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Novum Alpha - Daily Analysis 6 July 2022 (10-Minute Read)

How many investors need to believe that a recession will happen before one actually does?

 
A wonderful Wednesday to you as markets come under pressure as recession risks increase. 
 

In brief (TL:DR)

 
  • U.S. stocks opened a mixed bag the first day after the July Fourth long weekend with the Dow Jones Industrial Average (-0.42%) down slightly as investors shunned value stocks which have more exposure to the economy, while the S&P 500 (+0.16%) and the Nasdaq Composite (+0.16%) gained as a more sanguine outlook for rate hikes against a backdrop of recession helped revive the fortune of tech stocks. 
  • Asian slipped on Wednesday as growing concerns over a global recession wore down sentiment. 
  • Benchmark U.S. 10-year Treasury yields continued to slide to 2.831% (yields fall when bond prices rise) as recession risks saw heightened demand for haven assets and as signs that inflation may have peaked abound. 
  • The dollar soared to its highest level in two years. 
  • Oil slipped below US$100 for the first time in months with August 2022 contracts for WTI Crude Oil (Nymex) (+0.47%) at US$99.97 with recession fears weighing on demand outlook.  
  • Gold sank with August 2022 contracts for Gold (Comex) (+0.06%) at slipping below US$1,800.00 against a strengthening dollar and ending at US$1,764.90.
  • Bitcoin (-1.04%) slipped to US$20,080, with bids and asks equally weighted on both sides as investors mulled the prospect of a recession with the possibility of a softer U.S. Federal Reserve at its next policy meeting. 
 

In today's issue...

 
  1. G7 Proposed Price and Output Cap on Russian Oil Likely to Fail
  2. Canada at Risk of Wage-Price Spiral 
  3. Vauld is Next Domino to Fall as Crypto Lending Contagion Worsens
 

Market Overview

 
How many investors need to believe that a recession will happen before one actually does? 
 
As economic storm clouds loom on the horizon, there are growing signs that inflation may have peaked and sentiment soured against the backdrop of aggressive monetary policy tightening by the U.S. Federal Reserve increasing the possibility that a recession is on the cards (if not already). 
 
Investors found safety in U.S. Treasuries, putting pressure on yields while the outside chance of milder rate hikes this month are once again fueling bargain hunters in rate-sensitive tech stocks. 
 
Asian markets were were weighed down by recession risks on Wedensday with Tokyo's Nikkei 225 (-1.10%), Seoul's Kospi Index (-1.82%), Sydney’s ASX 200 (-0.41%) and Hong Kong's Hang Seng Index (-1.37%) all lower in the morning trading session. 
 

 

 

1. G7 Proposed Price and Output Cap on Russian Oil Likely to Fail

 
  • The Group of 7 industrialized nations is attempting to implement a tariff and price cap on Russian oil in an attempt to alleviate Europe's looming energy crisis, while stymieing Moscow's ability to continue waging war in Ukraine.  
  • G7 cap on Russian oil unlikely to work in practice because China and India remain major buyers of heavily discounted Russian crude. 
     
Seven of the world’s largest industrial economies are mulling a price cap on Russian oil in a bid to curtail the Kremlin’s ability to fuel its aggression in Ukraine as well as shield consumers from soaring energy prices, but the prospect of implanting one may be more aspirational than realizable. 
 
In May, U.S. Treasury Secretary Janet Yellen described a plan to her European counterparts to tariff or cap Russian oil in order to alleviate Europe’s fuel shortage until a full ban on the country’s energy exports came in effect.
 
Energy analysts suggest that imposing a price cap could possibly backfire if key consumers are not involved to synergistically implement the measures.  
 
Some of the biggest customers of Russian fossil fuels include China and India who have benefited greatly from discounts on Russia crude oil of US$30 a barrel or more, as compared to the international benchmark Brent Crude which trades around US$110 a barrel.
 
Given how neither India nor China have been unequivocal in their condemnation of Russia’s invasion of Ukraine and have been soaking up heavily discounted Russian crude, it’s highly unlikely that sufficient consumer unity can be garnered to implement a price cap in any meaningful way.
 
Speaking with CNBC, Senior Vice President at energy research firm Rystad Claudio Galimberti noted that a price ceiling will have “many obstacles that could derail” the plan and states that Russia could easily refuse to sell its oil at prices set by the cap, especially if the benchmark is low and close to production costs.
 
Galimberti adds that while a price cap is “a measure worth considering at this stage” he also notes that “time is running out”.
 
With the war in Ukraine dragging on and Russian forces making greater gains in the Donbas, Europeans are meanwhile facing an energy crisis which has seen the price of natural gas shoot up by over 700%.
 
A G7 cap on Russia’s crude oil exports, while admirable, is unlikely to find the needed consensus amongst the current major buyers of the resource – the real cap on current energy prices will come from worries over an impending recession.  
 
 

2. Canada at Risk of Wage-Price Spiral

 
  • Rising inflation expectations in Canada could become fuel for consumers and businesses that would spark off a wage-price spiral.  
  • Stagflation risks are increasing in Canada especially as the prices of key commodity exports come off their most recent highs. 
 
The Bank of Canada’s quarterly survey of executives and consumers suggest expectations of inflation are likely to be persistent as Canada experiences tight labor markets and companies continue to be battered by increasing input overheads.
 
With Canadian businesses struggling to fill demand, there is growing pressure on the Bank of Canada’s Governor Tiff Macklem to swiftly withdraw stimulus from the economy.
 
Speaking with Bloomberg, Assistant Chief Economist at the Royal Bank of Canada Nathan Janzen suggests the Bank of Canada is worried expectations of long-term inflation could become unstable and in order to prevent such an outcome, raising rates from their current low levels is “an easy call to make”.
 
Consumer expectations of price increments soared to record highs, with households observing inflation levels at 6.8% in one year and 5% in two years, the highest forecasts in decades.  
 
Anticipated increases in the cost of living are key indicators of actual inflation where businesses elevate prices and staff fixate on salary raises in expectations of higher prices, with the potential to fuel a wage-price spiral.  
 
According to the Bank of Canada, there are growing concerns that consumer expenditure may be beaten down by higher inflation, and lower consumer confidence could be compounded by wages not meeting the rising cost of living.
 
The prospect of course is that expectations become reality and Canada tumbles into stagflation, with low growth and high inflation tanking the economy.
 
A recent slump in commodity prices has also hit Canada, with rising expectations of a global recession pulling down major agricultural and industrial commodity prices down from their recent highs. 
 
 

3. Vauld is Next Domino to Fall as Crypto Lending Contagion Worsens

 
  • Singapore-based Vauld is the latest crypto lender to freeze all transactions on Monday. 
  • Multiple high-profile collapses of Singapore-based crypto firms is forcing the city-state's regulators to take a closer look at the sector and may see fresh regulations being implemented.
 
As contagion from the collapse of algorithmic stablecoin TerraUSD and its sister token Luna, as well as cryptocurrency hedge fund Three Arrows Capital continues to spread, Singapore-based crypto lender Vauld has become the latest firm to halt transactions.
 
This week, Vauld halted all withdrawals, trading and deposits on its platform and is currently scouting for potential restructuring solutions, according to the firm.
 
Vauld is also known to have engaged Kroll as its financial advisor and lawyer Cyril Amarchand Mangaldas as its Indian legal advisor as well as Singapore law firm Rajah & Tann to advise on Singapore legal matters.  
 
Vauld CEO Darshan Bathija stated in a blog post on Monday that the firm is experiencing “financial challenges” which stemmed from “volatile market conditions” and the issues with the firm’s major business partners.
 
Vauld’s customers withdrew close to US$200 million the crypto lender’s platform since June 12 before it halted all transactions halt this week.
 
According to a Bloomberg report, Vauld is said to be in discussions to be bought by rival Nexo, which is currently conducting a 60-day due diligence process on the firm.
 
Vauld is the latest domino to fall as crypto lenders resort to emergency financing and bailouts amidst a US$2 trillion cryptocurrency market rout, creating a smorgasbord of opportunities for well-funded crypto firms to sweep in and pick up assets at pennies on the dollar.
 
In an interview with Bloomberg, Nexo co-founder Antoni Trenchev suggests that Vauld may have been responsible for its own predicament,
 
“It was built out correctly, unfortunately turns out they made some bad investment decisions, but the company as such is interesting as it has a lot of traction in India and Southeast Asia.”
 
According to Trenchev, who did not elaborate on what investment decisions Vauld made that were questionable, Vauld is said to have “hundreds of millions” in assets under management, well down from the firm’s earlier target of US$5 billion.  
 
Bitcoin, the world’s largest cryptocurrency by market cap saw its worst quarterly performance since 2011 in the second quarter of this year.
 
But the recent high-profile fallout of many Singapore-based crypto entities is forcing the city state’s regulators to take a closer look at the sector.
 
Just hours after Vauld’s announcement on Monday that it would be freezing transactions, Singapore’s central bank said that it was mulling fresh cryptocurrency rules to protect consumers.
 
In a written response to a question from Singapore’s parliament, Monetary Authority of Singapore Chairman Tharman Shanmugaratnam said,
 
“These (rules) may include placing limits on retail participation, and rules on the use of leverage when transacting in cryptocurrencies.”
 
 

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If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  

Jul 06, 2022

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