Has the big picture changed?
Policymakers will be very cautious about removing policy accommodation too soon.
In the short term, the rout in the China and Hong Kong stock markets is putting a dent on global risk sentiment. Investment funds which are losing a bunch of money in the harrowing sell-off, especially in the education stocks, will need to be reducing risk across the board.
However, in the longer term, coupled with the risk of resurgence in virus infection due to new strains of Covid, policymakers will be very cautious about removing policy accommodation too soon.
Later today, the Federal Reserve will announce its policy decision and Fed Chair Powell, in his post-meeting press conference, will likely stick to the script that inflation is transitory and the tapering process will be very transparent and well-telegraphed.
The earnings beat by the tech giants (Apple, Alphabet, Microsoft) and the growth they are registering are clear signs that their dominance will continue unabated. Dips are opportunities.
Ethereum A Better Squeeze Potential?
Ethereum 2.0 staking (over 6.4 million ETH now, almost $15 billion worth) is soaking up a lot of liquid coins. The number of ETH on exchanges continues to drop (blue line), and is moving down faster than that of BTC at the moment:
Ethereum is about to launch EIP-1559 in August, which will change how transaction fees work and will add a deflationary component (burning part of the transaction fees) to offset some of the inflationary component (issuing new ETH with each block). This should further support a supply squeeze.
All eyes will be on what Federal Reserve Chair Jerome Powell says at a post-meeting news conference on Wednesday at 2 p.m. EDT (1800 GMT), especially in relation to inflation, economic growth, interest rates and when the Fed will likely start reducing its purchases of government bonds. His thoughts on how the rise of new strains of Covid are affecting Fed projections will also be probed.
More earnings reports but especially important will be the one from Facebook (FB), especially given the huge upside surprises shown by SNAP, Twitter and Alphabet’s Youtube’s growth.
Keep short USD and long NZD, & CNH. Remain short USD vs NZD & CNH. USDCNH has broken above resistance levels at 6.50–51, some risk reduction is prudent especially given the horrible performance of Chinese stocks in recent days.
2. Commodities: Uranium & Energy — Stay the course. .
Key risks: Spread of the delta strain and also the rout in Chinese stocks due to clampdowns from the central government are the key drivers of risk sentiment for now. Federal Reserve policy decision and comments tonight will drive the market direction as well.
Equity Index: Long Nasdaq futures. A rare pullback triggered by the aggressive sell-off in China and Hong Kong stock markets. Long term picture remains extremely positive given the strong earnings beat by the tech giants. Stay long and patient. Approach of support levels at 13950–14000 will be a good opportunity to add to longs.
Single Stocks: Every dip is a chance to get involved. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Spread of the delta strain, geopolitical worries and China’s crackdown on various sectors will dictate the market risk sentiment for now.
WHAT HAPPENED YESTERDAY
- The U.S. Dollar Index fell -0.2% to 92.46, mainly due to losses against the large components of the index such as JPY and EUR. Against risk currencies such as AUD & NZD, USD rose as risk sentiment was tellingly weak on a day the stock markets were taking a rare beating.
- Global investors were feeling bruised and uncertain on Tuesday as a third day of heavy selling hammered China’s top tech stocks and began to seep into currency and debt markets. Tuesday’s falls included a -9% plunge in internet giant Tencent, its worst in a decade, as its WeChat social network suspended user registrations while it underwent an upgrade “to align with all relevant laws and regulations”.
- The growth-sensitive 10-yr yield decreased 4 basis points to 1.25% amid increased buying interest while the fed-sensitive 2-yr yield dropped 2 basis points to 0.20%, ahead of the FOMC policy statement later today.
- S&P 500 lost -0.5% on Tuesday, snapping a five-session winning streak along with the Dow Jones Industrial Average (-0.2%), Nasdaq (-1.2%) and Russell 2000 (-1.1%). Buyers looked nervous in front of Apple’s (AAPL 146.77, -2.22, -1.5%), Microsoft’s (MSFT 286.54, -2.51, -0.9%), and Alphabet’s (GOOG 2735.93, -56.96, -2.0%) earnings reports after the close given the disappointing reaction in Tesla (TSLA 644.78, -12.84, -2.0%) following its better-than-expected Q2 results.
- Microsoft (+0.16% after hours) reported its highest quarterly revenue ever, exceeding expectations, and it projected overall sales for the current quarter of up to $44.2 billion. Earnings: $2.17 per share, adjusted, vs. $1.92 per share as expected.
- Google (+3.18% after hours) parent Alphabet had its largest percentage jump, a massive +61.6%, in quarterly revenue in more than 14 years. Earnings: $27.26 per share, vs $19.34 per share as expected.
- Apple (-2.09% after hours) posted its best fiscal third quarter in its 45-year history, but stock fell after iPhone chip supply warning. Earnings: $1.30 per share vs. $1.01 per share as expected. iPhone revenue: $39.57 billion vs. $34.01 billion estimated, up 49.78% year-over-year. Services revenue: $17.48 billion vs. $16.33 billion estimated, up 33% year-over-year.
HEADLINES & MARKET IMPACT
Notable Snippet: U.S. coronavirus cases have been rising due to the highly contagious Delta variant, which emerged in India but has quickly spread and now accounts for more than 80% of U.S. coronavirus cases.
U.S. President Joe Biden said that increased vaccination and mask wearing would help the United States avoid the pandemic lockdowns, shutdowns and school closures that the country faced in 2020. “We are not going back to that,” Biden said.
THEMATIC CONTEXT: “Measures taken by countries on a Macro level will impact already sensitive social sentiment and we suspect that as Delta variant spreads, this will be the worst time for central banks and governments to talk about talking about tightening credit conditions. In fact, we have been banging the table that the entire credit tightening situation is a farce and merely showboating. The time to unveil the actual show is here and we suspect that assets will resume its trajectory in time.” — 19th July 2021
Notable Snippet: Visa Inc (V.N) beat estimates for quarterly profit on Tuesday, with domestic spending almost back to pre-pandemic levels and international travel on the road to recovery as rising vaccinations and reopening economies take effect.
Payment companies are seeing an uptick in volumes from the coronavirus-induced slump as travel and entertainment spending gathers force, while the rise of e-commerce during lockdowns also drives transactions.
THEMATIC CONTEXT: “US is a huge turnaround story in contrast to the start of Covid and we believe that the effects of a successful vaccine drive coupled with free flowing fiscal money will show up as higher velocity in the M2 money supply in time. A higher velocity M2 money supply is expected to be inflationary in absolute terms and we suspect that assets, materials and commodities will benefit in the long run.” — 7th July 2021
Notable Snippet: Apple Inc (AAPL.O) said on Tuesday that a global chip shortage that has bit into its ability to sell Macs and iPads will start to affect iPhone production and forecasted slowing revenue growth, sending its shares lower.
During the investor call, Chief Executive Tim Cook said that chips affected by the shortages are made with older technology but are still needed as supporting parts to make the company’s flagship device, the iPhone. “We do have some shortages,” Cook said, “where the demand has been so great and so beyond our own expectation that it’s difficult to get the entire set of parts within the lead times that we try to get those.”
THEMATIC CONTEXT: “This is a theme we are heavily invested in as it’s the economic policy that underpins the Post-Covid recovery and the road map that will define the new order of the world, which entails more deglobalization and the rise of economic factions. We believe that Materials, Commodities, Infrastructure and asset prices will all be beneficiaries from the fiscal and monetary accommodation that will be required to ensure Western economies will not lose out in the great power competition.” — 14th July 2021
Phan Vee Leung
CIO & Founder, TrackRecord