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Novum Alpha - Daily Analysis 7 July 2022 (10-Minute Read)

A terrific Thursday to you as U.S. stocks continue to rise owing to poor economic data suggesting slower growth in the U.S. prompting a more sanguine outlook on the pace of policy tightening.

 

In brief (TL:DR)

 
  • U.S. stocks marked another day of gains on Wednesday with the Dow Jones Industrial Average (+0.23%), S&P 500 (+0.36%) and the Nasdaq Composite (+0.35%) all up as investors bet that declining economic conditions in the U.S. may prompt a pause from the U.S. Federal Reserve's pace of tightening policy. 
  • Asian stocks gained on Thursday, taking their cue from Wall Street, with Hong Kong and China the only outliers as fresh Covid-19 infections in China dampen sentiment. 
  • Benchmark U.S. 10-year Treasury yields gained to 2.912% (yields rise when bond prices fall) as risk appetite rose, dampening demand for haven assets. 
  • The dollar held gains. 
  • Oil was mostly flat with August 2022 contracts for WTI Crude Oil (Nymex) (+0.20%) at US$99.22. 
  • Gold gained with August 2022 contracts for Gold (Comex) (+0.43%) at US$1,744.00
  • Bitcoin (+1.40%) gained to US$20,459, moving in sync with other risk assets and tech stocks. 

 

In today's issue...

 
  1. Global Gas Demand Likely to Slow But Prices Will Stay High in Medium Term
  2. China's Fresh Covid-19 Outbreak Could Threaten 5.5% Target GDP Growth
  3. Bitcoin Bears Prepare for the Crypto Winter Taking Billions off Exchange 

 

Market Overview

 
Ironically, the best thing that investors can hope for right now is a slowing U.S. economy. 
 
Fresh data is pouring in that the U.S. economy marked slower growth in the second quarter, with instantaneous GDP data suggesting that June saw zero growth in the world's largest economy. 
 
All of which is prompting some investors to brush off the hawkish stance of the U.S. Federal Reserve demonstrated in the minutes of the last Federal Open Market Committee meeting and pushing equities higher. 
 
Asian markets were mostly higher on Thursday with Tokyo's Nikkei 225 (+1.34%), Seoul's Kospi Index (+1.82%) and Sydney’s ASX 200 (+0.30%) up, taking their cue from Wall Street, while Hong Kong's Hang Seng Index (-0.42%) was the only outlier given fresh Covid-19 infections in China putting a damper on sentiment in the morning trading session. 

 

 

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1. Global Gas Demand Likely to Slow But Prices Will Stay High in Medium Term

 
  • Global demand for natural gas will likely start to dampen as Russia holds Europe to ransom by constantly threatening supply of the key heating fuel. 
  • Europe swapping to alternative sources of natural gas as well as relying on alternative fuels, including coal, while other countries reduce consumption due to diminished economic activity.  
     
Global gas demand is expected to falter over the next three years amid rising crude prices and fears of future Russian supply cuts, according to the International the consumption of fossil fuels.
 
Gas usage is expected fall by 0.5% this year as economic activities in Asia slow coupled with a sharp downturn in European gas demand, according to an International Energy Agency (IEA) quarterly market report.
 
The IEA report notes that soaring prices alongside supply disruptions are “damaging the reputation of natural gas as a reliable and affordable energy source” and dampening demand.
 
According to the IEA, future growth for natural gas consumption is projected to be low as the “result of weaker economic activity and less switching from coal or oil to gas.”
 
Natural gas prices have soared by 700%, owing to Europe’s move to import liquefied natural gas from other suppliers, creating what the IEA notes has become an “exceptionally tight global market.”
 
But investors betting on sustained high prices for natural gas may be in for volatility, as the IEA report notes,
 
“The current forecast is subject to unusually large uncertainty, due to Russia’s unpredictable nature.”
 
As has been seen in several other key global commodity prices that have come off their most recent highs, it’s entirely possible for natural gas prices to slip as well, especially given that Europe is already working with other sources for fuel to heat itself over the coming winter.
 
Natural gas prices should nevertheless hold up in the medium term, as American sources for liquefying natural gas take time to come online. 

 

 

2. China's Fresh Covid-19 Outbreak Could Threaten 5.5% Target GDP Growth

 
  • High frequency GDP indicators suggest that China's economy may have shrunk in the second quarter of this year despite what Beijing says. 
  • Investors mulling the purchase of Chinese assets on the cheap should also consider the veracity of official Chinese economic reports, and the authenticity of any purported rebound. 
 
China is facing a fresh spike of Covid-19 cases with growing concern over whether a series of lockdowns would be enforced again to combat the outbreak.
 
Shanghai saw a fresh influx of cases, prompting the implementation of mass testing in several districts, while eleven cities in China are restricting movement, an increase from five cities from a week earlier.
 
Hong Kong’s Hang Seng Index dipped 1.37%, with key component stocks like HSBC and CNOOC (China National Offshore Oil Corporation) declining by 3.93% and 5.58% respectively and dragging down the index.
 
China markets were hammered with the Shanghai Composite falling 1.34%, erasing a portion of the gains from the previous weeks.
 
With China ramping up Covid-19 testing once again, fears of fresh lockdowns are putting a damper on consumer sentiment and domestic business confidence, with the country’s goal of achieving 5.5% GDP growth this year looking increasingly elusive.
 
High-frequency economic indicators out of China for June suggest that the Chinese economy contracted over the second quarter, due to the lingering effects of lockdowns in dozens of cities.
 
China has only experienced a quarterly drop in GDP once, since it instituted economic reforms to open up its market in 1979, but Chinese Communist Party apparatchiks may dread telling the emperor that he wears no clothes.
 
Debate over the accuracy of China’s official economic data will likely persist for the rest of this year as Chinese President Xi Jinping puts pressure on his lieutenants to achieve the impossible – 5.5% GDP growth while sticking with touch zero-Covid policies that require lockdowns and other restrictions the minute virus cases are detected.
 
There is growing evidence of an ongoing slump in the Chinese economy, as evidenced by a slew of alternative indicators.
 
Travel data shows that passenger trips on Chinese roads were mostly below last year’s levels into July, according to transport figures analyzed by TS Lombard, while the number of domestic flights in the quarter was down 62% from the same period last year according to data provider Variflight.
 
The movement of trucks carrying goods between cities, which bears a strong correlation with GDP, also shows weak activity.
 
Chinese farmers are said to be struggling to obtain fertilizers and other key equipment for the planting season, which could affect the harvest in several months.
 
Data from G7 Connect, a digital logistics firm, notes that as of the last week of June, 20% less trucks plied China’s roads from a year earlier.
 
China’s real estate market, which accounts for a fifth of GDP and 70% of the economy through its ancillary materials and services demand, remained in a deep slump in the second quarter, according to data from China Real Estate Information Corp.
 
While China’s real estate market may have bottomed out in May, there are no signs of actual growth.
 
Data from the China Association of Automobile Manufacturers suggests that car purchases, which make up about 10% of monthly retail sales, fell by over 10% in the past quarter, which makes sense since many Chinese cities were under lockdown from zero-Covid policies.
 
Yet despite the glaring economic reality, Beijing is unlikely to report a contraction in the economy.
 
In May, Chinese Premier Li Keqiang said that officials should work to ensure the economy expands over the quarter, which is doublespeak for lower-ranking mandarins to “tell the emperor what he wants to hear.”
 
Against this backdrop, investors and analysts covering Chinese assets may struggle to gather an accurate picture of the economic situation on the ground, the durability of a rebound in asset prices and the economic prospects of a country that is increasingly deluding itself. 

 

 

3. Bitcoin Bears Prepare for the Crypto Winter Taking Billions off Exchange

 
  • Bitcoin whales are becoming bears and taking their substantial holdings of Bitcoin off cryptocurrency exchanges in anticipation of long-term holding. 
  • Withdrawal of liquidity from cryptocurrency exchanges may also be a function of Bitcoin investors opting to self-custody and many major centralized counterparties have gone insolvent. 
 
Bears prepare for the winter by storing fat over the summer months and going into hibernation when temperatures start to drop and it appears that Bitcoin bears may be doing exactly that.
 
According to data from blockchain analytics firm Glassnode, more long-term Bitcoin investors are opting to self-custody their Bitcoin instead of leaving it on cryptocurrency exchanges.
 
Bitcoin holders may also be withdrawing from exchanges as a slew of centralized cryptocurrency firms go bankrupt and on revelations that a large number of them owed money to each other and are now insolvent.
 
Against this backdrop, Bitcoin “whales” or holders of large amounts of Bitcoin, may be opting to safekeep their Bitcoin until the dust settles from the fallout of major cryptocurrency lenders such as Celsius Network, BlockFi and hedge fund Three Arrows Capital.
 
Rumors that major cryptocurrency exchange KuCoin may also be insolvent, whilst unsubstantiated, are also leading to caution amongst Bitcoin holders, who are now opting to shift their cryptocurrency off exchanges.
 
Glassnode notes that cryptocurrency balances on exchanges have fallen by over 20% from their January peak.
 
Nevertheless, there appears to be a stable investor base for Bitcoin, which has enabled its price to straddle the US$20,000 level, and Glassnode data reveals relatively flat transaction activity at the level, indicative of continued consolidation. 

 

 

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Jul 07, 2022

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