Market Report: Week Of 6 June 2022

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Introduction

Welcome all. In this new series, I will be initiating a weekly market report that summarizes developments in the prior week as well as provide some outlook for the upcoming week. This way, investors and traders will be better able to navigate the uncertainty and bouts of volatility as the FED further ramps up i/r and QT. Coverage will span both the US equity and crypto markets as well as a thematic China coverage. Let’s begin!

Equity Markets

Major Indexes (TradingView)

Markets ended the week down significantly despite an early rally, with the SPY (NYSEARCA:SPY) down 506bps, Dow (DJIA) down 485bps, and the Nasdaq (NASDAQ:QQQ) down 570bps to close the worst trading week since January 2022. The selloff represented the 9th week that markets closed in the red for the past 10 weeks, with all 3 indexes threatening to print a new YTD low. To date, the SPY remains down 18.7%, DJIA down 14.2%, and NDQ down 28.3%.

Inflation Readings (CPI)

US Headline CPI (YoY) (Panther Investment Research)

Markets rallied from Monday to Wednesday, before closing Thursday in the red as investors braced for May CPI data the following day, and ultimately registering most of the selloff pressures on Friday when CPI data came out worse than anticipated. The DJIA dived 800 points as headline May CPI data registered an 8.6% YoY increase in May, higher than the 8.3% the prior month (April) and higher than the widely assumed local peak of 8.5% in March. The selloff was broad with nearly every member of the 30-stock Dow in the red. To make things worse, this YoY increase is built off a much higher base than the 8.5% in March, as seen from the increase in 2.6% print in March 2020 to 5.0% in May 2020. Most economists were forecasting an 8.3% growth to further prove that the 8.5% print in March had significantly decelerated since, but were shut down.

US Core CPI (YoY) (Panther Investment Research)

The May CPI showed prices at the highest level since 1981, with the core 6% YoY also rising faster than the 5.9% consensus had anticipated. While no peak has definitively been printed, the YoY change in core CPI is still growing slower since March, a potential sign that deceleration in inflationary pressures is really in the making, exclusive of the volatile food and gasoline prices, the latter of which continues to surprise to the upside from recovering Chinese DD and weak production levels from OPEC+.

Personal Savings Rate

US Personal Savings Rate (Panther Investment Research)

The personal savings rate (PSR) has also reached a new low of 4.4%, dropping to the lowest since 2008. In last week’s report, I mentioned that:

Given that US household wealth is at an ATH, the low PSR moving forward also likely means that inflationary pressures, though decelerating, will eat into the wealth of Americans.

True enough, data from the FED has shown that the falling PSR combined with continued will from consumers to keep spending has finally started to eat away at the only buffer consumers have to weather the higher costs – all-time high household wealth. In Q1’22, US household wealth declined by 0.33% for the 1st time in 2 years as a drop in the stock market outweighed further gains in home values. But compared to pre-pandemic levels, household balance sheets remain 30+TRN higher, supporting consumer spending in the face of higher inflation.

Michigan Consumer Sentiment Craters

US Michigan Consumer Sentiment (Panther Investment Research)

To make things worse, US Consumer sentiment has dropped to record low levels. The 50.2 preliminary June reading for the University of Michigan consumer sentiment index came in well below expectations of 58.4, hitting a record low not seen in more than 40Y, lower than levels when lockdowns were just starting to be enforced. Soaring inflation continues to batter household incomes with just 13% of respondents expecting their incomes to rise more than inflation. That being said, the tight labour market and wage inflation should help consumers offset some of the general price increases.

GDPNow Tracker Hints Recession

The FED’s Atlanta GDP tracker shows that the economy is on the brink of a recession. As of June 1st, the GDPNow tracker is pointing to an annual gain of just 0.9% for Q2, revised downwards from a 1.3% growth just less than a week ago. With little room left for further compression despite 3 weeks of count remaining for Q2, a potential 2nd consecutive negative GDP print will push the economy into a recession, an overall development offsetting UBS’s previous week analysis that a Q2 negative print is unlikely due to the shrinking trade deficit.

On net, trade is expected to subtract 0.13 percentage point from GDP in the second quarter, from a previous estimate of -0.25 percentage point, according to the Atlanta Fed.

The negative contribution is because the US is perpetually in a trade deficit (exports < imports).

Surging Crude Oil & Gasoline Prices

Crude Oil Prices (TradingEconomics)

Crude oil prices have also printed a new high of $120/barrel, up 100% since Russia’s invasion of Ukraine on the 24th of February. Goldman Sachs (NYSE:GS) has predicted that oil prices will surge to $140 by summer, with a fall in Russian SS and recovering Chinese DD adding pressure to the markets. Worse off, consumers will feel as though prices have hit $160 due to a further lack of capacities at refineries and record low levels of inventories.

US Petroleum Inventories Excl SPR (Thomson Reuters)

The markets remain chronically undersupplied as OPEC+ and the US shale firms unable or unwilling to meet rapidly recovering DD as prices flirt with record levels. As a result, US petroleum inventories have fallen a net 273M barrels since the past 1-2 years.

Breakeven Inflation Rate + Greenback

US10Y (TradingView)

Greenback (TradingView)

The markets broadly speaking remain mixed as to their confidence in the Fed’s ability to contain inflation, but with the CPI print on Friday, traders have fled bonds once again, sending the US10Y yields surging past 3% to 3.159%. The reversal in safe haven flows last week due to improving consumer sentiment has also once again been reversed, with investors flocking to the dollar as a hedge once again, sending prices up past $104. As a hedge, the dollar still remains a good portfolio pick, albeit the limited upside remaining.

Lastly, value stocks continue to outperform growth stocks, and healthcare and energy remain the preferred sectors of exposure. The MSCI World Energy index remains up significantly YTD, and the healthcare sector also posting positive delta relative to the broader markets.

Crypto Markets

BTC Price Action (TradingView)

On the side of crypto, Bitcoin’s (BTC-USD) relief rally last week lost its footing once CPI data was released. BTC remains down 8% for the week and is set to close its 10th weekly candle in the red in the past 11 weeks. YTD, BTC remains down 43% and looks to experience further downside. As mentioned in the last report:

Personally, I’m bullish crypto with a 30% set allocation to the asset class, but still believe the bottom isn’t it and am sitting 70% cash heavy within the 30% segment.

BTC’s 100W and 20W SMA is looking to cross which could hint that the cycle bottom is near, although history has shown that there still could mean 40% downside from current levels. Regardless, the 200W SMA has always been a generational wealth buying opportunity and current levels for that stand at 22.3K. I’m waiting for BTC to retest its prior low and perhaps put in a new low between 22-24K before turning bullish once more. BTC is likely also set to outperform all other altcoins in today’s recessionary near-term period.

Ethereum Price Action

ETH Price Action (TradingView)

On the side of Ethereum (ETH-USD) which I care more about and actually invest in, the cryptocurrency has already put in a new low in the past 52 weeks while BTC has yet to, owning to the altcoin underperformance as mentioned above. The $1300-$1400 levels represent the 2018 bull cycle peak that ETH is currently set to move towards and possibly retest. When prices do reach that range, I will be starting 1/5th of the allocated position. Should prices not hold at those levels, the further downside could get ugly. For context, the 200W SMA for ETH currently stands at $1192. Regardless, the $1000-$1300 range is where I will be looking to complete the rest of my ETH position and lock it away generating yield till the next bull cycle. I don’t anticipate that I will have to wait more than 1 year to see the next bull cycle start, given that BTC resumes its bullish nature close to 1Y before the next halving in 2024.

China Markets

China still remains the preferred market within APAC. That being said, investor sentiment further dipped with Reuters reporting that certain parts of Shanghai began imposing new Covid restrictions. This comes amidst positive trade data that shows exports jumping 16.9% in May YoY. Whether this strong export growth can be sustained remains uncertain, but the potential reduction of US tariffs on goods should bode well for Chinese exports.

China PPI + CPI Disparity

China CPI Rate (Bloomberg)

China’s CPI rose 2.1% for May, unchanged from the 2.1% rise in April. The PPI which reflects prices that factories charge wholesalers for products rose by 6.4%, down from the 8% in April, a sign of decelerating inflationary pressures. Still, the disparity between the PPI and CPI hint that firms may have difficulty passing on costs to consumers and margins are set to compress. The lack of transmission has also been attributed to weak domestic demand.

HSTECH Rallies For The 1st Time In A Long Time

HSTECH Index (Bloomberg)

The Hang Seng Tech Index jumped 4.8% after the Chinese government approved 60 new game licenses, bolstering bets that a yearlong crackdown that wiped out $2 trillion in market value from the sector was nearing its end.

NDQ & HSTECH YTD Delta (TradingView)

NDQ & HSTECH 1Y Delta (TradingView)

This breakout in the HSTECH also marks the 1st time that the index’s negative sentiments have decoupled from the NDQ, and now outperforms the NDQ YTD with a close to 14% delta. This outperformance stands in stark contrast to the 1Y performance, where the HSTECH is down close to 40% and registers a -24% delta.

Upcoming Week Outlook

For the upcoming week, the street is largely focused on Wednesday’s Retail sales for May, Empire state manufacturing index print for June, and the FOMC statement, projections, and most importantly, what Powell will say in the news conference. Currently, the bond markets are no longer pricing in a 50bps hike for the next 2 meetings followed by a 3x 25bps hike for the remaining 3 that was initially the street case, but a larger rate hike of potentially 75bps. That remains to be seen, but should that be the case, investors should brace themselves. Once again, as mentioned in the previous report, no one knows which way markets will trend in the near-term, and so investors should cautiously navigate the uncertainty by keeping cash on the sidelines, DCAing where it makes sense, and reconsolidating the portfolio towards the highest conviction names. Till next time!