Novum Alpha - Daily Analysis 4 August 2022 (10-Minute Read)
A terrific Thursday to you as global shares climb toward the highest levels since early June on a wave of optimism over better than expected corporate earnings.
In brief (TL:DR)
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In today's issue...
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Market OverviewA global share gauge pushed toward its highest level since early June, helped by gains in Chinese tech companies.
U.S. Federal Reserve officials again signaled they will do what’s required to cool high inflation with rate increases even if that raises the risk of recession.
The bond market reflected the rhetoric, with higher shorter-tenor yields helping to deepen a key yield curve inversion, a typical precursor to recession.
Asian markets were higher on Thursday with Tokyo's Nikkei 225 (+0.54%), Sydney’s ASX 200 (+0.12%), Seoul's Kospi Index (+0.33%) and Hong Kong's Hang Seng Index (+1.78%) all up.
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1. Too Soon to Price in the Bottom
A commonly held view in the market is that picking bottoms is difficult, so investors should just make sure they have sufficient dry powder to bet on the upswings.
And while it’s true that no previous market selloff was preceded by a global pandemic, the case for more volatility ahead versus a durable rebound is still relevant.
July’s rally in global equities rolled into a far more humdrum August, and history is replete with examples of protracted selloffs peppered with invigorating rallies.
But July’s rally was special in that it was only the sixth time since the end of the Second World War, where the benchmark S&P 500 regained everything it lost in the previous month and then some, with the other five incidences on October 1974, October 2002, March 2009, January 2019 and April 2020.
In those previous episodes where the S&P 500 staged a furious rebound, it would then go on to average gains of 30% in the ensuing 12 months.
But the last five times the S&P 500 had a big reversal as it did in July, the U.S. Federal Reserve had already slashed rates aggressively, this time the central bank is hell bent on dealing with inflation by hiking borrowing costs.
And even though investors are increasingly betting on a softer Fed, there is little evidence to suggest that policymakers are prepared for any dramatic pivot within the foreseeable future.
Last year, when U.S. Federal Reserve Jerome Powell was actively selling the theory that inflation was “transitory” the central bank was behind the curve and caught flat-footed when price pressures remained stubbornly durable.
The Fed has now swung to the opposite extreme instead, with Powell conceding that failure to restore price stability would be a “bigger mistake” than pushing the U.S. into a recession, which he believes that the U.S. can still avoid.
What is more likely though is that in trying to avoid the Scylla of recession and the Charybdis of inflation, the Fed will likely achieved neither and instead reintroduce the “stop-start” policy approach that was disastrous in the 1970s and 1980s before a fresh Fed chairman stepped in and stuck to his guns.
Markets and investors hate uncertainty and with the Fed determined to keep investors guessing at the conclusion of every policy meeting, there is nothing other than an abundance of uncertainty on the horizon.
That the language and posturing of the Fed after its last meeting shifted away from a clear path of supersized rate hikes was the respite, however brief, that investors may have been looking for.
But make no mistake about it, because policy operates with a lag, even if actual inflation has slowed, just as in 2021, policymakers are likely to behind the curve when it comes to rate-setting as well and could underestimate the risk of triggering a recession.
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2. Retail Stockbroking Darling Robinhood Slashes Jobs
The pandemic upturned businesses and created winners and losers, one of which was Robinhood Markets (+11.70%), the slick retail stockbroking app that made traders of us all, as legions of bored investors flush with stimulus checks headed to gamble in the markets.
But as effective vaccines and monetary policy tightening have set in against a backdrop of soaring living expenses, retail traders have become an increasingly elusive set, forcing Robinhood to curb its costs by laying off almost a quarter of staff.
In a blogpost Tuesday, the retail trading app that popularized and gamified trading and investment, announced that it was slashing 780 employees, or around 23% of its workforce, closing two if its offices.
During more halcyon days, Robinhood once boasted 50% of retail trading accounts opened in the U.S. from 2016 through 2021, fed off a steady diet of lockdown boredom fueled by stimulus.
But since the Fed’s policy shift, shares of Robinhood have been hammered, falling by over 50% this year alone.
Robinhood’s most recent cut comes on the back of a 9% cut in headcount in April.
To be sure, trading volumes have declined dramatically, not just for Robinhood, but for markets in general, and the traditionally thin summer trading season has seen liquidity trickle as retail investors head for the beach instead of their Bloomberg terminals.
Nevertheless, Robinhood managed to narrow losses this quarter, losing just US$295 million compared with the US$308 million according to analyst forecasts and 41% less than the US$502 million the brokerage lost last year.
Net losses per share was US$0.34, compared with US$2.16 from the same quarter last year, when retail investors were out in full force.
To that end, Robinhood may be positioning itself nicely for when trading conditions improve, especially if it manages to keep costs in check.
With the bulk of revenues coming from payment for order flow, the controversial practice of selling customer trades to market makers, when market volumes eventually pick up, the combination of lower costs and higher revenue should help Robinhood narrow losses and possibly turn a profit eventually.
For now, much of Robinhood’s fortunes lie in the hands of the Fed as cryptocurrencies and tech stocks, the two most popular holdings amongst its customers, are highly sensitive to interest rates, and the central bank shows no signs of letting up on its fight against inflation.
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3. July Marked a Turning Point for Cryptocurrencies but is it durable?
It may be too soon to mark a bottom in cryptocurrencies, but no doubt the tremendous rebound in prices in July would be welcome respite for an industry bracing itself for another prolonged winter.
The market cap of all cryptocurrencies rose a whopping US$280 billion in July, after a painful selloff in May and June shook many weaker hands out of the market completely.
Significantly, institutional investment products that track cryptocurrencies have hoovered up just below US$400 million in flows since the beginning of last month, chalking up the longest run of sustained weekly net inflows since March this year, according to CoinShares.
Short positions have also waned of late, with seller exhaustion appearing to be priced into decisions and the early signs of rebound are luring investors back into cryptocurrency markets once again.
The spectacular failure of a handful of high-profile cryptocurrency firms has rattled and continues to rattle investors, including the collapse of algorithmic stablecoin Terra, lender Celsius Network and hedge fund Three Arrows Capital.
Those failures also rippled over to investment vehicles such as ETFs and trusts such as the Grayscale Bitcoin Trust, which provide investors exposure to cryptocurrencies without needing to manage the complexities of self-custody.
The market capitalization of the 500 biggest cryptocurrencies recovered to just over US$1 trillion last month and inflows are improving token prices, with asset under management in institutional-grade cryptocurrency investment products back to US$30 billion, levels not seen since early June.
But stabilization of prices may be just that – stabilization, and may not represent a more durable uptick given the challenging macroeconomic backdrop facing all manner of risk assets, of which cryptocurrencies are a subset.
Persistently high inflation and central bankers determined to put a lid on price pressures by ratcheting up borrowing costs will mean that a clear pivot in policy will be needed before a bottom can be convincingly called.
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Aug 04, 2022