Novum Alpha - Daily Analysis 14 January 2022 (10-Minute Read)
A fantastic Friday to you as stocks flop into Thursday on comments by Fed officials with the prospect of interest rate hikes increasing.
In brief (TL:DR)
In today's issue...
American stocks tumbled Thursday, led by technology companies, which are seen as most sensitive to higher rates.
Rising rates - an upshot of strong economic growth - could drive investors toward value stocks, which tend to be more cyclical and offer near-term cash flows.
In Asia, markets fell Friday with Tokyo's Nikkei 225 (-1.38%), Seoul's Kospi Index (-1.48%), Hong Kong's Hang Seng (-0.96%) and Sydney’s ASX 200 (-1.08%) were all down.
1. Tech Shares Get Hammered on Inflation Outlook
After an initial rebound as it looked as if inflation data was within expectations, investors had a period of introspection as a plethora of U.S. Federal Reserve officials pledged to stamp out inflation at all costs.
Tech stocks were dumped en masse in a sharp selloff that saw the Nasdaq Composite fall by as much as 2.5%.
Investors were roiled by comments from Fed Vice Chairman who said that the central bank could boost rates as early as March to ensure that the highest price pressures in four decades are brought under control.
Federal Reserve Bank of Philadelphia President Patrick Harker and Federal Reserve Bank of Chicago leader Charles Evans also joined a growing chorus of policymakers who are calling for higher interest rates this year.
The assumption is that rising interest rates, an upshot of robust economic growth, could drive investors towards “undervalued” value stocks, which tend to be more cyclical and offer near-term cashflows.
Underwhelming tech earnings for the final quarter of 2021 also weighed on appetite and sentiment for just how much higher the stock market darlings of the pandemic could go.
The rotation into value stocks however is not a given nor is it clear if it will be durable.
While it is commonly held that higher interest rates make the future earnings of tech stocks appear less attractive than near-term income, the limited growth prospects of value players are precisely why they trade discounted to their tech counterparts.
Given how asset valuations have become apparently grossly inflated, the psychology of many investors has grown increasingly skittish, with just the mention of monetary policy tightening enough to shake out weaker hands.
Yet a closer examination of the components of last month’s U.S. CPI data does seem to lend some credence to the prospect that inflation could ebb in the coming periods.
Price increases were led primarily by user car sales – which makes sense because of chip shortages leading to longer delivery times for new cars.
The pace of meat and fuel price increases slowed – thanks to efforts by the Biden administration to break up supply chain bottlenecks and supply-side issues.
U.S. consumer sentiment, thanks in large part to the omicron variant, is also waning, with the current outlook decidedly less rosy than in the last quarter.
2. Sell Dollar Buy Anything
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.
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3. Bitcoin Hodlers at All Cost Provide Lifeline
While it’s arguable that bitcoin has no buyer of last resort, it also helps that it has no shortage of “hodlers” who will at no resort sell.
This clutch of “hodlers” in cryptocurrency parlance, have proved a stabilizing force for bitcoin, despite the benchmark digital asset still well off its all-time-high.
Down over 30% from its record near US$69,000 in November last year, examination of the Bitcoin blockchain appears to suggest that more investors are “hodling” for longer amounts of time than before.
In essence, speculators are turning into investors, adding bitcoin to their portfolio as part of a holistic approach to managing their investments.
About 57% of bitcoin currently in circulation hasn’t moved from addresses in over a year, a sign of long-term holders.
But holding bitcoin in and of itself doesn’t do much to affect price.
Given the volume of derivatives available, the notional movement of bitcoin far exceeds the actual traded underlying asset and that can still contribute to significant amounts of volatility, even when the sales and/or purchases are relatively muted.
Since the dawn of cryptocurrencies, “hodling” has been a time-tested strategy that thus far, has consistently paid out in spades and the increasing amount of illiquid supply of bitcoin is why the cryptocurrency’s daily price movements appear to mimic other risk assets.
While long-term “hodlers” appear to be accumulating during dips, short-term traders view and trade bitcoin like it’s any other risk asset, with their movements driving daily price volatility that appear to react to macro trends like inflation data and interest rates.
Yet since last July, there has been a steady transfer of bitcoin from short-term traders to long term holders, likely as more institutional investors hold at least a portion of their assets in the cryptocurrency.
In fact, examination of data from Glassnode, which provides blockchain analysis, reveals that the amount transferred from liquid (“hot” wallets) to illiquid (“cold” wallets) has increased.
To be fair, if the current timeline was a reflection of 2017, bitcoin ought to have crashed to around US$20,000 by now, but it hasn’t.
And while that’s not to say that bitcoin isn’t due for a sharp correction, the odds of that are increasingly unlikely as the base of staunch bitcoin maximalists appears to be growing and the recent leverage liquidations hasn’t caused a dip below the US$40,000 level.
If nothing else, bitcoin has traded range-bound over the past several weeks, while bitcoin’s so-called “dormancy flow” a measure of the number of days since a bitcoin was last sold, is flashing historically bullish.
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Jan 14, 2022
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