Vijay Kumar Gaba: Nasdaq

Showing posts with label Nasdaq. Show all posts

Wednesday, November 9, 2022

What colour glasses are you wearing?

The year 2022 is proving to be a bad year for the global investors. The investors’ wealth erosion in the US financial markets, in the past one year, matches the losses suffered during the global financial crisis in 2008-09.

If we consider the top 10 global stock markets, in terms of market capitalization, eight of these markets have yielded negative returns this year (in local currency), whereas the rest two are unchanged. Given the USD strength against most currencies this year, the returns would be much worse for the global investors who participated in these markets by investing US dollars.

Hang Seng, the benchmark index of the Hong Kong stock market that is mostly used by the global investors to invest in Chinese companies through ‘A’ shares of these companies, has seen 33% draw down in the past one year. With this draw down the 10yr return of Hang Seng is negative 25%.

NASDAQ Composite, the benchmark index for technology stocks listed in the US, is the second largest stock market in the world with a market capitalization exceeding US$22trilions. This Index has lost over one third of its value in the past one year. European (Euronext) and Japanese (Tokyo Stock Exchange) equities have also seen a value erosion of over 10% in the past one year.

Besides stocks and bonds, other asset classes like Bitcoin (-70%); Gold (-13%) and US residential real estate (-13%) are also down materially. Even the cash positions are effectively down by 3 to 5%, given the negative rates on saving deposits.

This is however plain statistics. This may be interpreted in a variety of ways by various persons; depending upon which vista point the interpreter is viewing these data points and what colour eyeglasses they are wearing. For example—

(a) US$100 invested by an investor in US Tech 10yrs ago is still worth US$250, despite it diminishing by one third in the past one year. But, a large number of investors who started investing (or increased their exposure significantly) during the pandemic may be sitting on material losses.

(b) An investor in US equities who was leveraged 3x in the past one year may have lost his entire capital, regardless of when he started investing or what he earned in the past. The losses would have been worse if the investor was leveraged in US treasuries. Whereas, an investor following a strict asset allocation strategy with no leverage, may not be doing as bad, though he might have also witnessed a drawdown of ~20% in the past one year.

(c) A handful of highly skilled traders and hedge funds might have made very good profits by taking short positions on various assets, though a large majority of investors and traders have suffered losses.

(d) A foreign investor, e.g., Japanese or Indian, parking his money in USD deposit may have outperformed a large majority of investors; whereas a US investor investing in Asian securities might have fared much worse.

(e) Many investors are terming this sharp fall in value across asset classes as a once in a decade opportunity; citing that historically this kind of fall has invariably been followed by sharp rallies. Whereas, there is no dearth of experts who believe that we are not even half way through the corrective phase; and asset prices will fall much more to adjust for the reversal in QE programs unleashed by the central bankers and fiscal profligacies of the governments.

Thursday, November 3, 2022

Fed stays the course

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) has decided to hike the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008. It is an unprecedented fourth hike of 75bps each at the consecutive meetings. The Committee indicated that “ongoing increases” would still likely be needed before the rates become “sufficiently restrictive” to slow down the inflation.

In a post meeting press statement, the Fed Chairman Jerome Powell said, “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” He added that it was “very premature” to discuss when the Fed might pause its increases.

Further hikes could be lower than 75bps

The FOMC statement promised to take economic risks more clearly into account in deciding the size of any further rate increases. The FOMC statement read, “in determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

The statement is being widely interpreted to mean that the future hikes, from the FOMC’s December 2022 meeting onwards, could be lower than 50bps. Though no dot plot (a traditional indicator of Fed official’s view on future rate hikes) was released after the meeting.

No recession, but less chance of a soft landing

Chairman Powell expressed hope that the U.S. economy can escape a recession as the Federal Reserve raises interest rates to lower inflation. He was however skeptical about the soft landing of the economy. He said that given the persistence of price pressure this year, the window of opportunity for a "soft landing" has narrowed; though he is still hopeful of a soft landing.

"Has it narrowed? Yes," Powell said at a press conference after the Fed's latest rate hike. "Is it still possible? Yes."

It is pertinent to note that signs are emerging in the US economy that a hard landing is now probable. The latest PMI came at 45. The stress in households is becoming more evident as personal savings are collapsing; credit card debt is rising at a much faster rate; over a third of the small businesses are unable to pay rent on time. The larger engine of the US economy, the consumer, has already started to stutter.

Markets disappointed

Stock markets corrected sharply after the Fed’s decision, with benchmark S&P500 shedding 2.5% and Nasdaq Composite diving 3.6%. Volumes were large as the market dived post Powell’s press statement, indicating heavy unwinding of positions.

US Dollar Index (DXY) ended more than half of a percentage point higher to close above 112.

Gold and Bitcoin were lower.

The Benchmark 10yr treasury yields were higher by 87bps at 4.10%.

Thursday, July 28, 2022

Fed leaves it open

Hikes another 75bps

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) hiked the federal fund rate by 75bps yesterday to the range of 2.25% - 2.50%. This is the second 75bps hike in two months. In the post meeting press interaction the Fed chairman Jerome Powell outrightly rejected the speculations that the US economy is in recession. The FOMC members are of the opinion that the strong labor market allows the US economy to tolerate rapid monetary tightening.

For the first time since February 2020, the FOMC statement did not mention Covid or coronavirus.

…leaves the door open for further data dependent hikes

Reiterating the commitment to achieve the 2% inflation target, Powell also indicated that while another unusually large increase could be appropriate at our next meeting, the FOMC would set policy on a meeting-by-meeting basis rather than offer explicit guidance on the size of their next rate move, as he has done recently; thus, leaving the future course of the FOMC action wide open.

As per the Bloomberg estimates, the market consensus is now gathering around two more 50bps hikes in September and December FOMC meetings, with the fed fund rate peeking around 3.4%, lower than the previously estimated 3.8%.

The US economy is estimated to have grown at a tepid 0.4% (QoQ, annualized) rate in 2Q2022 after recording a negative growth in 1Q2022, technically avoiding a recession. The US officially acknowledges a recession if the economy logs a negative growth for two consecutive quarters.

Markets react positively to FOMC – stock rally, yields and USD tumble

The markets took comfort from the growth outlook and Powell’s statement on future rates being data dependent. The market participants appear to have concluded that the FOMC may reach the end of the tightening cycle by the end of 2022, triggering a “risk on” rally in the markets.

· Battered tech stocks surged strongly with the benchmark Nasdaq rising 4.06%, the largest one day gain since November 2020. The broader index S&P500 gained 2.62%.

· US Dollar Index lost 0.66%.

· 2yr SU Treasury yields fell 10bps; while 10yr benchmark yields were down 5bps at 2.78%.

…but deeper yield curve inversion signals recession as consensus

The US yield curve is now inverted the most in two decades, highlighting that the markets strongly believe a recession is around the corner. The 2yr yields are now over 30bps lower than the benchmark 10yr yields – clearly indicating that the market sees higher risk of recession than the Fed. The deeper yield curve inversion is seen to imply that Fed may actually return to the path of easing as early as 2023.

Click here to see a nice compilation of analysts’ reactions to the FOMC statement.

Tuesday, May 31, 2022

No need to lose sleep over NASDAQ

When the independently priced cryptocurrencies were melting in the past few months, a stablecoin Tether (USDT) has been relatively much more stable. The value of USDT did show some volatility, but it was marginal in comparison to some other stablecoins like Terra and independently priced cryptocurrencies.

Being a technology challenged crypto illiterate person, I must outline my understanding of a stablecoin to make the context clear. In my understanding, a stablecoin is a crypto token which is backed by some financial or real asset, whose value is pegged to a fiat currency like USD. In simple terms, it is a tradable electronic entry priced in a fiat currency (like ADR of an Indian company tradable in US) which has an underlying asset like bonds. Theoretically, the price of a stablecoin shall move in tandem with price of the underlying; but in practice the movement in price could be less or more than the underlying.

Curious by the relative stability of USDT, I discussed the issue with some experts and crypto traders. While no one offered any satisfactory answer, the common thread was a conspiracy theory. It is commonly believed that a significant part of trade by “sanctioned jurisdictions” like Russia, Iran etc., is happening in stablecoins, USDT being the most popular one. Secondly, it is suspected that USDT is also a preferred currency for money laundering in many emerging economies.

Of course, I do not understand much of this, so I cannot make any intelligent remarks on this. Nonetheless, I must say that (i) tech enabled alternatives to gold are here to stay for long; (ii) the challenges to USD as the exclusive global reserve currency are rising gradually; and (iii) the global economy (and markets) might delink from US economy (and markets) sooner than previously estimated.

The experts have extensively talked about Japanification of the US economy (and markets) since the global financial crisis (GFC) hit the world in 2008 and the US Federal Reserve unleashed a torrent of quantitative easing (dollar printing). With massive monetary and fiscal corrections now becoming increasingly inevitable, in view of the rapidly changing (a) global trade dynamics and (b) global geopolitical balance; the probability of experts’ prognosis about the US economy coming true is rising gradually.

In my view, the forecast for the global economy and markets for next few years must account for these probabilities; howsoever small these probabilities may appear for now.

I would therefore not like to undermine the movement in NASDAQ and S&P500 to form my view on Indian markets and/or deciding my allocation to say IT services sector, for next few years. I would also like to read the predictions about a “lost decade for equities”, in relation to developed markets, especially US, without correlating it to India. I am also aware of the fact that equities in two major global economies China (15yrs) and UK (5yr) are already witnessing this phenomenon of lost decade; and this has not impacted the performance of other European and Asian markets materially.

In simple words, I do not see much merit in drawing correlations between GOLD-S&P500; Nifty-S&P500; and NIFTY IT-NASDAQ. The Beta of Nifty vis à vis S&P500 and NASDAQ shall reduce incrementally. There is no need to stay awake till late night to watch US markets.