In the Chaos, there are opportunities
Hidden within the sudden increase of price movements lies many opportunities
The increase in volatility in the stock markets have woken the bears and they’re all looking forward to harp on about inflation, stagflation and central bank policy errors that will lead to the end of everything.
However, hidden within the sudden increase of price movements lies many opportunities. For example, the supply and demand dynamics of the energy sector do not change just because of a little bit of extra volatility. Chronic underinvestment has led to supply not being able to keep up with the sudden surge in demand as the world economies start to reopen.
A few basis points rise in US bond yields will not stop the tech giants from continuing their domination and stop them from raking in the exorbitant profits generated by their dominant business models.
Fade out the noise and concentrate on the inevitable.
The Bullish case for Cryptos
Regulators in the US are currently discussing how they should regulate cryptocurrencies which will likely promote the asset class to the masses in a positive light (after all, regulation implies safety right?). However, there are quite a few prominent figures (Elon Musk, Katie Haun) voicing that the US should not regulate the nascent asset class.
As with this article which discusses why China’s latest bitcoin ban is bullish for DeFi, we agree that regulation of crypto will show how it can circumvent the boundaries imposed by the law which in turn shows why the asset class is gaining traction in the first place.
Regulation, if and when it happens, after a possible initial knee jerk panic reaction from cryptophiles, will likely just make adoption more “acceptable” to more institutions and corporates and by extension, to the mainstream masses.
So, no matter whether the US regulates cryptos, the bullish case for cryptos will remain and what can be done is to only slow the growth as Elon Musk has stated.
US GDP for the 3rd quarter will be released today with expectations at 6.6%, in line with the 2nd quarter’s growth. Federal speakers Williams (current voter, known slight dove), Bostic (current voter, known hawk) and Evans (current voter, known dove) are expected to speak today.
Keep short USD and long NZD, & CNH. The USD continues to power ahead and caution is warranted. For now, stay on the defensive while keeping core shorts.
2. Commodities: Uranium & Energy — Stay the course.
Key risks: The US debt ceiling, higher US bond yields, the Evergrande situation and Fedspeakers’ thoughts on the tapering process.
Equity Index: Long Nasdaq futures. Trades weak, but it still will likely just be a minor retracement in a strong uptrend.
Single Stocks: The TrackRecord Model Portfolio is taking a step back in line with the broad market sell-off. Though many talking heads are harping on how it may become a major correction, it is an opportunity to pick up discounted stocks of great companies.
Key risks : The US debt ceiling, higher US bond yields, Evergrande situation and Fedspeakers on the tapering process in the days ahead.
WHAT HAPPENED YESTERDAY
- At the ECB discussion panel, Federal Reserve Chairman Powell stated that the US economy is close to achieving the bar for tapering asset purchases but a rate hike is still a long way to go. He added that inflation is transitory and current inflationary spikes due to supply constraints amid strong demand will not lead to higher inflation. He highlighted that the challenge will be to manage inflation and maximum unemployment and the Fed will respond if inflation remains too high for long. On today’s GDP, he expects it to come off but remain at strong levels.
- ECB’s Lagarde predicted that Eurozone economic activity could be back at pre-pandemic levels by the end of the year. She stated that the ECB will monitor wage negotiations as inflation expectations have increased although still distant from targets.
- S&P 500 increased +0.16% on Wednesday amid a calmer Treasury market, although the benchmark index was up +0.8% at session highs. The Dow Jones Industrial Average increased +0.26% while the Nasdaq 100 (-0.12%) and Russell 2000 (-0.2%) closed lower.
- The U.S. Dollar Index rose +0.62% to 94.34, signalling a defensive undertone. The JPY showed little reaction to the election of Fumio Kishida as leader of Japan’s ruling Liberal Democratic Party, which put him on course to become the country’s next prime minister. The yen, the currency most sensitive to U.S. yields as higher rates can attract flows from Japan, touched an 18-month low against a resurgent dollar.
- US 10-year Treasury Bond yield increased 1 basis point to 1.55% (below yesterday’s high of 1.56%) while the 2-yr yield decreased -1 basis point to 0.30%.
- The semiconductor stocks held back the technology sector after Micron (MU 71.64, -1.46, -2.0%) issued downside guidance for its fiscal first quarter due to ongoing supply chain disruptions. The Philadelphia Semiconductor Index declined 1.5%.
- Dollar Tree (DLTR 100.51, +14.23, +16.5%) was a prime example of “pricing inflation” with an announcement that it will start selling certain items for $1.25 to $1.50. DLTR shares rallied 16.5%, further supported by plans to increase its share buyback program to $2.5 billion.
- Boeing (BA 225.36, +6.95, +3.2%), meanwhile, helped lead the Dow higher after the stock was upgraded to Outperform from Mkt Perform at Bernstein. The firm believes global travel is reaching an inflection point.
HEADLINES & MARKET IMPACT
Notable Snippet: President Joe Biden’s agenda was at risk of being derailed by divisions among his own Democrats, as moderates voiced anger on Wednesday at the idea of delaying a $1 trillion infrastructure bill ahead of a critical vote to avert a government shutdown.
The White House said talks over twin bills that would revitalize the nation’s roads and airports and fund social programs and climate change measures, were at a “precarious” point as moderates and progressives disagreed over the scope of some $4 trillion in spending.
Congress, which Democrats control by a razor-thin margin, is due to vote on a bipartisan resolution to fund federal operations through early December before funding expires at midnight on Thursday.
Thematic Context: “With US/Debt to GDP at record levels of 130% and US expenses costing more than tax receipts, the government will have to choose between defaulting on its obligations or printing more money, and we strongly believe that the US government will opt for the latter. Any attempts to curtail easy money will kill the patient and send the Fed right back into money printing panic mode.” — 28th Sep 2021
COMMENTS/IMPACT: This fiasco will take center stage in the weeks ahead and be driving risk appetite. We should keep an eye on any microshifts in developments. One crucial thing to note is the microfractures appearing within the Democrats. If this gets worse, it may be bad for risk sentiment as markets are betting on the Democrats ability to rely on bipartisanship when the going gets tough, but if that option is at risk, we suspect markets will correct further.
Notable Snippet: China on Wednesday demanded railway companies and local authorities raise their game in shipping vital coal supplies to utilities, as regions key to the world’s no. 2 economy grapples with power cuts that have crippled industrial output.
The order, handed down from China’s powerful state planner, comes after a collision of tight coal supplies, tougher emissions standards and strong manufacturing demand has pushed the price of coal, the biggest source of China’s electricity, to eye-watering records — just as winter approaches.
Thematic Context: “This is the real elephant in the room for China, a power supply crunch will have a material impact on GDP and growth on China as opposed to the Evergrande situation and we should be alert to the developing situation. We have been heavily positioned in energy and warning about this acute problem since 2020, it seems that things are playing out as projected. Hold onto your hats as traditional energy will be back in vogue.” — 28th Sept 2021
COMMENTS/IMPACT: The transition to green energy is great, but no one talks about the “cost of transition” because it will first entail very high energy prices (due to lack of funding), this combined with massive requirements for new infrastructure and materials demand will cause inflation to remain high on an absolute basis for a good period of time. We remain well positioned for this outcome.
Notable Snippet: The United States and European Union agreed on Wednesday to deepen transatlantic cooperation to strengthen semiconductor supply chains, curb China’s non-market trade practices and take a more unified approach to regulating big, global technology firms.
Launching a new forum, the U.S.-EU Trade and Technology Council (TTC), senior cabinet officials from both continents also pledged to cooperate on the screening of investments on export controls for sensitive dual-use technologies and on the development of artificial intelligence (AI).
Thematic Context: “The West needs to protect its own interest in an increasingly multi-polar world and we believe that we will see more of such infrastructure deals and building between these countries. In addition, the effect of supply chain deals are not just siloed between the two parties but beneficiaries also extend to those who are reliant on the network, increasing the value of localized companies and businesses for those who will take the effort to look deeper into domestic issues.” — 23rd Mar 2021
“As we move into an increasingly multi-polar world, the reshoring of supply chains, logistics and manufacturing will be mega projects governments around the world will be working on and this will be funded by unlimited fiscal spending. In addition, domestic costs tend to be more expensive, feeding into our trajectory of high and sustained inflation in time to come.” — 3rd May 2021
COMMENTS/IMPACT: We remain cognizant of the developments in chips supply issues as they are a huge bottleneck for production and cause for supply side inflation.
Phan Vee Leung
CIO & Founder, TrackRecord