Hello there,

A magnificent Monday to you as U.S. markets closed higher last Friday while Asian markets muddled through the opening session.

In brief (TL:DR)

• U.S. stocks closed higher on Friday with the Dow Jones Industrial Average (+0.80%), the S&P 500 (+1.17%) and the Nasdaq Composite (+2.05%) all up as investors weighed the risks from the ongoing Russian invasion of Ukraine against resilience in the U.S. economy.

• Asian stocks were steady as crude oil jumped and investors monitored diplomatic efforts to bring an end to Russia’s almost month-old war in Ukraine.

• Benchmark U.S. 10-year Treasury slipped Friday to 2.153% (yields fall when bond prices rise).

• The dollar fluctuated.

• Oil rose with April 2022 contracts for WTI Crude Oil (Nymex) (+3.01%) at US$107.85 as investors assessed the war as well as Middle East tension.

• Gold was lower with April 2022 contracts for Gold (Comex) (-0.16%) at US$1,930.90.

• Bitcoin (-1.69%) fell to US$41,229, despite rising as high as US$42,000 over the weekend. Weakness in early week Asian trading could be the product of profit-taking.

In today's issue...

1. Are we in a bear market yet?

2. Chinese Stocks are Rebounding Hard, Should You Bite?

3. Could blockchain gaming be the Crypto’s Next Big Thing?

Market Overview

Investors are awaiting a speech later Monday by U.S. Federal Reserve Chairman Jerome Powell, less than a week after he and his colleagues kicked off a campaign of interest-rate hikes to fight the highest inflation in a generation.

Markets expect the U.S. central bank to lift its target rate to around 2% by the end of this year and appear to have priced that in.

The bond market continues to flash caution about risks from the war and rising U.S. interest rates suggesting that the economic outlook may not be as sanguine as projected.

Russia is pressing on with its invasion of Ukraine, which has stoked inflation by pushing up the price of key commodities such as oil and wheat.

In China, embattled real-estate developer China Evergrande Group along with its other units suspended trading in Hong Kong. Evergrande said in January that it aimed to present a preliminary restructuring proposal in the next six months.

Asian markets were mixed at the open on Mondaywith Sydney’s ASX 200 (-0.03%) and Seoul's Kospi Index (-0.34%) down slightly, while Hong Kong's Hang Seng Index (+0.31%) was up and Japan is closed.

1. Are we in a Bear market yet?

• Historically, geopolitical risks mixed in against a backdrop of rising interest rates, rising inflation and inverted yields curves, have when combined led to bear markets.

• Markets are still awash with liquidity from the pandemic, and the relentless money printing by the Fed which has spilled over into inflation has long contributed into asset inflation.

Given how stocks marked their biggest turnaround last week since November 2020, it would seem churlish to be asking if we’re in a bear market, yet history is not on the side of current macroeconomic conditions.

Historically, geopolitical risks mixed in against a backdrop of rising interest rates, rising inflation and inverted yields curves, have when combined led to bear markets.

While the U.S. Federal Reserve’s 0.25% rate hike last Wednesday was well within market expectations, they are merely the first of many this year.

Russia’s war in Ukraine is raging on, creating the largest humanitarian crisis in Europe since the Second World War and destabilizing financial markets around the world.

Meanwhile, the price of everything from gassing up to guzzling down has increased, with oil and food prices soaring and U.S. inflation pushing a 40-year high.

Parts of the U.S. Treasury yield curve are inverting – meaning that short-term borrowing yields more than longer-term debt, suggesting that traders hold a bleak outlook for economic growth in the long run.

Markets can typically stomach a couple of challenges, but not a quartet of them, at least historically.

According to research firm CFRA, since the Second Word War, the combination of a Fed rate-tightening cycle, geopolitical tension, high inflation and a flattening yield curve have triggered bear markets, or a 20% decline from the benchmark S&P 500’s peak.

CFRA points out that the heady mix of these factors led to bear markets between 1956-1957, 1973-1974, 1980-1982 and 2000-2002.

Could our current epoch play out in much the same way?

To be sure, there aren’t many economists who are betting on a U.S. recession in 2022, but the stock market is not the economy.

A strong labor market, robust consumer spending and better-than-expected corporate profits are all bullish factors for the economy, but will not necessarily translate to gains in equities, especially at currently elevated levels.

Even if there isn’t a sharp correction, many analysts still expect the market to deliver more moderate returns from here on out, as the Fed withdraws monetary policy support from the financial system, it’s implied “put.”

But, and this is a big “but,” since 1957, the average bull market in the S&P 500 has lasted 5.8 years, according to Truist Advisory Services, whereas this bull is relatively juvenile, at just 2 years old, fresh from the pandemic stimulus.

So, who’s right?

It’s been said that those who don’t learn the lessons of history are doomed to repeat it, but there are reasons to believe that a juvenile bull market seems more likely than not.

Markets are still awash with liquidity from the pandemic, and the relentless money printing by the Fed which has spilled over into inflation has long contributed into asset inflation.

All those excess dollars ultimately need to go somewhere, and the asset markets have absorbed them like a sponge – first it was equities and bonds, then more speculative corners of the market like high yield debt and cryptocurrencies, finally it’s reached commodities.

And that’s not forgetting that while the Fed has taken a hawkish turn, it’s pledged “nimbleness” in its policy, meaning that it can loosen (unlikely but possible) just as quickly as it has been to tighten.

2. Chinese Stocks are Rebounding Hard, Should You Bite?

• Chinese stocks listed in Hong Kong resumed last week’s historic rally, with investors betting on more policy support from Beijing despite the central bank leaving rates unchanged.

• Global investors wondering if this would be the right time to buy the reversal in Chinese stocks should note that ultimately, Beijing only sees the market as a tool to entrench its power and like any other tool, can be tossed aside when no longer needed.

Investing in emerging markets can be a bit like taking a walk through a dense jungle, you don’t know what’s out there, but you do know to be scared.

Which is why many global investors who have trekked through the jungle that is China’s equity markets and have suffered the slings and arrows of unexpected misfortunes, have finally called it a day, with some US$6 billion of flows exiting Chinese stocks this year alone, the highest since 2015.

But this morning, Chinese stocks listed in Hong Kong resumed last week’s historic rally, with investors betting on more policy support from Beijing despite the central bank leaving rates unchanged.

Everything from embattled real estate developers to tech firms gained at the open on Monday.

But Chinese stocks have had been on a roller coaster the past week, swinging from sharp dives to rallies, over concerns on everything from Beijing cozying up to Moscow and refusal to condemn Russia’s invasion of Ukraine, to potential U.S. delistings.

Fears that the U.S. may delist Chinese firms that refuse to comply with more stringent audit requirements have dissipated somewhat, as Beijing has signaled that it was willing to subject its U.S.-listed companies to these measures, albeit with some pushback.

Shares of Chinse firms have also been helped as Beijing vowed to stabilize markets and ease a regulatory crackdown that has hit sectors from afterschool education to real estate.

Worries about Sino-American tensions have also eased following a video meeting between U.S. President Joe Biden and Chinese President Xi Jinping last Friday, with China’s top envoy pledging that Beijing will “do everything” to de-escalate the war in Ukraine.

But could this be all a ruse in a year when Xi is looking to install himself as leader of China for life?

It could well be.

Back in 2012, when Xi took power, many were hopeful that he would continue the push to decentralize and continue reforms for the Chinese economy, to build on the advances over the past three decades so that China would look more like Hong Kong.

Instead, Hong Kong today looks more like China.

Power is more centralized than ever before, with rumors that Xi controls everything and sits on every significant advisory board or central committee.

Xi’s chief lieutenant, Premier Li Keqiang, has faded into the background, as Xi has ditched the communal leadership style favored by Deng Xiaoping, that ushered in China’s economic miracle.

Bloated and inefficient state-owned enterprises are coming back to the fore in China and party committees exist in almost all companies, state-owned and privately held, vetoing and making all manner of decisions, often with little regard to commerce or profit motives.

Xi needs economic stability this year, ahead of a key leadership conclave that would see him pursue an unprecedented third term in office and potentially onwards for life, and will likely see him willing to do anything to stabilize the economy to do so.

Make no mistake about it, there is no social contract between the Chinese people and the Communist Party as many outside observers assume, where citizens are willing to forgo their freedoms in exchange for economic goodies.

In 2017, the Communist Party vowed,

“Party, government, military, civilian, and academic; east, west, south, north, and center, the Party leads everything.”

Global investors wondering if this would be the right time to buy the reversal in Chinese stocks should note that ultimately, Beijing only sees the market as a tool to entrench its power and like any other tool, can be tossed aside when no longer needed.

3. Could Blockchain Gaming be the Crypto's Next Big Thing?

• Some of the most tuned-in investors, the so-called “smart money” are betting that it will soon be the “GameFi Spring,” with Galaxy Interactive, Republic Crypto and Alameda Research launching a consortium that will invest in blockchain-focused gaming studios and developers.

• According to DappRadar, there are already over 1,450 active blockchain-based game apps, with varying degrees of success and following.

From the “Crypto Winter” to the “DeFi Summer,” to everything in cryptocurrencies, there is a season.

And now, some of the most tuned-in investors, the so-called “smart money” are betting that it will soon be the “GameFi Spring,” with Galaxy Interactive, Republic Crypto and Alameda Research launching a consortium that will invest in blockchain-focused gaming studios and developers.

Dubbed NG+, the consortium will seek to fund experienced, traditional, video game developers and studios, helping them with token economics and liquidity as they build out blockchain-based games.

In return, NG+ will receive minority stakes in the tokens of such games.

Last year, the blockchain gaming industry rose to prominence on the back of games such as Axie Infinity, that lets users earn tokens and which provided a viable play-to-earn model for millions of people in emerging markets whose incomes had suffered because of the pandemic.

NG+ is hardly the only juggernaut muscling in on blockchain gaming.

Last year, Solana Ventures, a spinoff of the Solana blockchain, cryptocurrency exchange FTX and venture capital firm Lightspeed Venture Partners, created a US$100 million gaming fund.

Meme stock GameStop (+3.52%) said it was in talks with partners to create funds to support gaming startups and nonfungible token developers.

For investors, pushing into GameFi makes sense especially since it’s less likely to raise the hackles of regulators, which are scrutinizing other applications like DeFi more closely.

DeFi allows a variety of financial services to be accessed in virtual anonymity, raising difficult AML and KYC issues which have been a serious concern for regulators.

GameFi on the other hand looks far more innocuous and is less likely to be a priority issue for regulators having to deal with other pressing areas of cryptocurrencies, especially insofar as they can be used to evade sanctions.

According to DappRadar, there are already over 1,450 active blockchain-based game apps, with varying degrees of success and following.

And while many large traditional gaming companies have stayed on the sidelines, some are throwing their hat in the ring already, including Square Enix, creator of the famed Final Fantasy series, while giants EA Sports and Epic Games have both expressed an interest in the technology.

Legacy gaming companies with rich intellectual property stores they can dive into have proved to be more cautious, as their existing business models are already lucrative.

In-game purchases make up a significant amount of revenue for many video game developers, but games do not typically allow the credits purchased on one game to be swapped to those of another publisher or title.

For instance, Robux, which are the in-game currency for Roblox (+7.06%), can’t be spent on platforms such as Fortnite, and if a gamer loses interest in a game, that pre-purchased in-game currency is lost forever.

Blockchain gaming differs in that developers are actively working to ensure the digital properties players purchase remain theirs forever, via NFTs or non-fungible tokens, while some blockchains are dedicated to interoperability that would allow digital assets from one game to be spent and used on other blockchain games.

Blockchain technology could also be used to secure player accounts, banning hackers through their blockchain addresses and discouraging the anticompetitive behavior that has been a bugbear of millions of gamers globally.

The timing may be perfect as well, as video gaming ha become a growing pastime for billions of people globally who prior to pandemic lockdowns, would otherwise never have taken to gaming.

Video-game spending got a boost during the pandemic, as many consumers stayed home instead of going out for entertainment and those numbers have remained high even after lockdowns have been lifted.

In the U.S. alone, spending on video game subscription services excluding mobile, rose 14% last year, as restrictions were being lifted, according to researcher NPD and the prospect of play-to-earn could drive that number even higher.