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Novum Alpha - Daily Analysis 29 July 2022 (10-Minute Read)

A wonderful Friday to you as global shares are on course for a second weekly advance.

 

In brief (TL:DR)

 
  • U.S. stocks continued to rise on Thursday with the Dow Jones Industrial Average (+1.03%), S&P 500 (+1.21%) and the Nasdaq Composite (+1.08%) all up on expectations that the Fed will temper the pace of rate hikes as it heads off for a break.
  • Asian stocks were hampered by a tumble in Chinese tech shares that dragged Hong Kong toward a correction of more than 10% from a June high.
  • Benchmark U.S. 10-year Treasury yields fell one basis point to 2.67% (yields fall when bond prices rise).
  • The dollar retreated. 
  • Oil hovered below $97 a barrel with September 2022 contracts for WTI Crude Oil (Nymex) (+0.17%) at US$96.58.
  • Gold was higher with December 2022 contracts for Gold (Comex) (+0.55%) at US$1,778.90. 
  • Bitcoin (+4.13%) surged to US$23,931 alongside other risk assets.
 

In today's issue...

 
  1. What analysts say is next for Asian markets after Fed decision
  2. U.S. Enters Technical Recession
  3. Three Arrows Capital Liquidators are Trying to Force Cooperation from Missing Founders
 

Check out Novum Alpha Weekly Interview #1: What is the future of Crypto Lending?

 
 

Market Overview

 
Global shares are on course for a second weekly advance, paring this year’s rout to about 16%.
 
The risk is that the recent bout of optimism eventually gets a reality check if inflation stays stubbornly elevated, leaving interest rates higher than investors would like amid an economic downturn.
 
Asian markets were mixed on Friday with Sydney’s ASX 200 (+0.87%) and Seoul's Kospi Index (+0.45%) up, while Tokyo's Nikkei 225 (-0.23%) and Hong Kong's Hang Seng Index (-2.31%) were down. 
 

 

 

1. What Analysts say is next for Asian markets after Fed decision

 
  • While the dollar paused its ascent, analysts are warning that it is too early to see that pause as a durable reverse as the greenback remains a haven in uncertain economic conditions.
  • Given that Asia imports an abundance of dollar-denominated commodities, central banks in the region, especially in Southeast Asia, will inevitably need to race with the Fed to just keep up.
     
Investors enjoyed a reprieve this week as the U.S. Federal Reserve met market expectations with a 75-basis-point rate hike, and posturing that was far less hawkish than feared.
 
And even though Asian markets rallied after the Fed meeting, investors shouldn’t let their guard down because more policy tightening by the Fed could trigger even sharper capital outflows from emerging markets, which are looking increasingly vulnerable.
 
While the dollar paused its ascent, analysts are warning that it is too early to see that pause as a durable reverse as the greenback remains a haven in uncertain economic conditions.
 
Not helping matters, flows continue to leave Asia against the strength of the greenback and rising U.S. Treasury yields.
 
Given that Asia imports an abundance of dollar-denominated commodities, central banks in the region, especially in Southeast Asia, will inevitably need to race with the Fed to just keep up.
 
Earlier this month, the Monetary Authority of Singapore surprised with an interest rate hike while the central bank of the Philippines mirrored the move.
 
One silver lining of course is that as Asian yield spreads widen, Asian bonds may start to look attractive with possible value in Indian high-yield issuers in sectors such as renewable energy, steel and telecom that could provide durable returns.
 
Nevertheless, the Fed’s somewhat softer posturing at the end of its most recent meeting has fueled some optimism that the beginning of the end of the hiking cycle may be in sight, especially with the U.S. economy rapidly starting to slow.
 
 

2. U.S. Enters Technical Recession

 
  • GDP fell two consecutive quarters in a row, with a dip of 0.9% on an annualized basis and comes on the back of first-quarter GDP data contracting by 1.6%.
  • Fed rate hikes are beginning to slow the U.S. economy, with many investors watching the markets closely to see if tightening measures risk pushing the U.S. into a full-blown recession.
     
The U.S. slipped into a technical recession in the second quarter, according to data published by the U.S. Commerce Department on Thursday which showed that the U.S. economy shrank in the second quarter.
 
GDP fell two consecutive quarters in a row, with a dip of 0.9% on an annualized basis and comes on the back of first-quarter GDP data contracting by 1.6%.
 
Weaker business inventory growth headed second quarter data with several retailers indicating that their inventories grew at an unusually quick pace last year, as pandemic-swept shelves were restocked, and supply-chain bottlenecks were alleviated.
 
In the last two quarters of 2021, U.S. retailers rushed to beef up inventories in anticipation of pent-up pandemic demand and on concerns that supply chain disruptions would leave them with empty shelves.
 
Instead, that bout of overbuying has burdened some of America’s biggest retailers, including Target, which is known for its excellence in inventory management, with massive overstock that it is now struggling to clear.
 
A technical recession means two consecutive quarters of GDP contraction and although markets have rebounded on expectations that the Fed will dial back tightening if economic conditions get worse, the central bank remains focused on fighting inflation.
 
Fed rate hikes are beginning to slow the U.S. economy, with many investors watching the markets closely to see if tightening measures risk pushing the U.S. into a full-blown recession.
 
But the same way that the Fed was in denial about inflation, it appears to be in denial about recession with U.S. Federal Reserve Chairman Jerome Powell saying that he did not believe that the U.S. was in a recession, drawing attention to how American labor markets remained tight.
 
To that end, Powell’s view is supported by the data, with U.S. unemployment holding at 3.6%, the lowest since the pandemic struck and even if job losses should mount, the Fed Chairman has indicated that the policymakers would be open to letting unemployment rise as a cost of its fight against inflation.
 
 

3. Three Arrows Capital Liquidators are Trying to Force Cooperation from Missing Founders

 
  • Founders Su Zhu and Kyle Davies have only provided “selective and piecemeal disclosures” regarding the fund’s assets and are threatening further legal pressure to get more disclosure.
  • Davies and Su have surfaced periodically for interviews with Bloomberg and the Wall Street Journal, in an attempt to steer the narrative surrounding the implosion of their hedge fund, and claim that threats against their lives have been made, which is why they are staying in hiding.
 
You can’t hit what you can’t see and liquidators for Three Arrows Capital are struggling to communicate, let alone locate the founders of the insolvent cryptocurrency hedge fund.
 
According to lawyers for Three Arrows Capital’s liquidators, founders Su Zhu and Kyle Davies have only provided “selective and piecemeal disclosures” regarding the fund’s assets and are threatening further legal pressure to get more disclosure.
 
Both Davies and Su have been elusive since their multibillion-dollar cryptocurrency hedge fund collapsed under the weight of massive leverage and the implosion of Terra Luna, a protocol whose tokens Three Arrows Capital was heavily invested in.
 
Liquidators appointed by the bankruptcy court in the British Virgin Islands have so far gained control of over US$40 million of the fund’s assets, a far cry from the US$2.8 billion of claims filed against Three Arrows Capital, a figure that is expected to grow in the coming weeks.
 
Davies and Su have surfaced periodically for interviews with Bloomberg and the Wall Street Journal, in an attempt to steer the narrative surrounding the implosion of their hedge fund, and claim that threats against their lives have been made, which is why they are staying in hiding.
 
 

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Jul 29, 2022

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