look under the surface and there may be some method to the madness. For starters, even Bill Ackman’s Pershing Square is getting in on the action, buying up 3.1 million shares in streaming giant Netflix, even as shares of the company continue to come under pressure on concerns over subscriber growth. Ackman was made famous with his very public US$1 billion short bet against multilevel marketing firm Herbalife, going head-to-head against longtime activist investor Carl Icahn and is not known for being a “long” investor.” But the times have changed and not to be outdone, Ark Investment Management stepped up buying of retail trading app Robinhood Markets, even as the online broker’s stock tanked to a record low following earnings that fell well short of Wall Street expectations, buying 2.44 million shares last Friday. With Robinhood Markets trading at 67% below its IPO price, Ark Investment Management, through its various ETFs, has bought shares almost every week since late October, when the stock dropped below its IPO price of US$38 according to data compiled by Bloomberg. Legendary value investor Warren Buffett once provided this analogy – if you like eating hamburgers and suddenly they go on sale at half price, what do you do? Buy more hamburgers. If so, then perhaps investors like Wood and Ackman are taking a leaf out of Buffett’s own page book, choosing to be greedy while others are fearful. Because there is increasing pressure on professional money managers to report wins regularly, with reporting periods getting more compressed, Wood and Ackman could possibly be the Buffett’s of the future, betting big on companies that have tremendous value, but aren’t showing it up right now. Netflix arguably pioneered the streaming industry, pivoting from a company that provided mail-order video rentals to a content giant that has now expanded into games as well. Similarly, Robinhood Markets revolutionized investing and trading for retail investors and pressured legacy brokers to bring down fees – that move alone saw retail trading flows on U.S. markets rise to as high as 25%, in a space traditionally dominated by institutional investors. Both Ackman and Wood emphasize that investors need to look towards the long-term, at least five years or greater, and they may end up having the last laugh. Not many investors will recall that Facebook (now called Meta) (+2.40%) had an abysmal IPO and traded underwater for the most part, falling by as much as 47% from its offering price just four months after its debut. Had investors snapped up Facebook at the time, for the “princely” sum of just US$20 in August of 2012 and held them for a decade, they would be sitting on returns of 1,400%. Whether it was betting on railroads in late 19th century America, or a man named Henry Ford at the turn of the century, disruption and innovation ultimately play out well for early backers in the long run and those who take a long-term view on investments.

3. NFTs as Collateral for Loans?

  • U.S. digital asset management firm Genesis is offering loans on NFTs

  • NFTs combining with complex crypto finance products creates a new avenue for investors or collectors betting on NFTs to generate a yield or return on their collections

Who says that they just sit there and stare at you? As the burgeoning market for NFTs or non-fungible tokens starts to grow, investors or collectors are finding that they can monetize their appreciation for digital art, thanks to digital asset trading group Genesis now accepting NFTs as collateral for loans and derivatives deals. For years, many art collectors and traders have often struggled with finding ways to monetize their collections, but increasing digitalization now provides a unique means of realizing some of those aspirations. NFTs are unique digital tokens that can’t be replicated or divided and are typically minted on the Ethereum blockchain, using the ERC-721 standard, tied to a digital work, which can be an image, GIF, text, video or audio file. By combining NFTs with the booming market for complex cryptocurrency financial products, Genesis is tapping into one of the hottest corners of the digital finance industry. NFTs swelled into a US$40 billion market last year and despite weakness in cryptocurrency prices this year, enthusiasm surrounding them has not waned, with even China throwing its hat in the ring to embrace the technology, albeit without the decentralization. Structuring products around NFTs would allow investors to pledge their tokens in a way that a traditional trader would use an asset to underpin a financial deal, such as a loan or a bet on the market. Given the highly volatile price action for NFTs, Genesis appears to be taking a “safer” track, taking in only what it considers “blue-chip” NFTs that have some historical significance or liquid secondary markets. The overlap between high art and high finance may be set to continue growing, with major brands in sport, alcohol, art and fashion, all launching dedicated NFTs in recent months, in an effort to ensure that they stay engaged with recent pushes into the Metaverse. One of the most obvious applications for NFTs is their ability to prove ownership, which may be relevant for use in the Metaverse. The idea that a digital item can be non-replicable exists only on the blockchain and can be expressed in the Metaverse provides a strong incentive for some of the world’s biggest brands to start minting NFTs. Consider that a pair of designer shoes could always be knock-offs, but that same pair in the Metaverse couldn’t be copied because of the nature of NFTs that make them irreplicable.

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