The Rollercoaster ride continues…
Without new bad news, weak shorts may come under further pressure soon
The stock market continues to be highly volatile with the S&P 500 up nearly 3% and the Nasdaq up more than 3% on the day with barely any significant news. The boost in risk sentiment came from the new UK Chancellor’s announcement that most of the tax cuts in the profligate mini-budget of his predecessor will be cancelled.
Despite the bad inflation data from the US last week, the market refuses to break to new lows. Though fundamentals remain bad, and the US Federal Reserve officials will likely remain hawkish while inflation refuses to abate, the price action is looking increasingly threatening to risk asset bears who came too late to the party.
Without new bad news, weak shorts may come under further pressure soon.
Trading Tip
Don’t try to Buy Low and Sell High
This may seem like the foolproof method when it comes to trading. But often, many people overlook the difficulty of performing the said action. How will one ever know that he is buying at the low as prices continue to plummet or selling at the high as prices are soaring relentlessly?
Instead, it is easier to buy lower than the trajectory that one expects the asset price to have and sell when that trajectory starts to waver. In such a case, one does not need to fret about buying at the lows (which is often a fruitless endeavour) but focus on ensuring that the fundamentals for higher prices (i.e. a trend) remain.
Day Ahead
China GDP Growth Rate has been postponed to a later date. Focus will be on the 20th National Congress of the Chinese Communist Party.
Trading Plan
1. Currencies:
EUR - Short the EUR. Some signs of life in the EUR, but it is likely to turn out to be an opportunity to add to short positions. Stay short and wait for the upside momentum to wane.
2. Commodities:
Uranium & Energy - Stay invested.
3. Stocks:
US Stock Index: The market remains highly volatile with the US stock market recovering all the losses from the sell-off on Friday and then some. Expect volatility to remain high as the bears are once again wrong-footed.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: Comments from US Federal Reserve officials on their thoughts about future interest rate hikes will influence risk sentiment. The Ukraine-Russia war rages on, and though the market impact is limited, the energy shortage situation could worsen if tensions should escalate.
What Happened Yesterday
Despite the smaller than expected rate hike by the RBA 2 weeks ago, the RBA meeting minutes showed that the central bank still thinks that inflation is too high and that they will continue to hike in the months ahead. The smaller than expected hike was to allow for the RBA to assess the effects of the significant increase in interest rates to date due to uncertainty in the global economy. Michele Bullock, the Assistant Governor (Financial System) at the Reserve Bank of Australia, supported further hikes in her speech as well.
The UK axed almost all its recently announced tax cuts after new finance chief Jeremy Hunt took over the reins. Hunt estimated the tax changes would raise about £32 billion (US$36 billion) per year and warned about spending cuts ahead. This retraction boosted risk sentiment as the risk of further meltdowns in the UK bond market abated.
The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.46%. The 2yr yield declined -0.03% while the 10yr treasury yield rose +0.02%.
The US stock market were boosted by the strengthened risk sentiment and saw a recovery led by the strong performance from Tech stocks (Pinduoduo, +8%; Zoom, +6%; Roblox, +19.83%) and bank stocks (Bank of America, +6%; Bank of New York Mellon, +5%). The S&P 500 rose +2.65%, the Dow Jones increased +1.86% while the Nasdaq soared +3.46%.
The crypto market traded in tandem with the US stock market as risk sentiment improved. Bitcoin and Ether rose +1.5% and +2.0% respectively.
Headlines & Market Impact
Japan will respond appropriately to excessive FX moves, finmin says
Notable Snippet: Japanese Finance Minister Shunichi Suzuki said on Tuesday authorities would respond appropriately to excessive currency moves driven by speculators, as the yen fell to a fresh 32-year low to the dollar.
Suzuki, speaking to reporters, declined to comment when asked whether authorities are conducting stealth intervention to support the weakening currency.
"We cannot tolerate excessive currency moves driven by speculators," Suzuki said.
Speculation lingers that Japanese authorities may have intervened in the market since then without announcing, but Suzuki declined to comment.
"Generally speaking, there are times when we intervene by making an announcement and some other times when we do without it," Suzuki said, declining to comment further.
What we think: The JPY is likely to continue to weaken as long as the BoJ continues to buy unlimited amounts of Japanese government bonds to keep bond yields low. Volatility spikes caused by any intervention by the authorities will just be opportunities to get discounted USDJPY.
UK Prime Minister Liz Truss faces serious pressure to resign after failed budget
Notable Snippet: Truss sacked Hunt’s predecessor on Friday, and now lawmakers from across the political spectrum are calling for her to follow him out the door.
Elected members of Truss’ own party are openly calling for her to quit, while up to 100 members of the party are believed to have submitted letters of no confidence in the prime minister, according to reports by the i newspaper.
“The fundamental question here is whether any Conservative leader can offer credible economic direction. We are increasingly unsure,” an analysis note from the bank said.
What we think: Political instability continues to haunt the UK and does not bode well for the GBP as well as the UK economy.
Mastercard will help banks offer cryptocurrency trading
Notable Snippet: The payments giant plans to announce a program Monday that will help financial institutions offer cryptocurrency trading, the company told CNBC. Mastercard
will act as a “bridge” between Paxos, a crypto trading platform already used by PayPal
to offer a similar service, and banks, according to the company. Mastercard and Paxos will handle regulatory compliance and security — two core reasons banks cite for avoiding the asset class.
Some consumers have been skeptical, too. Cryptocurrencies like bitcoin
are known for volatility, and the world’s top digital assets have lost more than half of their value this year. The industry has suffered billions in hacks since January, coupled with multiple high-profile bankruptcies.
Cryptocurrencies, ironically, were meant to disrupt banks and middlemen like Mastercard and Visa. Their underlying technology, blockchain, allows transactions to move without intermediaries. Still, Lambert said they haven’t seen industry pushback on their involvement. Crypto is on the “cusp of really going mainstream,” and still needs to team up with the incumbent players to get there, he said.
“It’s hard to believe that the crypto industry will truly go mainstream without embracing the financial industry as we know it,” Lambert said.
What we think: Despite the crypto winter, mainstream adoption continues unabated.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord