Daily Analysis 1 March 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as U.S. equities pare back some gains amidst escalating violence in Ukraine while tech stocks staged a small comeback.

In brief (TL:DR)

  • U.S. stocks opened a mixed bag on Monday with the Dow Jones Industrial Average (-0.49%) and S&P 500 (-0.24%) giving up gains where cyclical stocks came under pressure while the Nasdaq Composite (+0.41%) rebounded on bargain hunting.

  • Asian stocks made steady gains Tuesday amid a lull in the intense market volatility sparked by the war in Ukraine and the ensuing sanctions on Russia for invading its neighbor.

  • Benchmark U.S. 10-year Treasury yields rose three basis points to 1.85% (yields rise when bond prices fall).

  • The dollar was little changed.

  • Oil edged higher with April 2022 contracts for WTI Crude Oil (Nymex) (+0.78%) at US$96.47 with traders focused on the possible release of emergency stockpiles to counter fears of disruption to Russian exports.

  • Gold rose with April 2022 contracts for Gold (Comex) (+0.17%) at US$1,904.00.

  • Bitcoin (+13.56%) jumped to US$43,337 on speculation that digital tokens could be increasingly used for payments in the wake of the sanctions against Russia and heightened volumes versus the Ukrainian and Russian currencies.


In today's issue...

  1. FOMO Trade Replaced by FOTU

  2. Sell Now to Deep Regret or Keep Calm and Carry On

  3. Bitcoin Bolsters its Haven Attributes in a Warzone


Market Overview

Russia’s markets remain under pressure after the U.S. and its allies moved to block the Bank of Russia’s access to foreign reserves and cut some lenders off from the SWIFT messaging system for global banking.

Markets have been whipsawed by the conflict and steps to isolate commodity-rich Russia.

Disruptions to supplies of raw materials such as grain and energy threaten to stoke already-high inflation and hamper growth, just as the Federal Reserve prepares to raise interest rates.

Lenders worldwide are already making it harder to finance transactions involving Russian resources.

Asian markets rose Tuesday with Tokyo's Nikkei 225 (+1.55%), Hong Kong's Hang Seng Index (+0.04%), Seoul's Kospi Index (+0.84%) and Sydney’s ASX 200 (+1.12%) were all up in the morning trading session.



1. FOMO Trade Replaced by FOTU

  • Whereas this time last year, investors were piling into the meme stock frenzy, this year has been marked by the FOTU trade, one where the future is uncertain and requires hedging.

  • Investors are understandably jittery, especially since geopolitical risks are very difficult to factor into asset pricing

FOTU? Fear Of The Unknown.

Whereas this time last year, investors were piling into the meme stock frenzy, a mad bout of FOMO that saw shares of some of GameStop (+4.01%) and AMC Entertainment (+6.80%) soar, this year has been marked by the FOTU trade, one where the future is uncertain and requires hedging.

Russia’s intensifying invasion of Ukraine, with shells lobbed at residential areas in the eastern Russian-speaking city of Kharkiv has sent not just residents in the beleaguered city heading for cover, but investors as well.

The Cboe’s Volatility Index, otherwise known as the “fear gauge” for the S&P 500 has soared to its highest level on a closing basis since January 2021, the same time as the meme stock frenzy.

Meanwhile, Wall Street’s strategists are suggesting that investors load up on defensive stocks like utilities, commodities, telecommunications and other essential service firms that aren’t dependent on economic performance.

In what has been Europe’s worst conflict since the Second World War, investors have been rushing for cover in havens such as the dollar, gold and U.S. Treasuries, sending yields plummeting (yields fall when bond prices rise).

Rising oil prices are adding to inflationary pressures and increased defense spending hurts economies just coming out of the pandemic – Germany has authorized spending of US$100 billion on defense.

Consumer sentiment has also been affected and pressure will be on the U.S. Federal Reserve’s original plan for faster rate increases to tame inflation – tightening now could tip the balance in favor of an economic recession.

The value stock rotation, where investors bought up companies more exposed to the economy, including financials, hospitality and travel, is all but dead, given their vulnerability to higher commodity prices that put pressure on margins.

Investors are understandably jittery, especially since geopolitical risks are very difficult to factor into asset pricing.

Few investors would have expected the ferocity and cohesiveness of the European response to the Russian invasion of Ukraine – throwing Russian banks off the SWIFT system, essential for cross border bank transfers and isolating the world’s largest country by land mass from the global financial system was far from contemplated just weeks ago.

Countries which until recently had been wary about angering Russia are sending advanced antiaircraft and antitank missiles to Ukraine, along with fuel, supplies and financial aid, openly and proudly.

All of which creates a backdrop of increasing uncertainty and understandably has more investors rotating into cash.

In the long term, defense contractors, which had languished in the post-Cold War peace are likely to provide value even after hostilities in Ukraine end, given a significant shift in the global order and decades of underspending on defense capabilities.



2. Sell Now to Deep Regret or Keep Calm and Carry On

  • Predictably, Europe’s banking stocks were hit hard on Monday, sinking to their lowest in two months, after the U.S. and European Union kicked Russia off the international SWIFT transaction messaging system and moved to target the central bank’s foreign exchange reserves.

  • In the face of an increasingly chaotic geopolitical environment, JPMorgan Chase’s head of global equity strategy Mislav Matejka is advising investors to avoid panic selling, to focus on the market’s fundamentals instead.

It’s a common adage that investors often trade too much, to their own detriment, often chasing up assets as their prices are rising, panicking as their prices fall and selling near the low, only to crystalize those losses and handing over opportunities to the savvy “smart money.”

Hence the saying, bulls make money, bears make money, pigs get slaughtered.

But why pigs? Because they’ll eat anything that’s in front of them (allegedly) – and many retail investors fall into that category because they’ll lap up a hot stock tip and sell on fear just like a pig will chow down on whatever’s in the slop trough, even bacon.

And which is why in the face of an increasingly chaotic geopolitical environment, JPMorgan Chase’s head of global equity strategy Mislav Matejka is advising investors to avoid panic selling, to focus on the market’s fundamentals instead.

In a note to clients on Monday, Matejka wrote,

“If one is selling on the back of the latest geopolitical developments now, the risk is of getting whipsawed. Historically, vast majority of military conflicts, especially if localized, did not tend to hurt investor confidence for too long, and would end up as buying opportunities.”

Is this time different? It’s harder to say, especially because the world hasn’t had to face off with an autocrat armed with nuclear weapons that may (or may not?) actually use them and risk converting the entire European continent into a post-apocalyptic wasteland.

But what about North Korea?

That consideration matrix is considerably different – Kim Jong Un and his band are not in active conventional conflict with South Korea, Russia’s Vladimir Putin is, and it’s not going well.

What ought to have been a brief outing to Kiev has since seen Russian forces pinned down, demoralized, and undersupplied.

Matejka’s appeal for investor calm comes as a fresh wave of Western sanctions ordered against Russia are starting to hit home and hard, while Putin has grown increasingly belligerent, ordering his nuclear forces to be on alert.

Predictably, Europe’s banking stocks were hit hard on Monday, sinking to their lowest in two months, after the U.S. and European Union kicked Russia off the international SWIFT transaction messaging system and moved to target the central bank’s foreign exchange reserves.

Marejka isn’t the only one suggesting that investors stay calm, UBS Global Wealth Management echoed the sentiment with a note by strategists led by Mark Haefele on Monday,

“We think it is important that investors maintain a calm stance and keep a long-term perspective.”

Haefele and his colleagues have advised investors to diversify across regions, sectors, and asset classes, use commodities as a geopolitical hedge, and position for U.S. dollar strength.



3. Bitcoin Bolsters its Haven Attributes in a Warzone

  • Overnight, Western sanctions which hit ordinary Russians and Ukrainians whose cities remain under siege turned to trading Bitcoin to try and cater for the gaps in their financial systems.

  • Similar to the Bitcoin boom fueled by Turkey’s lira crisis, Bitcoin continues to act as a hedge against unpredictable times for more than a handful of investors.

What happens if your local bank has been shelled by artillery fire? Or you can’t get cash out of the ATM because foreign governments have booted your national lenders off the ubiquitous SWIFT system?

Why, you buy Bitcoin of course.

Overnight, Western sanctions which hit ordinary Russians and Ukrainians whose cities remain under siege turned to trading Bitcoin to try and cater for the gaps in their financial systems.

Ordinary Russians, many of whom do not agree with the Russian invasion of Ukraine and who have since witnessed the ruble plummet, took to buying Bitcoin to lock-in as much value as they could with volumes of the ruble-Bitcoin pair climbing to its highest level since last May.

Ukrainians are also betting on Bitcoin, both as a hedge against the war’s disastrous consequences on the economy, but also because many financial services have been disrupted by the Russian invasion, with Ukraine’s hryvnia trading for Bitcoin soaring to a level not seen since October last year, according to data provider Kaiko.

Russians are no stranger to cryptocurrencies, with Moscow estimating that they own US$22.9 billion worth, while 12% of Russians, or 17 million people already own cryptocurrencies, according to data from payment gateway TripleA.

While geopolitical uncertainty has seen stocks and other risk assets, including cryptocurrencies, tumble from their all-time-highs, cryptocurrencies are proving a genuine use case, as a tool that can allow ordinary citizens to continue with their financial lives, amidst the most dire of circumstances.

Bitcoin’s alleged role in a portfolio as “digital gold” has come under pressure.

With the price of bullion soaring amidst the uncertainty from the Russian invasion of Ukraine, flows out of Bitcoin products coincided with strong inflows into gold ETFs and other instruments.

Meanwhile, the correlation between stocks and Bitcoin has increased, with the Nasdaq 100 and S&P 500 continuing to show a strong relationship with the cryptocurrency.

Those assumptions have been overturned as the world witnessed cryptocurrency donations pour into Ukraine and ordinary Russians turn to Bitcoin to salvage what remained of their meager savings as the ruble collapsed.

Similar to the Bitcoin boom fueled by Turkey’s lira crisis, Bitcoin continues to act as a hedge against unpredictable times for more than a handful of investors.

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