Daily Analysis 5 April 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as stocks continue to trend upwards following a strong U.S. jobs report.

In brief (TL:DR)

  • U.S. stocks closed higher on Monday with the Dow Jones Industrial Average (+0.30%), the S&P 500 (+0.81%) and the Nasdaq Composite (+1.90%) as investors bet that the U.S. economy is resilient enough to stomach further tightening of policy.

  • Asian stocks wavered Tuesday as investors evaluated the prospect of tougher sanctions against Russia for alleged atrocities during the war in Ukraine.

  • Benchmark U.S. 10-year Treasury yields were at 2.39% (yields rise when bond prices fall) on the prospect of sharp U.S. Federal Reserve interest-rate hikes to fight inflation.

  • The dollar slipped against a basket of peers.

  • Oil advanced on renewed fears about supply disruptions due to the war in Ukraine, with May 2022 contracts for WTI Crude Oil (Nymex) (+1.42%) at US$104.75.

  • Gold fell slightly with June 2022 contracts for Gold (Comex) (-0.16%) at US$1,931.00.

  • Bitcoin (+1.15%) rose to US$46,622 in line with the broader increase in stocks.


In today's issue...

  1. Can Elon Musk Make Social Media Great Again?

  2. JP Morgan’s Jamie Dimon Warns of Volatility Even as Inflation Recedes

  3. Algorithmic Stablecoins Live & Die By Their Own Algorithms


Market Overview

Market moves are continuing to be shaped by the ramifications of the conflict and tightening monetary policy as raw-material costs stoke inflation.

The U.S. Federal Reserve minutes later this week will guide expectations for how rapidly the central bank will increase rates and reduce its bond holdings.

The European Union is working on new Russian sanctions, while the U.S. said it may impose further penalties this week. Russia rejected allegations of war crimes.

Asian markets mostly rose Tuesday with Seoul's Kospi Index (+0.05%), Tokyo's Nikkei 225 (+0.19%) and Sydney’s ASX 200 (+0.19%) up, while Hong Kong is closed for holiday.



1. Can Elon Musk Make Social Media Great Again?

  • Expectedly, shares of Twitter (+27.13%) surged on the discovery through a regulatory filing that Musk is now Twitter’s biggest individual shareholder.

  • After all, if Musk can master spaceflight, surely he can succeed in social media, after all it’s not rocket science.

First, he fixed the automotive industry that was reluctant to get rid of oil-burning, carbon-contributing vehicles.

Then he went to make spaceflight, cheaper, safer and better.

Now, he has his eyes set on fixing social media, or at least that’s what Elon Musk’s acquisition of over 9% of social media giant Twitter appears to be motivated by.

A week ago, Musk hinted at shaking up the social media industry and if anyone is well-equipped to do so, Musk certainly is.

Himself a Twitter star in his own right with 80.1 million followers, Musk has had an excellent track record and ability to turnaround industries and companies where he’s had no prior experience.

Expectedly, shares of Twitter surged on the discovery through a regulatory filing that Musk is now Twitter’s biggest individual shareholder.

Musk has publicly mulled starting his own social media company for some time, one which is likely to adhere more stringently to the principles of free speech, and it would be unsurprising if he makes a play to gain a controlling stake in Twitter.

Twitter, one of the earliest social media stars, is unlike Facebook (+4.02%) and Snap (+5.20%), where the company’s founders have special voting control over its future and could become the target of a takeover bid by Musk.

And for shareholders of investors into Twitter, Musk’s next move could be profitable no matter what.

Should Musk be intent on acquiring a controlling stake in Twitter, shares of the social media company are almost certain to go up, and even if he’s not, if he should become an activist investor in Twitter (as is likely), he might bring some of the magic that he’s brought to Tesla’s share price, over to Twitter.

Against all odds, Tesla (+5.61%) is turning a profit, delivering electric vehicles and has become the standard bearer for global vehicle electrification.

After all, if Musk can master spaceflight, surely he can succeed in social media, after all it’s not rocket science.



2. JP Morgan's Jamie Dimon Warns of Volatility Even as Inflation Recedes

  • JPMorgan Chase's CEO Jamie Dimon assured investors that the banking giant was prepared for higher interest rates, but urged central bankers to remain calm about volatile markets unless they spilled over into the real economy.

  • Dimon has urged Washington to develop a “new” Marshall Plan to help mitigate Europe’s energy dependence on Russia, referring to the U.S. postwar policy to provide financial aid to the European continent.

In his annual letter to JPMorgan Chase (+0.46%) shareholders, CEO Jamie Dimon assured investors that the banking giant was prepared for higher interest rates, but urged central bankers to remain calm about volatile markets unless they spilled over into the real economy.

“If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets.”

Last month the U.S. Federal Reserve lifted interest rates by 0.25%, its first hike since 2018 and there are signs that policymakers may have the appetite to get even more aggressive on rates, with indications that a 0.50% increase may be in the offing in May.

While banks such as Dimon’s stand to benefit from higher rates, because they could earn more from the loans that they make, other areas of business such as investment banking and capital markets could suffer as risk sentiment suffers.

With evidence of potential war crimes by Russian forces in Bucha, Ukraine, it’s highly unlikely that Western sanctions against Russia will be lifted any time soon, and could get worse, which will at the minimum slow the global economy.

Dimon has urged Washington to develop a “new” Marshall Plan to help mitigate Europe’s energy dependence on Russia, referring to the U.S. postwar policy to provide financial aid to the European continent.

A move akin to the Marshall Plan would provide a huge boost for American energy producers like ExxonMobil as well as other commodity producers that would be able to replace Russian supply, including wheat and nickel.

But Dimon also echoed some elements within the U.S. Federal Reserve who believe that inflation will eventually start to recede.

Some Fed policymakers believe that inflation will start to ebb by the end of this year and should normalize by 2024, where many believe that the Fed will start another round of rate cuts.



3. Algorithmic Stablecoins Live & Die By Their Own Algorithms

  • An algorithmic stablecoin known as Neutrino that is associated with the Waves blockchain lost its peg to the dollar this week after the price of its underlying token took a tumble.

  • Algorithmic stablecoins are typically backed by a regular stablecoin (which is backed by assets such as the U.S. dollar) as well as another token that can be minted or destroyed according to demand and supply.

Cryptocurrencies can be considered one of the most complex industries out there, requiring a mastery of computer science, finance, and behavioral economics to be successful.

And often when projects suffer setbacks, it’s not the technology that lets them down, but a failure to adequately cater to the incentive mechanisms that need to be finely tuned to cater for various stakeholder interests.

This past week has seen two projects suffer for precisely these reasons – behavioral economics.

An algorithmic stablecoin known as Neutrino that is associated with the Waves blockchain lost its peg to the dollar this week after the price of its underlying token took a tumble.

WAVES, the token backing Neutrino USD, or USDN, fell by over a quarter early this week, leading to USDN trading at US$0.796 and creating an arbitrage opportunity that had the potential to send the price of WAVES headed to zero.

Last year, another algorithmic stablecoin IRON made headlines as its underlying token Titan started to fall in value, leading to a run on the stablecoin that eventually saw Titan become virtually worthless.

Algorithmic stablecoins are typically backed by a regular stablecoin (which is backed by assets such as the U.S. dollar) as well as another token that can be minted or destroyed according to demand and supply.

However, when the underlying token loses its value too quickly, arbitrageurs can take advantage of the opportunity to make risk-free profits by swapping out the algorithmic stablecoin which is rapidly losing its peg, for the fully-backed stablecoin.

For instance, in the case of IRON, one IRON token is backed by US$0.75 worth of USDC and US$0.25 worth of Titan.

As the value of Titan increases, more Titan is minted to ensure a stable value of IRON, whereas if Titan loses its value, Titan gets burned (taken out of circulation) to maintain the value of Titan and keep the peg of IRON one-to-one with the dollar.

In theory, algorithmic stablecoins assume that arbitrageurs will hold the Titan tokens that are getting burned expecting them to rise in value – but what if they don’t?

And that’s exactly what happened in the case of IRON.

As more arbitrageurs rushed to sell Titan, more followed suit, causing IRON to lose its fixed peg, and literally causing a run on Titan.

The way it worked was as IRON lost its peg, an arbitrageur could now exchange US$0.90 worth of IRON for US$0.75 worth of USDC and US$0.25 worth of Titan, and keep selling the Titan.

At one point, the peg for IRON had fallen well below US$0.75, meaning that arbitrageurs could just completely ignore the Titan portion and swap 1 IRON costing less than US$0.75 for US$0.75 worth of USDC, literally free money.

USDN is fortunate that that didn’t happen to it, but the experience highlights the risks associated with algorithmic stablecoins, something that applies to the Terra blockchain as well, which powers the UST algorithmic stablecoin.

To be sure, the code works exactly as it’s designed to, and therein lies the problem.

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