A new dawn, a new day for risk assets
Stocks snapped a 3-day losing streak on Thursday and crypto currencies had a less volatile session, as risk sentiment returned. By this stage we all know what happened to Bitcoin and other crypto currencies earlier this week. While sentiment in the crypto market has been shaky for several weeks, the news that the PBOC will intensify its crackdown on the use of crypto currencies sent the market into a tailspin. The post-mortem of the $10,000 dollar drop in BTC/USD in a matter of hours on Wednesday has begun, and unsurprisingly the systems that are underlying the crypto market remain fragile and can stutter during busy periods, this undoubtedly added to the market volatility that we saw on Wednesday.
The crypto recovery spurred by market whales
As we move to the end of the week, the crypto contagion that we saw in other asset classes including major blue-chip stocks and commodities, has eased and stocks look ready to extend Thursday’s gains as we move to the end of the week especially after news of the Israel/ Hamas ceasefire was announced late on Thursday. However, there were more swings for Bitcoin on Thursday after the Biden administration in the US announced that was proposing that all crypto currency transfers over $10,000 should be reported to the IRS. This weighed on Bitcoin, which fell 5% on the news, however it has since managed to regain the $40,000 handle.
The sell-off in crypto and the wider market, especially tech stocks, and the subsequent recovery on Thursday, tells us two things about the market right now. Firstly, it is worth remembering that large institutional players are heavily invested in the crypto market after US authorities have made it easier for them to access this market in recent years. When they see a capitulation in the price of Bitcoin like we saw on Wednesday that can translate into a large buy signal for some of the big players in the markets, which is why Bitcoin has regained all of Wednesday’s losses. Secondly, the Nasdaq is also in recovery mode after a week of losses, the market is currently testing resistance at 13,500 and the index was the best performer on the day. This suggests that the market is still willing to buy the dip when it comes to tech.
The case for tech remains intact
We continue to think that the long-term investment case for tech remains in place for a few reasons. Firstly, the Fed may have sounded more hawkish than they have in some time in the minutes of their April meeting. However, we still think that the prospect of interest rate hikes from the Fed are some way off, and the FOMC remains committed to its new policy framework where it will allow inflation to run hot after a period of economic stagnation.
The narrative of rates up/tech down is too simple, in our view. Treasury yields have not been able to sustain gains made after the Fed minutes on Wednesday, and the 5-year yield, which is closely linked to inflation expectations, has fallen back from 0.85% to 0.81% at the time of writing. While we think that the Fed is preparing the market for a dovish taper, we do not expect any changes to happen any time soon. It is worth remembering that back in 2013 the Fed started to signal that tapering was coming in the March, however, it did not embark on tapering until the December of that year.
Are inflation and labour market concerns over done?
Concerns about inflation are valid at this point, especially after recent inflation reports across the Atlantic, but even here there are signs that fast-rising rates of inflation could be temporary. Some key input prices have fallen sharply in May, including lumber prices and copper prices look like they may have topped. Thus, the growth rate for inflation is likely to slow in the coming months. The labour market data in the US has been patchy recently.
The latest reading for unemployment claims dropped below 500k for the second week running and claims are now at pre-pandemic levels. However, not all news on the labour market is good. There are signs that manufacturing jobs are declining and while we expect US jobless claims to fall further in the coming weeks, that will partly be due to Republican governors in 21 states who will withdraw from unemployment programmes funded by the federal government in the next month. Thus, the labour market may not be as strong as some expect, which is another reason why the Fed will not be too hasty when it comes to raising rates, which is another reason why tech remains perky in our view.
Market action: why tech remains the healthy choice
All of this boils down to our view that tech and risk are likely to continue to make gains in the coming days and weeks, albeit with short bursts of volatility. The market psyche is in buy the dip mode, for example, Tesla rose more than 4% on Thursday. A strong debut from Oatly, the oat milk company, also lifted market spirits on Thursday. It was due to price at $17 and rose to $22 during the trading day, valuing Oatly at a healthy $13 billion.
Food-tech is big business, and while the Nasdaq and tech in general has not been able to perform at the same level as 2020, companies like Oatly continue to make the world’s benchmark tech index an attractive and relevant option for traders.
In the FX space, the dollar weakened on Thursday as US Treasury yields gave up ground and risk appetite returned. GBP/USD is capitalising on dollar weakness, and this pair is testing key resistance at $1.42. A weekly break above this level would open the way for a sustained recovery back to $1.45 in the next three months.