China risks weigh on stocks, Fed meeting ahead

Morning Note

Rough day for equities: China risks to the fore at the start of the week as the fallout from the collapse of Evergrande weighed on the Hong Kong market. The Hang Seng fell 3.5%, with Evergrande down another 12%. Basic resources are feeling the heat as a slowdown in demand from Chinese property developers would be a negative. Luxury also hit – Chinese investors are seeing portfolios hammered, which means less for fur coats. Hong Kong’s weakness was all the more noticeable with Japan, China and South Korea on holiday. Spiking natural gas prices and a European energy crisis, talk of produce shortages and surging inflation don’t provide an encouraging backdrop. Meanwhile a Federal Reserve meeting this week and Sunday’s German election both offer macro uncertainty.

Contagion risks from the Evergrande meltdown are the prime cause of today’s sell-off. You’ve got all kinds of banks and insurers caught in the net but ultimately, I don’t see this as a Lehman’s moment right now. But combined with the tech crackdown it’s probably another reason why investors will be seeking to avoid China in the near term. What we are seeing today is how risks get priced gradually then suddenly. It is definitely though a major cause for investor concern right now and it is possible we see further losses before the dip finally gets bought. A market so well-conditioned to buying the dip will find it hard to resist. But the Fed meeting this week will be of particular importance – does a Chinese property collapse and energy crisis collide with expectations for a Fed rate hike next year and biting inflationary pressures? That would be a pretty nasty cocktail for risk appetite and I think these are the risks being priced into today’s (and possible further) selling.

European equities took the weak handover and limped to a decline of more than 1% in early trade. The blue-chip index is now testing its 200-day simple moving average at 6,880. Rolls-Royce and AstraZeneca gained 2% each but the rest of the board is nasty looking, led lower by basic resources and financials. Prudential fell 4% after placing 130m shares in Hong Kong following the demerger of its US business Jackson Financial. A very soft start for the DAX’s brave new world – 10 more companies added as of this morning but down more than 2% at the start of the session. Airline stocks are just about the only bright spot on the Stoxx 600 as investors bet that looser restrictions will drive up demand over the winter. Also, Lufthansa’s decision to launch a capital raise to pay back the €2.1bn state bailout it received during the pandemic is also being viewed as a positive – clearly, the company feels the medium-term prospects allow it to think about paying back the state. All sectors on the Stoxx 600 are lower.

Wall Street suffered a third straight down week, with the S&P 500 failing to hold its 50-day SMA support and declining 0.9% on Friday to 4,432.99. Futures indicate the market will open about 1% lower around 4,390. The Dow Jones industrial average was lower by 0.5% on a day of veay volume – the highest since July on quad witching day. Although the S&P 500 has traded through its 50-day SMA before and bounced in the last year, we’re dealing with a set of financial fears (China) rather than ‘concerns’ about a variant weighing on growth.

Conspiracy theory: Handy timing for Fed officials to be forced to sell their stocks a week or two ago because of ‘ethics’, not perhaps because they wanted out at the top? The Fed haters and many more think it’s more than a coincidence that their stock trading was revealed, leading to voluntary liquidation just in time to avoid a fallout. Better that than selling out at the top and people finding out later.

Metals weaker – copper down 2% and testing its 200-day SMA, gold treading water at $1,750 after last week’s steep losses, hitting its lowest since mid-August earlier this morning. Silver – once a darling of the Reddit crowd – dropped to its weakest since Nov 2020.

Natural gas prices in the US have come back after spiking last week above $5.60 – top called? Expected rise in demand going into the winter may be well priced. Remember what is happening in Europe with gas prices and the infrastructure problems are not directly correlated to the Henry Hub contract.

Natural Gas Chart 20.09.2021

The USD is finding all this risk-off sentiment a positive – fresh three-week highs for DXY. GBPUSD declined to a new three-week low at 1.36650, towards the bottom of the YTD range, whilst EURUSD is testing a 4-week low at 1.170.

GBP USD Chart 20.09.2021

Cryptocurrencies also markedly weaker on the general risk-off liquidation we are seeing across global markets. Bitcoin took a leg lower in early European trade and may want to test the Sep 13th lows around $44k.

Bitcoin Chart 20.09.2021

Little in the way of data today so all the China contagion/fallout stories will be the prime driver of sentiment. Looking ahead we have the Federal Reserve meeting on Wednesday – key question is whether it announces plan to taper QE or sits on its hands a little longer. But actually, the key risk lies in what the dots (if you still look at them) tell us about when Fed policymakers (increasingly hawkish?) think the lift-off date for rate hikes will be. Meanwhile, the Bank of England will need to respond to biggest jump in inflation on record when it convenes this week. Does is call time on QE now and prepare the market for a rate hike soon? Surging inflation is not going away and the MPC risks all kinds of trouble by not administering some medicine early.

Cryptocurrency update: Is the BTC bull market back on?

After making strong gains across the past couple of weeks, crypto analysts are suggesting the Bitcoin bull market is back.

Cryptocurrency update

Analyst says crypto bull market could make a return

Bloomberg’s Mike McGlone has stated he believes bitcoin will hit $100,000 this year in a “refreshed” crypto bull market.

McGlone, a commodity strategist, predicts the massive price, despite the May broad crypto sell-off tanking BTC prices. In terms of other coins, Ethereum was McGlone’s other top pick, predicting $5,000 being the path of least resistance.

In September’s Bloomberg Crypto Outlook, McGlone said: “Crypto-assets appear in a revived and refreshed bull market with the 2H benefit of a steep discount from previous highs at the start.”

“We see Ethereum on course toward $5,000 and $100,000 for bitcoin. Portfolios of some combination of gold and bonds appear increasingly naked without some Bitcoin and Ethereum joining the mix,” McGlone continued.

Diminishing supply but a higher level of adoption for practical use may be behind the ETH support. Ethereum’s status as the primary denominator for non-fungible tokens (NFTs), which are dramatically rising in popularity, could also help put prices on an upward trajectory.

The London Fork, a change to the Ethereum blockchain protocol, caused significant coin burn and a drop in overall ETH supply when it went live last month.

Looking to Bitcoin, McGlone believes the $100,000 price is “highly probable, especially after last year’s supply cut. Post-halving years have seen the greatest appreciation, and 4x in 2021 would be quite tame for the No. 1 crypto compared with 55x in 2013 and 15x in 2017.”

Anything can happen in the world of cryptocurrencies. Volatility is the watchword. It will be interesting to see if this most bullish of predictions comes true – especially when we’ve seen the brutal market effects a sustained sell-off can bring.

At the time of writing, Bitcoin futures were trading at $51,812.91 and were up 3.15% on the day.

Ethereum was trading for $3905.05.

Bitcoin price pump El Salvador movement gains traction on Social Media

Twitter and Reddit users are organising plans to support El Salvador’s adoption of BTC as legal tender by buying small amounts of Bitcoin.

By buying up to $30 worth at a time, the users hope this will bring attention to El Salvador’s controversial plan.

On September 7th, El Salvador brings BTC fully into its economy as legal tender. ATM machines have been installed around the country to allow Salvadorans to exchange US dollars for Bitcoin. The government has also a $150m fund to back nationwide conversion efforts.

The $30 amount comes from the fact Salvadorans will be able to download the government’s digital wallet, enter their ID number and receive $30 in Bitcoin going forward.

The whole thing smacks of the recent Gamestop/memestocks market manipulation tactics employed by the more vociferous members of the online trading community. The fact that thousands of online traders could start snapping up more BTC at one time could create ripples that end up with higher BTC/USD conversion rates. That may drain El Salvador’s conversion fund at a rapid rate, and semi-scuppering the launch.

Additionally, the citizens of El Salvador are not particularly keen on the introduction of BTC into their currency system anyway.

A poll by the local Central American University showed that of 1,281 people surveyed, at least 67.9% of 1,281 people disagree or strongly disagree with the use of Bitcoin as a legal tender.

South Korea introduces its first blockchain mutual fund

KB Asset Management, an investment-focussed branch of KB Financial Group, has launched South Korea’s first mutual fund for blockchain technologies.

The KB Global Digital Chain Economy fund will invest in three main areas:

  • Hardware – This includes investment in businesses specialising in the physical products needed to run blockchain servers and/or crypto mining, Companies like NVIDIA, AMD, and Intel are just some of those mentioned by KB Asset Management.
  • Software – Under this umbrella are software suppliers involved in sustaining and creating blockchains, such as IBM, Amazon Web Services and China’s Baidu.
  • Users – The third segment covers companies that have integrated blockchain into their businesses. According to KB, this means it will invest in businesses such as PayPal, Square, NTT Data and Tencent amongst others.

US firms are KB’s primary investment target. A smaller allocation of funds will be put towards companies operating in Japan, Europe, and China.

KB Asset Management had more than $90 billion under management as of February, according to Korea Financial Investment Association data.

Earnings season: Coinbase rides crypto volatility all the way to the bank

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Investments

Cryptocurrency exchange Coinbase sees profits surge this quarter following a period of high volatility in crypto markets.

Coinbase earnings

Coinbase’s headline stats

Q2 was a very solid quarter for Coinbase this earnings season. The current crypto market volatility played into the exchange’s hands as it record Wall Street-beating estimates.

Here are Coinbase’s key stats for this earnings season:

  • Revenue -$2.23 billion vs. $1.78 billion expected
  • Earnings – $3.45 per share vs. $2.33 expected

Note: the EPS figure excludes stock-based shareholder compensation.

Coinbase profits soared 4,900% year-on-year with net profit totalling $1.6bn. While volatility may not suit traders, it’s certainly paid off big time for Coinbase.

The exchange’s profitability and economic health essentially rely on the price of Bitcoin. The world’s most popular digital token, and the biggest by value, did have a torrid time last quarter. Prices fell 41% in that time.

Despite this, a flurry of trading took place, which explains the hefty revenues Coinbase generated. $1.9bn of its total revenues stemmed from transaction fees last quarter. A further $100m came from subscription-related services.

Bitcoin is still the most popularly traded token on the Coinbase exchange. However, volumes had dropped quarter-on-quarter. In Q1, Bitcoin made up 36% of all transactions. This had dropped to 24% as of Q2 2021.

Other coins, notably Ethereum, have started to eat into Bitcoin’s market share.

Looking to the future, Coinbase offered no formal guidance but did indicate that trading volumes are likely to be smaller in Q3.

Coinbase share price action

At the time of writing, Coinbase shares are up roughly 7%, building on the 2.1% gains made when the exchange posted its results on Tuesday afternoon.

That’s interesting. Even some of the biggest tech-related firms like Apple posted strong quarters, but still their stock price drop after reporting.

The analyst consensus appears strongly in favour of Coinbase. 78.6% give the stock a Buy rating.

Coinbase analyst recommendations

In terms of price targets, Coinbase could offer upsides of up to 38%.

Coinbase price target

Analysts would suggest the stock is undervalued. It’s currently trading at $291.5, though the price target is as high as $370.64.

Coinbase sentiment tracker

Coinbase is down about 29% since it went public in April. At that time, Coinbase opened at $381 per share. Its valuation of $100bn was a bit of a landmark in terms of cryptocurrency legitimacy.

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