Should investors become more cautious?
After experiencing the worst week since February, global stocks are struggling for direction, as Asian equities traded mixed early Monday with US futures slightly in negative territory.
Excessively bullish sentiment due to reopening of economies along with massive stimulus spending had been a major feature of markets since the beginning of the year. Most economic data in developed and emerging economies have surprised to the upside until recently.
Today’s reading on China’s retail sales and industrial output were not encouraging. While retail sales rose 17.7% in April, it came well below forecast of 24.9% and the 34.2% surge in March. Meanwhile industrial output grew 9.8% last month, compared to 14.1% in March. These figures out of China came after disappointing employment, inflation, and retail sales data releases out of the US.
If we continue to see a trend of negative surprises on the data front, investors are likely to become more cautious.
The rise in commodity prices is seen as a key factor affecting the recovery, not just in the second largest economy, but on a global scale. Inflation is becoming the number one concern weighing on investors sentiment and when adding virus spikes in some parts of Asia, this would bring with it more volatility.
While India continues to struggle with the worst virus crisis, Singapore is sending school students back to home-based learning, and Taiwan is urging people to work from home as it races to contain new spike in cases and avert a new lockdown.
This is a reminder to many nations that we are not out of the woods yet with fighting Covid-19.
Very few may disagree that the excessive amount of stimulus and monetary policy easing led to huge inflows into speculative assets. Crypto currencies were one of the asset classes that attracted huge amounts of inflows since the beginning of the year, reaching a market cap of more than $2.5 trillion earlier this month from $776 billion at the beginning of 2021. Bitcoin’s percentage of the total market capitalization has fallen from 70% to 40% over the past five months, but with a market cap of more than $800 billion it’s still more than double the size of the second largest, Ethereum.
A tweet by Elon Musk on Sunday dominated the headlines once again in the crypto world after he indicated that Tesla may sell of have already sold the company’s bitcoins holding. The renewed criticism of Bitcoin by Elon Musk sent the price further lower on Monday and has now wiped out third of its value from April 14 high. While this looks bad, it is still a minor fall compared to the 84% plunge from the highs of 2017 into late 2018. If history repeats itself, the price of Bitcoin may drop below $10,000. However, the difference this time is its impact on other asset classes.
Crypto assets have grown incredibly over the past several years and a crash in value is no longer an idiosyncratic risk but highly likely to be a systematic risk.
We do not know yet the exact impact of a crypto assets crash on other asset classes. Today investors will monitor companies with large crypto holdings like MicroStrategy, Tesla, Square and Coinbase. However, there is a risk of broader selloff if Bitcoin and other major digital coins continues to sell off this week, so caution is warranted.