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Novum Alpha - Daily Analysis 26 July 2022 (10-Minute Read)

Markets are bracing not just for the Fed and any policy signals from Chairman Jerome Powell, but also corporate reports from the likes of Apple and Alphabet.

 
A terrific Tuesday to you as China tech lifts Asian stocks from its pre-Fed rate hike tempest. 
 

In brief (TL:DR)

 
  • U.S. stocks were mixed on Monday with the Dow Jones Industrial Average (+0.28%) and S&P 500 (+0.13%) up, while the Nasdaq Composite (-0.43%) was down ahead of an anticipated Fed rate hike and soft quarterly earning results.
  • Asian stocks received a fillip Tuesday from China’s technology sector, helping to alleviate some of the caution in global markets ahead of a hotly anticipated U.S. Federal Reserve interest-rate hike.
  • Benchmark U.S. 10-year Treasury yields were little changed at 2.79% (yields rise when bond prices fall) as traders sat on the sidelines pending policymakers raising rates by an expected 0.75%. 
  • The dollar is near its lowest level since early July.
  • Oil edged higher with September 2022 contracts for WTI Crude Oil (Nymex) (+1.39%) at US$98.04.
  • Gold was little changed with December 2022 contracts for Gold (Comex) (+0.19%) at US$1,740.40. 
  • Bitcoin (-3.21%) retreated to US$21,145, while investors eye the strength of the US$21,000 level of support. 
 

In today's issue...

 
  1. Dollar Strength is Bruising America’s Global Companies
  2. Chinese Real Estate Stocks Rebound on US$44 billion Bailout Hopes
  3. Bitcoin Buckles Under Macro Pressure
 

Market Overview

 
Markets are bracing not just for the Fed and any policy signals from Chairman Jerome Powell, but also corporate reports from the likes of Apple (-0.74%) and Alphabet (-0.36%).
 
Other risks include ongoing disruptions to European gas supplies from Russia as well as China’s Covid-19 curbs and property woes.
 
Traders are braced for a wave of debt sales and a widely expected 75-basis-point Fed rate hike on Wednesday, part of a campaign to tackle inflation.
 
Asian markets were mostly higher on Tuesday with Sydney’s ASX 200 (+0.26%), Hong Kong's Hang Seng Index (+1.67%) and Seoul's Kospi Index (+0.39%) up, while Tokyo's Nikkei 225 (-0.16%) was down slightly.
 

 

 

1. Dollar Strength is Bruising America's Global Companies

 
  • The soaring dollar has made it far more challenging for analysts to discern if U.S. companies were displaying evidence of a slowing U.S. economy, as high inflation and tighter monetary policy weigh on business and consumer demand.
  • Snapshot economic data already signal a pullback in activity as consumers cut spending with inflation eating into their purchasing power.
     
It’s all fun and games until it’s time to collect and more of America’s biggest firms are realizing that collecting from offshore customers is thinning out against the backdrop of a strengthening dollar.
 
Billions of dollars of second quarter sales have been wiped off U.S. companies, with many cutting of America’s biggest brands, including IBM (+0.23%), Johnson & Johnson (+0.20%) and Philip Morris (-0.094%) cutting guidance for the rest of the year. 
 
Apple (-0.74%) and Microsoft (-0.59%), which report their quarterly earnings in the coming weeks, and generate a substantial portion of their earnings outside of the U.S., are expected to join a growing list of American companies issuing forward guidance on earnings.
 
The soaring dollar has made it far more challenging for analysts to discern if U.S. companies were displaying evidence of a slowing U.S. economy, as high inflation and tighter monetary policy weigh on business and consumer demand.
 
Snapshot economic data already signal a pullback in activity as consumers cut spending with inflation eating into their purchasing power.
 
With the U.S. Federal Reserve largely expected to raise borrowing costs by a further 0.75% this week and tighten policy to restrain demand, the Fed’s monetary policy is in stark contrast to that of the European Central Bank and the Bank of Kapan, which have been far more restrained in their efforts to combat inflation.
 
The ECB recently raised interest rates by 0.50% for the first time in over a decade and its highest rate hike in over twenty years, while the BoJ has kept borrowing costs at rock bottom, which has sent the euro and yen plummeting against the dollar.
 
Under normal economic conditions, the yen and the euro have helped to temper some of the dollar’s rise as Europe and Japan pursued negative rates to prevent their currencies from rising too quickly in order to facilitate their export-oriented economies.
 
However, rapidly rising interest rates in the U.S. mean that the dollar is now heads and shoulders above the euro and yen, which hurts some of the biggest customers for American products overseas.
 
Last week, IBM warned that the strengthening dollar could reduce this year’s revenues by a whopping US$3.5 billion, while Johnson & Johnson, the consumer goods giant, warned of a US$4 billion drop in sales this year.
 
Cigarette giant Philip Morris saw a US$500 million drag on earnings because a strengthening dollar would make some of its most popular Marlboro cigarette products more expensive for export markets.
 
Efforts to hedge foreign exchange risk has also been futile, given the relentless ascent of the dollar.
 
But of all the sectors susceptible to an ascendant dollar, tech seems particularly vulnerable, with Goldman Sachs estimating that a whopping 59% of sales for tech companies listed on the S&P 500 coming from outside the United States, far above the average for the index.
 
 

2. Chinese Real Estate Stocks Rebound on US$44 billion Bailout Hopes

 
  • While the People’s Bank of China has encouraged lenders to make more loans and to fund more mortgages, the combination of a slowing global economy and rolling zero-Covid lockdowns has dampened appetite for Chinese property.
  • With the State Council moving to raise a fund to shore up embattled real estate developers, China’s property crisis of its own making may avoid a messy unwind.
 
There’s little denying that China’s moribund real estate market needs a lot more assistance than rhetoric.
 
But so far, measures out of Beijing have been lackluster and noncommittal.
 
While the People’s Bank of China has encouraged lenders to make more loans and to fund more mortgages, the combination of a slowing global economy and rolling zero-Covid lockdowns has dampened appetite for Chinese property.
 
Homebuyers have withheld mortgage payments in protest of unfinished projects and the gloomy economic outlook has found a market replete with sellers, but few buyers.
 
Against this backdrop and to avoid an implosion of a significant sector of the economy, on Monday, China’s powerful State Council passed a plan to establish a real estate fund worth up to US$44.4 billion to prop up at least a dozen embattled property groups.
 
It’s believed that the monies will go some ways towards helping real estate developers complete their projects and hopefully stave off an implosion of the Chinese real estate sector which contributes an estimated 29% of the Chinese economy. 
 
China’s State Council likely caved to public pressure after homebuyers across the country either stopped paying their mortgages or threatened to do so, as developers struggle to raise funds to build the homes promised.
 
Local governments across China have been forced to assume responsibility for stalled real estate developments and have reached out to state banks and asset managers to help fund completions, support that has been patchy.
 
But now with the State Council moving to raise a fund to shore up embattled real estate developers, China’s property crisis of its own making may avoid a messy unwind.
 
Ostensibly, it would seem as if the bailout should be welcome by real estate developers but given the current sentiment and property prices which are rapidly flatlining, if not declining, completing projects isn’t likely to turn a profit for developers.
 
Which is why the recent rally in Chinese property developers may be short-lived.
 
 

3. Bitcoin Buckles Under Macro Pressure

 
  • Bitcoin had slipped to US$21,095, well below its most recent level of support at US$22,000 and actively testing a new support at US$21,000.
  • Cryptocurrency markets have recovered somewhat since the initial rout from the collapse of algorithmic stablecoin UST and its sister token Luna, but are still some 70% off their all-time-highs. 
 
In further signs that Bitcoin is maturing as an asset class, the benchmark cryptocurrency buckled under pressure and expectation that the U.S. Federal Reserve will weigh in with another monster-sized rate hike this week.
 
At the time of writing, Bitcoin had slipped to US$21,095, well below its most recent level of support at US$22,000 and actively testing a new support at US$21,000.
 
So-called altcoins fell more sharply compared with Bitcoin, including Ether, Avalanche and Solana, which had only recently notched double-digit percentage returns, outpacing gains in Bitcoin.
 
Over the past several weeks, cryptocurrencies had defied expectations, by decoupling somewhat from other risk assets, in particular Bitcoin, which fell to its lowest rolling 60-day correlation versus the Nasdaq 100 since January.
 
However, riskier investments lost steam ahead of the Fed meeting this week, with an interest rate hike expected later tomorrow and a slate of disappointing earnings from some of America’s biggest technology companies against a slowing economy and soaring dollar.
 
Tech shares once again dragged down Bitcoin and the two asset classes regained their strong correlation, but some analysts suggest that the worst is over for Bitcoin, after a selloff this year saw over 50% of its value wiped off.
 
The cryptocurrency sector is having to contend with several headwinds, not least of which is the ongoing fallout from the highly public failure of several large cryptocurrency lenders, including Celsius Network and hedge fund Three Arrows Capital.
 
Cryptocurrency markets have recovered somewhat since the initial rout from the collapse of algorithmic stablecoin UST and its sister token Luna, but are still some 70% off their all-time-highs. 
 
 

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Jul 26, 2022

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