Daily Analysis 12 April 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as markets continue to come under pressure on rising recessions risks.

In brief (TL:DR)

  • U.S. stocks ended lower on Monday with the Dow Jones Industrial Average (-1.19%), the S&P 500 (-1.69%) and the Nasdaq Composite (-2.18%) all down as stocks, bonds and even oil started to sink on increasing concerns that a recession may be on the horizon.

  • Asian stocks dipped Tuesday as risks from high inflation, tightening monetary policy and China’s Covid outbreak ripple across markets.

  • Benchmark U.S. 10-year Treasury yields advanced five basis points to 2.83% (yields rise when bond prices fall) as the global bond rout continued.

  • The dollar is on its longest winning streak since 2020.

  • Oil steadied with May 2022 contracts for WTI Crude Oil (Nymex) (+2.09%) at US$96.26 after a tumble that saw crude erase most of the gains sparked by Russia’s invasion of Ukraine.

  • Gold rose with June 2022 contracts for Gold (Comex) (+0.63%) at US$1,960.50.

  • Bitcoin (-6.30%) fell to US$39,556 as investors dumped assets across classes, from oil to bonds, stocks to cryptocurrencies.


In today's issue...

  1. Europe Has Signed Ukraine’s Check for an End to the War or Start of a New One

  2. Global Markets are Falling Like It’s 2018 All Over Again

  3. Gaming Companies are Taking the Battle to the Metaverse


Market Overview

The next major test for markets looms later Tuesday, when the U.S. is expected to unveil an inflation print for March of more than 8% and which could force the hand of the U.S. Federal Reserve to act more decisively on rates and tightening.

While that could mark the peak, there are fears that price pressures will remain elevated. The Ukraine war is disrupting flows of essential commodities, and China’s lockdowns are straining supply chains.

China’s virus outbreaks and mobility curbs, in pursuit of a controversial Covid-zero strategy, are imperiling demand.

Asian markets were down on Tuesday with Seoul's Kospi Index (-1.08%), Tokyo's Nikkei 225 (-1.36%), Hong Kong's Hang Seng Index (-0.59%) and Sydney’s ASX 200 (-0.53%) were all down in the morning trading session.



1. Europe Has Signed Ukraine's Check for an End to the War or Start of a New One

  • With sanctions doing little to break Russian President Vladimir Putin’s resolve to win some sort of victory in Ukraine, European allies previously skittish about sending more deadly weapons to Ukraine have now shed those misgivings.

  • The reality on the ground of course is that Putin’s warmongering ability to other European states, at least in terms of conventional warfare, is limited at best now.

What happens when an unstoppable force meets an immovable object? Unfortunately, eastern Ukraine is about to find out in what is set to become a bloody showdown of military might against the indomitable will of a people whose only desire is to be free.

And because Europe can no longer afford to cut its nose to spite its face, even some of its most pacifist quarters have determined that the time for sanctions had ended, and the time for arming Ukraine has begun – with as heavy weapons as can be borne.

With sanctions doing little to break Russian President Vladimir Putin’s resolve to win some sort of victory in Ukraine, European allies previously skittish about sending more deadly weapons to Ukraine have now shed those misgivings.

As it becomes apparent that Europe cannot wean itself immediately off Russian gas, governments are resigned to the fact that the only way to bring a swift end to the Russian invasion of Ukraine is to provide Kyiv with the deadly weapons it’s been calling for weeks.

To be sure, many of the Western sanctions levelled against Russia are designed to work over time, and Europe has few tools left at its disposal other than sanctioning Russian energy exports, which divides its members and hits its own economies instantly.

Which is why there has been a growing focus in European capitals on hard power and a willingness to back it up with deliveries of deadly weapons.

Slovakia has already sent the advanced high-altitude S300 surface-to-air missile to Ukraine, but that can still be largely considered a defensive weapon, what Kyiv needs are tanks and fighter jets and these may be on the way.

But whereas the supply of defensive weapons could still be argued away by European powers reluctant to be drawn into a continental conflict, the supply of offensive weapons like artillery and air power to Ukraine may be an invitation for Moscow to bring its destructive powers to bear on their own capitals.

The reality on the ground of course is that Putin’s warmongering ability to other European states, at least in terms of conventional warfare, is limited at best now.

With Russian forces bogged down in Ukraine, signs that losses are mounting and units being redeployed from other regions into Ukraine, as well as the extensive use of militia and mercenaries – Moscow is in no position to wage conventional warfare on the fully-equipped and well-trained forces of NATO.

The days and weeks ahead will be crucial – whether European politicians are willing to call Putin’s bluff, risk the threat of thermonuclear war, and deliver badly-needed weapons to Ukraine, or whether they will allow the conflict to drag on to its inevitably bloody conclusion.



2. Global Markets are Falling Like It's 2018 All Over Again

  • The problem this time is that investors are concerned not just about policy tightening, but rising recession risks and unconvinced that the Fed can engineer a soft landing amidst a sea of macroeconomic challenges.

  • Dividend-paying stocks are back in vogue and defense contractors have been soaring on the back of heightened geopolitical risk.

The last time the U.S. Federal Reserve attempted to tighten policy in October 2018, a shakeout in global markets forced a hasty retreat that has since seen one of the loosest periods of monetary expansion on record.

But with price pressures hitting a 4-decade high in the U.S., everything from stocks to bonds is falling, even oil has pulled back from near records in a concerted cross-asset selloff that has echoes of the rate-spurred rout back in October of 2018.

The problem this time is that investors are concerned not just about policy tightening, but rising recession risks and unconvinced that the Fed can engineer a soft landing amidst a sea of macroeconomic challenges.

As the tide of monetary policy washes out, and with recession risks rising, investors are hunkering down, pouring into the U.S. dollar and companies that are expected to provide some form of safe haven during an economic slowdown, including previously unloved sectors like healthcare and consumer essentials.

Dividend-paying stocks are back in vogue and defense contractors have been soaring on the back of heightened geopolitical risk.

All of which do not bode well for the global economy because of fear of recession has superseded what would typically be expected in the wake of anticipated interest rate rises.

With just over a week into April, some of the best performers on the benchmark S&P 500 are soap makers, pharmaceutical companies, and utilities – hardly the stuff of an aspirational economy looking for new pockets of growth and inventing the next big thing.

The Fed unfortunately can’t do much about it because it may have its back against the wall with no end in sight for price pressures and they can justify more aggressive policy moves on the basis that there are few signs to be concerned about contraction.

As the U.S. labor market booms and consumer finance looks healthy, American companies haven’t shied away from capital spending, which would usually provide the first hint all is not week in the state of the economy.

But if stocks, bonds and oil end April lower, that will be the first time since 2018 that all major assets have suffered losses and what will be less clear is whether this is in response to policy tightening or concerns over an impending recession.

A worse-case scenario for investors is where the Russian invasion of Ukraine exacerbates already high inflation, against a backdrop of policy tightening by the Fed which plunges both the U.S. and Europe into recession – stagflation.



3. Gaming Companies are Taking the Battle to the Metaverse

  • After Microsoft’s acquisition of Activision Blizzard, one of the world’s biggest and most influential game publishers, other companies are fighting back, but on an entirely different turf.

  • Epic Games, maker of the massively popular multiplayer first-person shooter Fortnite, has secured US$2 billion in funding from Sony and the group behind the Lego franchise to build out an avatar-filled Metaverse.

With the prices of cryptocurrencies sliding along with other assets, from oil to stocks, some of the largest game publishers are betting that the next battlefield won’t be on consoles, but in the Metaverse.

After Microsoft’s (-3.94%) acquisition of Activision Blizzard, one of the world’s biggest and most influential game publishers, other companies are fighting back, but on an entirely different turf.

Epic Games, maker of the massively popular multiplayer first-person shooter Fortnite, has secured US$2 billion in funding from Sony and the group behind the Lego franchise to build out an avatar-filled Metaverse.

The funding was provided by Sony (-2.94%), maker of the PlayStation and Kirkbi, the investment company behind the Lego Group.

Last week Lego Group and Epic Games had announced that they had formed a “long-term partnership” to create a Metaverse that would be specifically for children, without providing any further details, but shows just how serious game companies are about this new virtual realm.

The move may comes in response to Microsoft’s acquisition of Activision Blizzard (-0.76%), which CEO Satya Nadella has said would allow the software giant to gain a foothold in the Metaverse.

Metaverse and gaming are a natural fit – gamers already spend billions of dollars a year on virtual goods and in-game items, including unique suits of armor, weapons and other elements to enhance avatars and the Metaverse would provide a new forum for gamers to spend more.

A survey in 2020 by Vorhaus Advisors found that 63% of gamers said that they would spend more on virtual in-game items if they had real-world value and could be traded or sold – which the blockchain and GameFi tokens have enabled.

So-called “bridges” have also facilitated blockchain interoperability, allowing tokens on one chain to be spent or used on another and helping the GameFi ecosystem.

Epic Games, which makes Fortnite, has already created a successful virtual world, and the Unreal Engine software that underpins Fortnite could be adapted to a Metaverse where thousands of players could move between discrete digital spaces as 3D avatars.

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