Hello there,

A terrific Tuesday to you as markets take a topsy-turvy turn upwards on the prospect of stronger action by Beijing to prop up the increasingly moribund Chinese economy.

In brief (TL:DR)

• U.S. stocks closed slightly higher on Monday with the Dow Jones Industrial Average (+0.70%), S&P 500 (+0.57%) and the Nasdaq Composite (+1.29%) all up.

• Asian markets steadied Tuesday as China pledged to boost monetary-policy support for the nation’s Covid-afflicted economy, whose travails are darkening the outlook for the global recovery.

• Benchmark U.S. 10-year Treasury yields held a climb to 2.81% (yields fall when bond prices rise) but have held back an otherwise relentlessly rally.

• The dollar dipped.

• Oil held a retreat below $100 a barrel with June 2022 contracts for WTI Crude Oil (Nymex) (+0.39%) at US$98.92, weighed down by the threat to demand from China.

• Gold inched higher with June 2022 contracts for Gold (Comex) (+0.30%) at US$1,901.70.

• Bitcoin (+1.40%) recovered to US$40,168 (at the time of writing) alongside equities, which it has had a very strong correlation with.

In today's issue...

1. A Different Kind of Oil May Fuel Further Inflation

2. Activity in Options Markets Hint at Dip Buying Fatigue

3. Bitcoin Rebounds Off 6-month Low

Market Overview

The prospect of slower economic expansion alongside persistent inflation is leading to a febrile mood in markets.

The panoply of risks spans the pandemic, supply-chain disruptions, central bank policy tightening and the grinding war.

The People's Bank of China Monday cut the amount of money banks must set aside in reserve for foreign-currency holdings, effectively boosting the domestic supply of dollars.

The virus outbreak in the world’s biggest crude importer is another source of commodity-market volatility alongside Russia’s invasion of Ukraine.

Asian markets were mostly higher Tuesday with Seoul's Kospi Index (+0.63%), Tokyo's Nikkei 225 (+0.56%) and Hong Kong's Hang Seng Index (+0.51%) all up, while Sydney’s ASX 200 (-1.90%) was down in the morning trading session.

1. A Different Kind of Oil May Fuel Further Inflation

• Indonesia is the latest country to institute a food export ban as the world struggles with disrupted food supplies.

• The palm oil industry is extremely time sensitive as the palm fruits rapidly go rancid in the humid tropical weather that the plant grows well in.

On the streets of Indonesia’s capital Jakarta, stalls selling snacks fried in vegetable oil are a cheap and favored staple – from friend bean curd to dough fritters.

But that same oil that fries Indonesia’s favorite street snacks has also been helping to make up for the acute shortage in edible oils globally since Russia’s invasion of Ukraine.

Before the Russian invasion, Ukraine was the world’s largest exporter of sunflower oil and with its ports blockaded and shelled by the Russian navy and artillery, demand has soared for substitutes such as palm oil, which Indonesia is the world’s largest exporter of.

As the Indonesian rupiah lost ground to the dollar on Monday, Jakarta banned all exports of palm oil, in a bid to contain soaring food prices, a consequence of inflationary pressures as well as the Russian invasion of Ukraine.

Both Russia and Ukraine are major food exporters and Russia is a major supplier of agricultural fertilizers, which are essential for food production.

Indonesia is the latest country to institute a food export ban as the world struggles with disrupted food supplies.

But palm oil doesn’t just go into making vegetable oil for cooking, it also goes into everything from soap to skincare and a disruption in supply could see more pressure on palm oil prices.

The United Nations Food and Agricultural Organization’s vegetable oil price index has already surged by 40% this year, largely due to the disruption of Ukrainian supplies of sunflower oil and as consumers have sought replacements.

Indonesia’s ban on palm oil exports may help bring down prices in Indonesia, but they would also push prices upwards for major importers like China and India, which may seek alternative oils and result in spillover effects.

Even before the Russian invasion of Ukraine, Indonesia was struggling with a domestic palm oil shortage, putting pressure on Jakarta to act as the world’s largest Muslim population prepares for the traditional Eid al-Fitr feast at the end of Ramadan, which typically includes plenty of snacks fried in vegetable oil.

While the ban may be good for Indonesians, the lost foreign revenue saw a selloff in Indonesian palm oil producers, but a rise in Malaysian producers, as they are expected to profit from the increased demand.

Palm oil production in the world’s two major palm oil producers Malaysia and Indonesia has been on the decline for years and made worse by the pandemic.

Prior to the Russian invasion, growing health consciousness saw a steady drop in demand for palm oil and the environmental degradation of primary rainforest for growing the crop has seen underinvestment in the sector.

Making matters worse, Malaysia’s palm oil planters had to battle a worsening labor shortage because of the pandemic as border cubs kept out migrant workers, slashing the numbers available to harvest and fertilize the highly perishable palm fruits.

The palm oil industry is extremely time sensitive as the palm fruits rapidly go rancid in the humid tropical weather that the plant grows well in.

2. Activity in Options Markets Hint at Dip Buying Fatigue

• Equities continue to come under stress as evidenced by the soaring cost of bearish “put” options.

• Bearish put options are also at their highest levels since the pandemic crash of 2020, although over the past five years, such a phenomenon has also dovetailed with stock market bottoms.

It’s important to stay positive, but even the most bullish investors are showing signs of fatigue, at least according to the options markets and ETF outflows.

Equities continue to come under stress as evidenced by the soaring cost of bearish “put” options (the option to sell at a specific price) and higher “insurance costs” are just another worry to add to an ever-increasing list of things to be concerned about as the S&P 500 flirts with its lowest levels in almost a year.

Despite draconian lockdowns, China’s coronavirus cases are surging as the death toll mounts given suspect Chinese vaccine efficacy, low rates of vaccination and a lack of herd immunity increasing concerns that a dramatic slowdown in the world’s second largest economy could take down the rest of the global economy with it.

Strong earnings have done little to provide investors with relief, as markets tend to trade based on the outlook, not on the past.

Bearish put options are also at their highest levels since the pandemic crash of 2020, although over the past five years, such a phenomenon has also dovetailed with stock market bottoms.

Yet given the rich valuations fueled by the unprecedented flood of liquidity from central banks, it would be a brave soul to call a bottom on stocks.

For many investors, the unimaginable prospect of a hard landing for China’s economy is weighing on sentiment and providing a possible headwind for equities, rates and commodities – China’s economy crashing does no one any favors.

However, market sentiment remains heavily conflicted, the Cboe Volatility Index, a gauge of the cost of S&P 500 options hit a high of 31.60 at one stage before retracing.

Some investors believe that the light positioning (no strong bets in either direction) and negative sentiment, set the stage for a strong rebound in the stock market, with JPMorgan Chase’s Marko Kolvanic suggesting that equities are likely to stage a rally in the coming days.

Kolvanic points to companies emerging from a share buyback blackout and funds shifting money from fixed income after April’s equity selloff to return to present asset-allocation levels by the end of this month.

There may be some merit to this view.

Funds have been withdrawing billions of dollars out of Chinese assets, given their uncertain outlook, and fixed income has been hammered.

3. Bitcoin Rebounds Off 6-month Low

• Slipping to as low as US$38,200, the benchmark cryptocurrency has since rebounded to over US$40,000.

• The standout performer amongst cryptocurrencies has been Dogecoin, which has been helped by the prospect of its longtime backer Elon Musk’s move to purchase Twitter (+5.66%) for a whopping US$44 billion.

As overall risk-off sentiment grips investor psyches, Bitcoin joined a slew of other risk assets in a broad selloff against a backdrop of tighter central bank monetary policy and risks ranging from Russia’s invasion of Ukraine to a potential hard landing for China’s economy.

Slipping to as low as US$38,200, the benchmark cryptocurrency has since rebounded to over US$40,000.

Ether, the world’s second most valuable cryptocurrency by market cap, tracked a similar course, declining to below US$2,800 at one stage before rebounding to over US$3,000.

The standout performer amongst cryptocurrencies has been Dogecoin, which has been helped by the prospect of its longtime backer Elon Musk’s move to purchase Twitter for a whopping US$44 billion.

Last year, Musk shilled Dogecoin, which was always intended as a meme-coin to parody the cryptocurrency industry, sending the Dogecoin soaring some 14,000% by May 2021.

In January, Musk announced on Twitter that Dogecoin could be used to buy Tesla merchandise (not the vehicles).

Despite several technical indicators suggesting that Bitcoin could have further to fall, the cryptocurrency markets have seldom been beholden to chart patterns, with swift reversals a hallmark of the trading landscape.

Given that most Bitcoin is not traded anyway, the little that is remains stuck in a relatively tight trading range between US$35,000 to US$45,000 and of late has straddled an even more closely held band roughly around the US$40,000 mark.

Bitcoin has also had an extremely strong rolling 30-day correlation with the S&P 500, with a reading of 0.91 (1.0 representing two assets moving synchronously).

That sideways movement for Bitcoin has also dovetailed with an overall fall in trading volumes across cryptocurrency exchanges, which may not necessarily reflect that investors are no longer interested in the cryptocurrency, but may no longer be interested in “trading.”

A study of blockchain analytics data provided by Glassnode reveals that a massive amount of Bitcoin is coming off cryptocurrency exchanges and put into “cold wallets” which are not connected to the internet and are typically used by investors looking to hold Bitcoin for the long run.

Investors typically only bring Bitcoin to the exchange when they are looking to sell the cryptocurrency and blockchain flows can be reflective of sentiment – the more heads into exchanges, the higher the likelihood that investors are looking to sell and vice versa.

For Bitcoin bulls, the lack of trading volume could be a potential catalyst that sees prices surge significantly upwards as times in the past where more investors held Bitcoin for the long-term have coincided with sharp rallies in illiquid markets.