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Novum Alpha - Daily Analysis 16 August 2022 (10-Minute Read)

A terrific Tuesday to you as increasing signs of economic slowdown stir caution in markets.

 

In brief (TL:DR)

 
  • U.S. stocks closed higher on Monday with the Dow Jones Industrial Average (+0.45%), the S&P 500 (+0.40%) and the Nasdaq Composite (+0.62%) all up. 
  • Asian stocks were weighed by mounting signs of a sharp economic slowdown.
  • Benchmark U.S. 10-year Treasury yields fell one basis point to 2.78% (yields fall when bond prices rise). 
  • The dollar was firm. 
  • Oil extended losses with September 2022 contracts for WTI Crude Oil (Nymex) (-0.68%) at US$88.80 on worries about demand as well as the possible return of Iranian supplies.
  • Gold fell with December 2022 contracts for Gold (Comex) (-0.29%) at US$1,792.90.
  • Bitcoin (-0.83%) fell to US$24,023 against a backdrop of concerns over an economic slowdown and how that could affect market sentiment. 

 

In today's issue...

 
  1. Russian Bonds are Finding Buyers in Big Banks
  2. Chinese Airlines Are Taking Off from U.S. Exchanges
  3. Crypto Rally Cools Off

 

Market Overview

 
Bets on cooling inflation and less punitive monetary tightening as the world economy slows have contributed to a near 13% rebound in global equities from June lows.
 
The danger for the bounce lies in the possibility of persistent price pressures that keep borrowing costs higher for longer, leading to recession.
 
Mounting signs of a sharp economic slowdown weighed on stocks in Asia as well as commodity prices while supporting sovereign bonds.
 
Asian markets were mixed on Tuesday with Tokyo's Nikkei 225 (-0.01%) and Hong Kong's Hang Seng Index (-1.05%) down, while Sydney’s ASX 200 (+0.58%) and Seoul's Kospi Index (+0.22%) were up.

 

 

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1. Russian Bonds are Finding Buyers in Big Banks

 
  • More Wall Street banks are willing to trade Russian bonds that were once viewed as untouchable, including JPMorgan Chase and Bank of America.
  • Energy sales have fueled fresh funds that have bid up the benchmark 10-year Russian government bond to 39 cents on the euro, up from a low of 16 cents at the end of June.
     
Not letting politics stand in the way of profits, some of Wall Street’s biggest and most storied names are throwing their hat into the Russian bond ring again.
 
With the Russian invasion of Ukraine and stiff western sanctions forcing many banks to withdraw from Russia and dealings in the nation’s assets taboo, many investors were stuck with deeply distressed Russian positions and unable to find a broker.
 
However, with the recent guidance from the U.S. Office for Foreign Assets Controls, there’s now more confidence in the market about the ways that banks can deal in Russian assets, without raising the ire of regulators.
 
More Wall Street banks are willing to trade Russian bonds that were once viewed as untouchable, including JPMorgan Chase (+0.27%) and Bank of America (-0.14%) with the duo offering to facilitate transactions in Russian corporate and sovereign debt on behalf of clients.
 
After the U.S. Treasury Department said it’s not a violation of U.S. sanctions for individuals to wind down their existing Russian positions, banks are now willing to broker transactions, which will bring relief to investors holding these assets and left unsure of how to value them.
 
Bank of America sent a note to investors last week saying the trades are for those seeking to exit Russian debt holdings, as opposed to those looking to add fresh positions.
 
With the war in Ukraine dragging on, pragmatism has prevailed, with the Russian ruble rebounding sharply from immediately after sanctions were lowered on Russia and trading increases from Russians looking for assets to buy, Russian debt has bounced back.
 
Energy sales have fueled fresh funds that have bid up the benchmark 10-year Russian government bond to 39 cents on the euro, up from a low of 16 cents at the end of June.
 
And the ruble has continued to defy expectations by maintaining its strength, which should be music to the ears of investors looking to exit from their embattled Russian positions. 

 

 

2. Chinese Airlines Are Taking Off from U.S. Exchanges

 
  • Analysts are seeing state-controlled Chinese airlines as the next potential group to depart, possibly followed by internet giants.
  • And while Chinese tech giants were always expected to bear the main brunt of the delisting from American exchanges, the likelihood of airlines joining that group has been an unexpected development.
     
With Chinese state-owned companies dealing in commodities, real estate, and infrastructure slated to leave U.S. bourses, the next group of firms that are speculated to be on the chopping block from America’s markets are China’s massive airlines.
 
The voluntary delisting of five Chinese state-owned enterprises (SOEs) including Sinopec (-0.48%) and PetroChina (-0.96%) from the New York Stock Exchange is already paving the way for further exits, the result of an accounting spat that’s a throwback to the Trump administration.
 
U.S. regulators have been pushing for Chinese firms listed on American exchanges to disclose financial data, which Beijing has pushed back against, on threat of delisting, citing national security concerns.
 
Earlier this year, strained economic conditions on both sides of the Pacific raised hopes that Chinese firms, of which there are hundreds, listed on American exchanges may prevail, with regulators in Washington and Beijing hinting that some form of compromise could be reached.
 
But a visit by the U.S. House of Representatives Speaker Nancy Pelosi to Taiwan, as well as another congressional delegation visit to the island that China deems a renegade province, have closed the door on any potential compromise on Chinese companies listed on America’s deep and liquid capital markets.
 
Analysts are seeing state-controlled Chinese airlines as the next potential group to depart, possibly followed by internet giants, even though it’s hard to see how the financial data of airlines could be an issue of national security, unless they represented ownership records that Beijing would prefer remain sealed.      
 
China Eastern Airlines (+0.42%) raised US$227 million in its initial public offering back in 1997, while China Southern Airlines (-0.32%) garnered US$632 million the same year.
 
Chinese internet and e-commerce giants, such as Alibaba Group Holding (-1.96%), Baidu (-0.67%), JD.com (-0.45%), Weibo and Tencent Music Entertainment Group (+5.90%), could come into focus in the coming weeks as they hold a huge amount of potentially sensitive data on millions of Chinese individuals, public enterprises and institutions.
 
And while Chinese tech giants were always expected to bear the main brunt of the delisting from American exchanges, the likelihood of airlines joining that group has been an unexpected development.

 

 

3. Crypto Rally Cools Off

 
  • Cryptocurrencies were mostly unchanged as the recent rally in market bellwethers Bitcoin and Ether has cooled, with many investors looking to the pullback as a natural symptom of taking some money off the table, especially given a long period of decline.
  • Fortunately, many of the tourists in the cryptocurrency markets appear to have left, and volumes hint at institutional flows.
 
After testing the psychologically-significant level of US$25,000 over the weekend for the first time since the broader market corrected in June, Bitcoin is now trading at just a hair over US$24,000 (at the time of writing).
 
Ether, the second largest cryptocurrency by market value, which led gains amid optimism over a major software update know as the Merge, was down almost 2% to US$1,875.
 
The Merge is tentatively scheduled for mid-September, making the switch from proof-of-work to proof-of-stake imminent, and burnishing Ether’s ESG credentials.
 
Ether rejected the US$2,000 resistance on August 14, and the solid 82.8% gain since the rising wedge formation started on July 13 seems like a victory for bulls, despite a retracement below US$1,900.
 
Cryptocurrencies were mostly unchanged as the recent rally in market bellwethers Bitcoin and Ether has cooled, with many investors looking to the pullback as a natural symptom of taking some money off the table, especially given a long period of decline.
 
Risk assets have risen of late, on growing expectations that the U.S. Federal Reserve is likely to be more restrained in its rate hikes, especially given signs that inflation in the U.S. may have peaked.
 
But what macro provides, macro takes away as well and the risks of a Fed-induced hard landing by way of a recession could take the wind out of crypto’s sails.
 
Fortunately, many of the tourists in the cryptocurrency markets appear to have left, and volumes hint at institutional flows.
 
Analysis of blockchain data appears to also suggest that more investors are holding and appear to be prepared to hold Bitcoin for the long-term.

 

 

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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.  

Aug 16, 2022

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