Daily Analysis 24 February 2022 (10-Minute Read)

Hello there,

A terrific Thursday to you as Russia appears to tear up the traditional world order with Russian troops entering the eastern regions of Ukraine and sporadic reports of bombings across Ukraine.

In brief (TL:DR)

  • U.S. stocks continued to fall Wednesday with the Dow Jones Industrial Average (-1.38%), S&P 500 (-1.84%) and the Nasdaq Composite (-2.57%) all down.

  • Asian stocks fell Thursday on growing geopolitical tension after the Kremlin said separatists in eastern Ukraine asked President Vladimir Putin for help, while Moscow has ordered strikes across Ukraine.

  • Benchmark U.S. 10-year Treasury yields fell three basis points to 1.96% (yields fall when bond prices rise).

  • The dollar held gains.

  • Oil pushed higher with April 2022 contracts for WTI Crude Oil (Nymex) (+1.38%) at US$93.37 as traders weighed possible risks to Russian energy exports against the potential release of some strategic reserves to restrain prices.

  • Gold rose with April 2022 contracts for Gold (Comex) (+0.35%) at US$1,917.00.

  • Bitcoin (-2.73%)fell to US$35,010 and continues to face downwards pressure as reports of explosions across Ukraine are reported.


In today's issue...

  1. Penny Stock Fever Cools But Doesn’t Disappear

  2. Key Food Crops Soar, Putting Further Pressure on Inflation

  3. U.S. Crypto Community Takes a Leaf Out of Wall Street’s Playbook


Market Overview

The cost of everything from oil to grains to metals has jumped because of the standoff in eastern Europe.

That’s helped to lift a gauge of agricultural commodities to a record high, heralding fresh challenges for a global recovery that was already struggling with elevated price pressures.

Russian President Vladimir Putin said he remains open to “diplomatic solutions” but insists Russia’s interests and security must be guaranteed. Ukraine President Volodymyr Zelenskiy said in an address to the nation that Ukraine poses no threat to Russia but will defend itself if attacked.

Explosions have been reported all across Ukraine as Russia attacks targets across the country.

Asian markets were lower Thursday with Tokyo's Nikkei 225 (-0.74%), Seoul's Kospi Index (-1.71%), Hong Kong's Hang Seng Index (-1.41%) and Sydney’s ASX 200 (-2.49%)were all down in the morning trading session.



1. Penny Stock Fever Cools But Doesn't Disappear

  • But with the prospect of U.S. Federal Reserve monetary policy tightening on the horizon, January marked the 11th consecutive monthly decline in the over-the-counter or OTC equity trades.

  • Yet even as trading volumes in OTC shares starts to flatten, overall activity remains elevated and well above pre-pandemic levels, suggesting a more durable shift.

In the quiet corridors of the opaque over-the-counter markets, shares of unlisted companies trade hands as investors, savvy or otherwise, try to make supernormal returns on U.S. penny stocks and microcaps that can go on rallies that would make even the most speculative cryptocurrencies blush.

But with the prospect of U.S. Federal Reserve monetary policy tightening on the horizon, January marked the 11th consecutive monthly decline in the over-the-counter or OTC equity trades, according to data from Finra, an industry watchdog for U.S. broker-dealers and exchanges.

Total number of trades was also 70% off the all-time high set last February against the backdrop of the meme stock frenzy.

OTC equities are stocks not quoted on a national securities exchange such as Nasdaq or the New York Stock Exchange and include smaller companies, as well as American depository receipts that make it easier to buy stock in large overseas companies such as Chinese tech firms.

But the continued crackdown by Beijing on its tech sector, as well as tightening monetary policy is starting to weigh on risk appetite for the most speculative corners of the market.

Yet even as trading volumes in OTC shares starts to flatten, overall activity remains elevated and well above pre-pandemic levels, suggesting a more durable shift.

And even as the absolute number of trades in America’s OTC markets has continued to decline, the dollar value of activity has been far more resilient, as a smaller number of investors make higher-value trades, suggesting that they may be intent on holding for a longer period as opposed to the day traders that this corner of the market is more well known for.

But not all the recent declines in volume on OTC markets can be pinned down to geopolitical risks or monetary policy either – the U.S. Securities and Exchange Commission has been cracking down on the otherwise opaque sector, banning retail investors from trading stocks of companies that do not provide up-to-date corporate disclosures.



2. Key Food Crops Soar, Putting Further Pressure on Inflation

  • Now that breadbasket is coming under pressure and sending prices for winter wheat futures soaring as escalating tensions between Russia and Ukraine stoke fears about disruption of key food exports and adding to already heightened inflationary pressures in the U.S. and Europe.

  • Any potential disruption of Ukraine’s supply to the global markets could be disastrous for central banks having to contend with food costs that are already at a decade high amid strong demand and diminished stockpiles.

Over the centuries, Ukraine has changed hands multiple times.

Well before Stalin and Hitler coveted the black soils and natural resources of this rich land, the Poles and Mongols held sway over a vast swathe of territory that make up modern Ukraine, trading blood and treasure to control the breadbasket of Europe.

Now that breadbasket is coming under pressure and sending prices for winter wheat futures soaring as escalating tensions between Russia and Ukraine stoke fears about disruption of key food exports and adding to already heightened inflationary pressures in the U.S. and Europe.

Unnoticed by most consumers around the world, Ukraine is a powerhouse agricultural producer, home to a quarter of the global wheat trade and a fifth of corn exports, thanks to its fertile black soils rich in humus, phosphoric acid, phosphorus and ammonia, natural fertilizers for crops.

Ukraine is also a top sunflower seed oil originator and is a major exporter of barley and rapeseed.

Any potential disruption of Ukraine’s supply to the global markets could be disastrous for central banks having to contend with food costs that are already at a decade high amid strong demand and diminished stockpiles.

As the U.S. Federal Reserve prepares to end its monthly asset purchases in March and raise interest rates to combat the fastest pace of inflation in four decades, rising food prices may be the straw that breaks the camel’s back, forcing a far more aggressive tightening than markets have currently catered for.

Regardless, the task of baking bread has to continue, with data from the U.S. Department of Agriculture showing that global importers are already seeking alternative supplies to cater to potential supply disruptions.

So far, ships from the Black and Azov seas, the key hub for Ukrainian and Russian crop exports, have continued as usual, according to Kyiv-based consultant UkrAgroConsult.

Last year’s bumper Ukrainian harvest may also provide some buffer to replenish depleting granaries, which suggests that the recent price hikes in food futures may have more to do with speculation and traders than with supply-side issues.

Although that could change in a heartbeat, depending on what the Kremlin does next.



3. U.S. Crypto Community Takes a Leaf Out of Wall Street's Playbook

  • The number of personnel moving between jobs in the U.S. cryptocurrency industry and government agencies has soared.

  • Employing former regulators has been common for years on Wall Street and in other industries, where modest government salaries are very quickly replaced for massive pay packages that the private sector provides.

Wall Street has been playing and paying the influence game like a pro for decades, so it’s no surprise then that the crypto industry which is looking to disrupt the incumbent financial services sector is taking a leaf out of the Street’s playbook.

Their coffers filled with the spoils of an incredible pandemic period that saw cryptocurrency prices soar, industry players are now doling out some of that cash to entice the very regulators who police them to come aboard.

The number of personnel moving between jobs in the U.S. cryptocurrency industry and government agencies has soared.

In a new report by the Tech Transparency Project, a watchdog group, there have been nearly 240 instances of the so-called “revolving door” where employees leave the government for the private sector and vice versa.

But the move is hardly new.

Trump-era U.S. Securities and Exchange Commission appointee Jay Clayton joined cryptocurrency custody firm Fireblocks soon after leaving his job as Chairman of the regulator.

During his term as Chairman of the SEC, Clayton applied his regulatory ambit in a piecemeal manner, going after some initial coin offerings as unauthorized securities, while looking the other way on others.

But Clayton’s high profile move to the crypto-side has since set a strong precedent for dozens of former top SEC and White House officials to do the same.

According to Tech Transparency Project, many of these former government officials are now working on behalf of cryptocurrency exchanges like Coinbase Global and Binance Holdings as well as token companies like Ripple Labs.

The traffic is not one way either.

The Tech Transparency Project report also found personnel from leading crypto firms like Circle Internet Financial, joining the Federal Reserve Bank of Boston, which has taken a leading role as officials weigh the prospect of a U.S. central bank digital currency.

According to the report,

“Faced with mounting legal and regulatory pressure in Washington, the cryptocurrency industry has turbocharged its D.C. lobbying machine.”

But corporate capture of the Capitol is hardly new, nor is it specific to the cryptocurrency industry.

Employing former regulators has been common for years on Wall Street and in other industries, where modest government salaries are very quickly replaced for massive pay packages that the private sector provides.

Given the bumper profits that some of crypto’s biggest companies have made over the past few years, they are understandably pouring money into lobbying efforts to either curb or at the very worst, delay new rules amidst a growing pressure to regulate the industry.

Hiring political insiders also gives U.S. crypto companies better access to lawmakers and regulators and could help them preserve their profits by avoiding tougher regulation.

Overall the trend should be positive for cryptocurrencies, as lobbyists ensure that regulations cater to the necessary, providing a certain framework to expand their businesses and engage more stakeholders, while doing away with costly compliance burdens.

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