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Novum Alpha - Daily Analysis 30 June 2022 (10-Minute Read)

A terrific Thursday to you as stocks continue their decline against a slew of conflicting data from China and the U.S.


In brief (TL:DR)

  • U.S. stocks marked another day of declines on Wednesday with the Dow Jones Industrial Average (+0.27%) up marginally, while the S&P 500 (-0.07%) and the Nasdaq Composite (-0.03%) were mainly flat thanks to falls in tech stocks on rate hike concerns. 
  • Asian stocks fluctuated on Thursday as investors tempered optimism over China's loosening of pandemic restrictions with concerns over a U.S. recession. 
  • Benchmark U.S. 10-year Treasury yields fell to 3.104% (yields fall when bond prices rise) as risk sentiment soured and the prospect of a recession in the world's largest economy loomed large. 
  • The dollar fell in Asian trading as Asian currencies rebounded on the back of China's looser pandemic measures. 
  • Oil gained with August 2022 contracts for WTI Crude Oil (Nymex) (+0.20%) at US$110.00 on optimism over renewed Chinese demand. 
  • Gold was flat with August 2022 contracts for Gold (Comex) (+0.00%) at US$1,817.50 ending unchanged.
  • Bitcoin (-1.04%) slipped to US$20,059, and is inches away from slipping below the psychologically-important support, with rumors of liquidations of long Bitcoin positions held by hedge fund Three Arrows Capital swirling. 


In today's issue...

  1. China Slashes Quarantine Duration, Fueling Stock Gains
  2. Massive US$3 trillion Cash Horde Complicates Central Bank Rate Hikes
  3. Grayscale Makes Fresh Attempt at Spot Bitcoin ETF


Market Overview

Despite signs that Beijing may have had a change of heart with respect to its harsh zero-Covid lockdowns, by reducing quarantines to 10 days from 3 weeks, investors remain jittery on the prospect of a U.S. Federal Reserve-triggered recession. 
There are increasing signs that inflation is likely here to stay and policymakers may need to adopt far more aggressive measures to put a lid on price pressures, even as they promised at the close of the last Fed meeting to steer away from needing to deploy such measures. 
Global investors remain on edge and it's hard to find optimism against a backdrop of heightened uncertainty, especially given that policymakers themselves are constantly having to adapt to a dynamic environment with respect to inflation. 
Asian markets were mostly lower on Thursday with Tokyo's Nikkei 225 (-1.47%), Seoul's Kospi Index (-0.98%) and Sydney’s ASX 200 (-0.77%) reversing gains from a China rally yesterday, while Hong Kong's Hang Seng Index (+0.03%) was up marginally in the morning trading session. 



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1. China Slashes Quarantine Duration, Fueling Stock Gains

  • China has slashed its quarantine requirement from 3 weeks to 10 days, fueling sentiment that the economy may be on the path to normalcy and reintegrating with the global economy. 
  • Durability of the rebound is still questionable because China still lacks long-term Covid-19 solutions such as effective vaccines that can pave the way for a more sustainable economic re-opening. 
Chinese stocks have found some respite after Beijing reduced the mandatory quarantine for its people.
For China bulls, this marks a move away from China’s zero-Covid policy and the prospect of improved economic fortunes, fueling positive sentiment and appetite for Chinese assets.
This week saw the CSI 300 index furthering its gains and is now up 19% since its April lows, outperforming global peers since for the first time since 2014. Hong Kong’s Hang Seng Index erased losses as well.
Zooming in, China’s reduction of its quarantine from 3 weeks to 10 days indicates that authorities are getting more serious about reducing the economic impact of rigid pandemic restrictions.
Bolstered by support from monetary and fiscal policies, the change in China’s virus regulations has rekindled confidence and appetite for Chinese stocks as it maintains its outperformance while its global counterparts slip under the immense pressure of policy tightening.
It may still be early days, but China’s policy divergence with other major central banks, the prospect of reawakening a sleeping economic giant that has been coaxed into a zero-Covid lockdown slumber, could see a swift rebound in Chinese stocks.
Whether a turnaround in Chinese assets is durable however, remains uncertain.
Until such time that effective long-term Covid policies can be enacted, especially the use of vaccines, there remains the possibility of renewed restrictions.



2. Massive US$3 trillion Cash Horde Complicates Central Bank Rate Hikes

  • A massive US$3 trillion household and corporate cash hoard in the U.S. is threatening to complicate U.S. Federal Reserve measures to use interest rates to rein in inflation. 
  • Rate hikes may ultimately need to become overly aggressive, triggering a recession, even as the abundance of cash ensures that prices remain stubbornly high. 
It’s hard being a central banker even in the best of times, but a cash horde is threatening to derail even the most hawkish policymaker’s attempt to rein in price pressures and temp down the fastest pace of inflation in four decades.
According to  Apollo Global Management Chief Economist Torsten Slok, the large quantity of cash on household and corporate sector balance sheets will “take more rate hikes to slow the economy down”.
Slok adds that the complete amount of household and corporate cash within checking accounts is estimated to be US$3 trillion higher than what pre-pandemic trends would suggested.
In a bid to slow demand growth and ultimately inflation, the U.S. Federal Reserve has hiked interest rates at the fastest pace in decades, but has thus far shied away from supersized rate hikes and this incremental approach to putting a lid on inflation is a time-consuming process.
An inherent risk, Slok adds, is the necessity for interest rates to climb higher as it will require time for the Fed to effectively “cool things down” especially with so much cash in the hands of investors.
Whereas policy expectations may reveal their effect almost immediately in markets, as evidenced by the price of risk assets, taming cost of living price pressures takes time to flow through the system.
Raising rates makes businesses borrow less, expand less and by extension, demand for more raw materials less, but that flow takes time to work its way through the system, whereas price pressures are immediate.
With headline inflation soaring to 8.6% in May, the Fed does not have the privilege of time to observe the implications of each subsequent rate hikes and there are growing concerns that if the Fed is pushed into a corner, it will have to slam the brakes to quell inflation.
A growing chorus of economists are warning the Fed’s mounting hikes risk tipping the economy into a recession.



3. Grayscale Makes Fresh Attempt at Spot Bitcoin ETF

  • Grayscale Investment enlists the help of Jane Street and Vertu in its bid to convert its Grayscale Bitcoin Trust product into a spot-backed ETF. 
  • U.S. Securities and Exchange Commission has been reluctant to approve spot Bitcoin ETF applications and the recent connection of GBTC to likely-insolvent Three Arrows Capital could complicate Grayscale's effort to convert GBTC into an ETF. 
While the U.S. Securities and Exchange Commission has doggedly refused a spot Bitcoin ETF, Grayscale Investment LLC continues to push ahead in an attempt to turn its Grayscale Bitcoin Trust product into an ETF.
The Grayscale Bitcoin Trust was one of the first ways that institutional investors could gain exposure to the cryptocurrency, without having to fumble with custodial issues and private keys, but the terms of the Trust also resulted in premiums and discount to the spot price of Bitcoin, based on market demand.
In times when the price of Bitcoin rallied, the Grayscale Bitcoin Trust traded at a premium to the spot price, whereas the Trust units now trade at a discount given the current market conditions.
To convert the Grayscale Bitcoin Trust into an ETF would allow the investment vehicle hopefully to more closely track the price of Bitcoin, which was its original goal to begin with.
And in an effort to lobby the SEC to approve its conversion, Grayscale has enlisted the help of market maker Jane Street and Virtu as authorized participants to back its spot Bitcoin ETF bid.
Grayscale’s Bitcoin Trust has an estimated market capitalization of US$13.6 billion and currently trades at a whopping 32% discount to the price of Bitcoin.  
Grayscale CEO Michael Sonnenshein suggests that this is a pivotal moment for the firm adding that the support from Virtu and Jane Street should be “digested as validation” as the nascent asset space has come to a point where institutional figures are ready to back such an ETF.
GBTC has come under increased scrutiny recently due to its connection to Singapore-based hedge fund Three Arrows Capital, with one of the fund’s purported trades said to be arbitraging the spread between the spot price of Bitcoin and the price of GBTC’s units.
Three Arrows Capital is thought to be insolvent and it is as yet unclear what will become of its alleged holdings of units in GBTC. 



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Jun 30, 2022

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