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Daily Analysis 7 June 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as Asian stocks waver amid soaring U.S. Treasury yields and the Japanese yen hits a 20-year low.

In brief (TL:DR)

  • U.S. stocks opened stronger on Monday with the Dow Jones Industrial Average (+0.05%), S&P 500 (+0.31%) and the Nasdaq Composite (+0.40%) all slightly higher as U.S. Treasuries declined.

  • Asian stocks fluctuated Tuesday as investors against a backdrop of soaring Treasury yields and a strengthening dollar.

  • Benchmark U.S. 10-year Treasury yields soared to 3.046% (yields rise when bond prices fall) as traders took into consideration the impact of the U.S. Federal Reserve running off its balance sheet.

  • The dollar gained.

  • Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+0.66%) at US$119.28 on continued supply concerns.

  • Gold was flat with August 2022 contracts for Gold (Comex) (+0.02%) at US$1,844.00.

  • Bitcoin (-4.78%) fell to US$29,607, as late long positions got liquidated and the benchmark cryptocurrency remains rangebound.

In today's issue...

  1. U.S. Federal Reserve Playing Dice with the Economy

  2. Amazon's Stock Split Victim of Market Conditions

  3. Bitcoin Rebound to US$31,000 comes Crashing down to US$29,000 Again

Market Overview

Choppy trading marked the Asian open as investors assessed the impact of a surge in U.S. Treasury yields that pushed beyond 3% for the first time in weeks while the Japanese yen sank to a 20-year low against the dollar, in a sign of the growing divergence in monetary policies.

The dollar gained as investors fled risk assets, including Bitcoin and indicate a general reluctance to take on risk while volatility remains elevated.

Much still depends on eagerly anticipated U.S. Consumer Price Index data due out on Friday, which will either cement the Fed's hawkish resolve or provide additional food for thought on the pace of tightening.

Asian markets were a mixed bag on Tuesday with Tokyo's Nikkei 225 (+0.54%) and Hong Kong's Hang Seng Index (+0.03%) up, while Sydney’s ASX 200 (-0.89%) and Seoul's Kospi Index (-1.29%) were down in the morning trading session.

1. U.S. Federal Reserve Playing Dice with the Economy

  • U.S. Federal Reserve policymakers concede that they're in uncharted waters when it comes to raising rates while simultaneously running off the balance sheet.

  • Investors can expect more volatility as the Fed adopts a policy of inputs and waiting to see how the economy responds, as opposed to forecasting any long-term trend.

Luck be a lady tonight because the U.S. Federal Reserve is playing dice with the economy.

At the start of the rate-hiking cycle last year, Fed Chairman Jerome Powell said that that the goal was “getting rates back up to more neutral levels as quickly as we practicably can” and many investors took that to mean landing at around 2.0% to 2.5%.

But trying to put a number on a “Goldilocks” value is somewhat arbitrary and even the Fed itself isn’t sure there’s such a thing.

That number between 2% to 2.5% was seen as a neutral stance, not so high as to discourage economic growth and spur unemployment, but not so low as to continue stoking the economy and piling on inflationary pressures.

The artificiality of these concepts was conceded in May however, when Powell walked back on the concept of neutral, cautioning that the discussion had a “sort of false precision.”

At a press conference in early May, Powell said,

“You know, you’re going to raise rates, and you’re going to be kind of inquiring how that is affecting the economy through financial conditions.”

And so, like the large hadron collider, the Fed and the rest of the world is going to find out what it means to tinker with the fabric of the economy because no one yet knows what will happen when rates are raised combined with the central bank shrinking its balance sheet.

To quote then-U.S. Defense Secretary Donald Rumsfeld with respect to the invasion of Iraq,

“As we know, there are known knowns; there are things we know we know. We also know there are known unknowns, that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”

For the Fed and for the rest of the world, policymakers are dabbling in the world of unknown unknows and that’s showing up in measurable data already.

Take standard U.S. 30-year mortgage rates for instance, which rose to a recent high of 5.6%, about 2% higher than in January and almost US$400 more in monthly payments on a US$300,000 home loan, a factor that is slowing home sales.

But for a company financing inventory on 90-day commercial paper at around 1.5%, inflation running at 6.3% according to the PCE, the Fed’s preferred measure, mean that the cost of funds is way cheaper than money in the bank.

Then there’s the spread between Treasuries (the safest form of asset) and junk bonds which typically widen to at least 8% as a precursor for the economy going into recession, but is at just 4% right now, suggesting investors believe the Fed can achieve a soft landing.

Where the greatest ambiguity remains is what the effect of thinning the Fed’s balance sheet will ultimately be and earlier this week, Fed Governor Christopher Waller tried to put a figure on the move.

Speaking to an audience in Frankfurt, Waller said that the planned annual US$1 trillion runoff in the Fed’s holdings of Treasuries and mortgage-backed securities was the equivalent of around a 25-basis-point increase a year, but warned that this was a rough judgment.

2. Amazon's Stock Split Victim of Market Conditions

  • Amazon (+1.99%) 20-for-1 stock split under the worst possible market conditions, with retail appetite for equities appearing to have waned.

  • Pandemic demand which fueled Amazon's fortunes also appeared to have waned, with more in-store purchases and slowing consumer demand, as evidenced by Amazon's excess warehousing capacity.

In life as in investment, timing, is everything.

While the stock splits of retail favorites Tesla and Apple saw a bumper bounty as mom-and-pop investors poured into shares of the two companies, that was against a backdrop of loose monetary conditions and an era of free money.

But now that that era of loose financial conditions appears to be coming to an end, e-commerce juggernaut Amazon has split its stock to an otherwise unreceptive market.

Think of stock splits like bite-sized Reese’s Pieces – they take a stock with a high absolute price and make it accessible to retail investors by splitting it into smaller chunks that investors with more modest means can chew on.

But the macro backdrop is unfavorable for companies, especially for the technology sector and Amazon’s split has meant that the stock is now trading at a discount to its original pre-split price.

On the flipside though, the lowered share price will make it easier for Amazon to enter the venerable Dow Jones Industrial Average.

To be sure, stock splits have no fundamental effect on share value – they’re the equivalent of swapping a $50 bill for five tens, but they were reason enough in the earlier part of this year to send share prices soaring as retail investors clamored for a piece of the action.

Nevertheless, stock splits can also be seen of as being opportunistic – no company splits their stocks expecting the price to fall even further.

And while Amazon has had an unsuccessful run with its recent split, much of this has to do with market conditions as opposed to the firm’s actual performance.

That having been said, Amazon has had to slow down some of its more ambitious expansion plans that were largely fueled by pandemic demand.

Warehousing and sales growth appear to be peaking and splitting stock into such an environment was always going to be a challenging proposition.

3. Bitcoin Rebound to US$31,000 comes Crashing down to US$29,000 Again

  • Rangebound Bitcoin is perfect for market manipulators looking to liquidate both long and short derivative positions.

  • Until broader macro conditions appear to create a durable bullish or bearish market for Bitcoin, manipulation will mean that traders will continue to get rugged at either end of the range.

Bitcoin advanced for a third straight day yesterday, rising back above US$31,000 only to come crashing back down again to US$29,000 and little of this may have to do with the U.S. financial markets or risk appetite.

As has been the case for the past several weeks, there have been signs that the real catalyst for movements of Bitcoin’s price behind the scenes have been the regular and periodic liquidations of long and short derivative products.

Given how the cryptocurrency markets are barely regulated, exchanges have the first look into the amount of longs or shorts overhanging the markets and it’s happened with an uncanny level of regularity over the past few weeks for these liquidations to kick in whenever Bitcoin has rebounded from around US$29,000 and pushed towards US$31,000.

In rangebound markets and absent any longer-term bullish reasons for Bitcoin to go higher, market manipulation can often become the order of the day, with market makers walking up the price of Bitcoin (spoofing) luring in the long futures at the peak (near US$31,000) only to orchestrate a swift reversal soon after.

Heatmaps which chart the buy and sell walls have shown relatively strong levels of resistance at US$32,000 and support at US$29,000, which are perfect for luring in traders to short and then get hammered at the liquidation and long (late) to see themselves caught out.

Bitcoin’s straddle around US$30,000 works because the macro backdrop remains uncertain.

Some analysts suggest that Bitcoin could get a weekend boost if U.S. consumer price data later this week suggests that inflation is coming down, fueling speculation that the U.S. Federal Reserve will dial back its hawkish pivot, but this is highly speculative.

Until such time that the broader financial markets provide a clear direction for risk assets, manipulation will continue to be the order of the day and traders should not despair when Bitcoin falls to US$29,000 nor should they expect a turnaround when it’s at US$31,000.



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