Hello there,

A magnificent Monday to you as the world descends into madness helped along by the maniacal machinations of a megalomaniac.

In brief (TL:DR)

• U.S. stocks finished higher on Friday in a strong comeback with the Dow Jones Industrial Average (+2.51%), S&P 500 (+2.24%) and the Nasdaq Composite (+1.64%) as the continued chaos in Ukraine had traders bet on a more restrained pace of policy tightening.

• Asian stocks were lower Monday amid heightened market uncertainty after Western nations unveiled harsher sanctions on Russia for the invasion of Ukraine.

• Benchmark U.S. 10-year Treasury yields fell five basis points to 1.91% (yields rise when bond prices fall) as investors continued to seek havens amidst the uncertainty.

• The dollar pared gains but remained elevated as a haven asset.

• Oil rose with April 2022 contracts for WTI Crude Oil (Nymex) (+5.08%) at US$96.24 on continued concerns over supply disruptions.

• Gold jumped with April 2022 contracts for Gold (Comex) (+1.38%) at US$1,913.70 alongside other commodities,

• Bitcoin (-0.78%) fell to US$38,163 as risk assets continued to face headwinds against growing geopolitical uncertainty and the prospect of policy tightening to cater to inflationary pressures.

In today's issue...

1. The Threat of Stagflation Starts to Crystalize

2. Dollar Dominates as Investors Duck for Cover

3. Cryptocurrencies Could Surprise as Russia’s Invasion of Ukraine Continues

Market Overview

Stricter Western penalties further split commodity-rich Russia from global finance by seeking to prevent its central bank from using foreign reserves to blunt sanctions.

Sanctions have also excluded some Russian lenders from the SWIFT messaging system that underpins trillions of dollars worth of transactions.

The hostilities threaten to stoke inflation by imperiling flows of key resources such as wheat, natural gas, oil and metals, exacerbating the pandemic-era price pressures that were already weighing on global growth.

A key question is how all this may affect the U.S. Federal Reserve’s plan for a series of interest-rate hikes starting March. Ebbing liquidity stirred major market swings even before the Ukraine crisis and there is the risk of stagflation.

Asian markets were mixed Monday with Tokyo's Nikkei 225 (-0.39%) and Hong Kong's Hang Seng Index (-0.82%) down, while Seoul's Kospi Index (+0.10%) and Sydney’s ASX 200 (+0.47%) were up slightly in the morning trading session.

1. The Threat of Stagflation Starts to Crystalize

• With inflation in the major economies of U.S. and Europe soaring, the Russian invasion of Ukraine has just thrown a spanner into the works for central bankers who were otherwise committed to tightening monetary policy.

• Medium term, stagflation conditions tend to favor real assets, commodities, small cap value stocks and emerging market assets.

There couldn’t be a worse time to be a central banker than now. With inflation in the major economies of U.S. and Europe soaring, the Russian invasion of Ukraine has just thrown a spanner into the works for central bankers who were otherwise committed to tightening monetary policy.

Whereas earlier on, central banks could argue that the bulk of inflationary pressures were caused by pent-up demand from the pandemic and supply chain snarls, the looming energy crisis because of the war in Ukraine will complicate matters considerably.

The world’s largest bond market, that for U.S. Treasuries meanwhile is signaling concern that the war in Ukraine could lead to a nightmare scenario that the U.S. Federal Reserve would rather avoid – persistent inflation and weak economic growth, otherwise known as stagflation.

While growth continues to be strong in the U.S., high energy prices could very easily derail the economy.

Even as bond-market gauges of short-term inflation soared last week against a backdrop of surging oil and natural gas prices, short and long-term yields narrowed, indicating heightened expectations of an economic slowdown.

The U.S. Treasury market provided temporary safe harbor for investors in the early stages of the Russian invasion, which sent stocks plummeting, but equities have since rebounded, with yields rising as well (yields rise when bond prices fall) as investors bet that the Fed would be slower to hike rates given the uncertain outlook.

With around two weeks to the Fed’s mid-March meeting, expectations are that the Fed will raise policy rates from near zero, and any sign at hesitance to hike further could see a temporary boost for risk assets.

Medium term, stagflation conditions tend to favor real assets, commodities, small cap value stocks and emerging market assets.

2. Dollar Dominates as Investors Duck for Cover

• The threat of a thermonuclear war on the European continent has seen the dollar rise against virtually every other currency as investors scramble to stuff their mattresses with the global reserve currency.

• Demand for dollars is expected to soar especially given that Russian banks banned from the SWIFT platform could miss payments and massive overdrafts, spurring monetary authorities to re-start daily operations to inject dollars into the market.

When you’re afraid and Putin’s busy invading

You can always get,

Dollars

When the markets are quaking, while Russian tanks are invading

Seems to help I know,

Dollars

Just feel those greenbacks rustling while the troops are busy storming

Keep those dollar stacks cause nuclear war may be a’coming

How can you lose?

This cash is so much more valuable where

You can forget all your rubles, forget all the rest

So get dollars!

Things you can buy with those dollars!

Dollars are waiting for you!

– Sung to the tune of Petula Clark’s "Downtown" © 1964 Pye

Far from declining in dominance, the threat of a thermonuclear war on the European continent has seen the dollar rise against virtually every other currency as investors scramble to stuff their mattresses with the global reserve currency.

With Western nations ratcheting up sanctions on Russia, including excluding Russian banks from the SWIFT international messaging system that banks use for cross-border fund transfers, investors are seeking shelter as market volatility surges on a conflict that is adding to global inflationary pressures.

The world is far more integrated economically than ever before and it would be naïve to assume the U.S. would be insulated from a slowdown in Europe, which has borne the brunt of the Russian invasion’s initial impact.

Higher energy costs and the level of sanctions will inevitably cause a slowdown in Europe and hurt consumption and there are growing signs of funding strains become apparent in major money markets.

Demand for dollars is expected to soar especially given that Russian banks banned from the SWIFT platform could miss payments and massive overdrafts, spurring monetary authorities to re-start daily operations to inject dollars into the market.

Although Russia has gone to some lengths to reduce its dollar exposure in the past decade, it still has some US$300 billion of foreign currency held offshore, sufficient to disrupt money markets if it’s frozen by sanctions or moved suddenly to avoid them.

Which is why the dollar is soaring against all major currencies, offering liquidity and safe haven attributes, while global bonds rallied, with the benchmark U.S. 10-year Treasury yield slipping to 1.91% (yields fall when bond prices rise).

3. Cryptocurrencies Could Surprise as Russia's Invasion of Ukraine Continues

• Bitcoin, which showed some signs of retaking US$40,000 last week has since fallen to US$37,700 at the time of writing while Ether is barely clinging on to US$2,600.

• Nevertheless, that cryptocurrencies continue to be used as a means to support the Ukrainian people has been put into the spotlight as a relatively speedy means by which anyone in the world can send aid.

While weekends are a tricky time for cryptocurrencies under normal circumstances, especially given the diminished volumes traded, Western sanctions are now putting risk assets into sharp focus, and benchmark digital assets slipped into the last day of February.

Bitcoin, which showed some signs of retaking US$40,000 last week has since fallen to US$37,700 at the time of writing while Ether is barely clinging on to US$2,600.

Nevertheless, Bitcoin remains well above key technical levels that would push it into oversold territory, managing to stay well above US$33,000 and there are signs that any rally, regardless of how short-lived, could indicate seller exhaustion.

Helping cryptocurrency prices though is the stream of donations made in the cryptocurrency, pouring in after the Russian invasion.

Technical indicators look promising as well and a constructive rally could push Bitcoin to the US$50,000 to US$55,000 level, according to a note by Rick Bensignor, President of Bensignor Investment Strategies and a former strategist for Morgan Stanley (+2.98%).

Cryptocurrencies in general, and Bitcoin in particular, have demonstrated resilience thanks to their use as a means to receive donations in Ukraine, to support the struggle against the Russian invasion.

Over the weekend, cryptocurrency exchange Binance announced that it would be donating US$10 million for aid to Ukrainians, including medical and humanitarian relief supplies.

And as shells rain down on Ukraine’s cities, the Bitcoin hash rate – the amount of computing power being used to mine the cryptocurrency and process transactions on the network – has taken a hit as many mining facilities face disruption from the ongoing conflict.

According to data from Blockchain.com, Bitcoin’s hash rate tumbled from a record 248.1 million terahashes as recently as February 12, to just 173.8 million on Saturday.

Both Russia and Ukraine are home to Bitcoin and other cryptocurrency miners, given access to cheap sources of energy, but which have since been impacted by the invasion.

Because some mining infrastructure are in active warzones in Ukraine, they have had to be shut off and even those which are in “safer” areas of Ukraine are preparing to relocate, should they too be embroiled in the conflict.

Soaring energy prices are also putting pressure on cryptocurrency miners, with higher energy costs eating into their profit margins.

Nevertheless, that cryptocurrencies continue to be used as a means to support the Ukrainian people has been put into the spotlight as a relatively speedy means by which anyone in the world can send aid.

Whereas a typical fiat currency transfer could take days or weeks to process, especially given that Ukraine’s infrastructure is under siege, the ability to send Bitcoin across war-torn borders stands in sharp relief to traditional money transfers and may seek to remind investors of the value proposition of cryptocurrencies.