Daily Analysis 8 March 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as markets tank on a slew of bearish factors, not least of which has been the soaring price of energy.

In brief (TL:DR)

  • U.S. stocks sank on Monday with the Dow Jones Industrial Average (-2.37%), S&P 500 (-2.95%) and the Nasdaq Composite (-3.62%) all down as commodity costs dim growth economic growth prospects.

  • Most Asian stocks fell Tuesday as traders evaluated concerns that elevated commodity costs will fan inflation and choke economic expansion.

  • Benchmark U.S. 10-year Treasury yields rose three basis points to 1.80% (yields rise when bond prices fall).

  • The dollar pared gains.

  • Oil retreated with April 2022 contracts for WTI Crude Oil (Nymex) (+0.94%) at US$120.52 but remained in sight of a near 14-year peak on fears of disarray in raw-material flows stemming from the war in Ukraine and sanctions on Russia.

  • Gold edged lower with April 2022 contracts for Gold (Comex) (-0.16%) at US$1,992.80.

  • Bitcoin (+2.38%)rose to US$38,710 on news that demand from Russia remains strong and as the narrative of the cryptocurrency being a hedge against inflation continues to build.


In today's issue...

  1. Don’t Relegate Retail Investors Yet

  2. Recession Nerves Rattled as the Market Moves the Economy

  3. Russian’s Take To Cryptocurrencies


Market Overview

Commodity costs are contributing to a climb in bond-market derived inflation expectations to records in the U.S. and Europe.

In the U.S., lawmakers are moving toward barring imports of Russian oil.

Russia for its part threatened to cut natural gas supplies to Europe via the Nord Stream 1 pipeline, while tightening monetary policy to contain inflation presents further challenges for investors.

JPMorgan Chase said it will remove Russian bonds from all of its widely-tracked indexes, further isolating the nation’s assets from global investors.

Asian markets fell Tuesday with Tokyo's Nikkei 225 (-0.95%), Hong Kong's Hang Seng Index (-0.45%), Seoul's Kospi Index (-0.75%) and Sydney’s ASX 200 (-0.68%) all down in the morning trading session.



1. Don't Relegate Retail Investor Yet

  • Bed Bath & Beyond saw its shares rise by as much as 86% over the past week with interest in the company apparent on popular retail trading forums like Reddit’s r/WallStreetBets and Stocktwits.

  • The case of Bed Bath & Beyond may really be an opportunity for investors to buy into the story that the company can be turned around.

Just when you thought that retail investors had gone into a long slumber, they’ve resurfaced, betting on an unlikely but nostalgic favorite, Bed Bath & Beyond (+34.18%), that activist investor Ryan Cohen can shake up the home goods retailer.

One of the beneficiaries of the meme stock frenzy, before declining alongside the rest, Bed Bath & Beyond saw its shares rise by as much as 86% over the past week with interest in the company apparent on popular retail trading forums like Reddit’s r/WallStreetBets and Stocktwits.

Mom-and-pop traders are betting that activist investor Ryan Cohen will be able to turn around the ailing Bed Bath & Beyond and quickly became Fidelity’s most traded stock on Monday, ahead of Apple (-2.37%).

The activity marks a reversal of recent price action as day traders have broadly been in retreat, shunning the once hot meme stock over the past month, and selling over US$1 million of Bed Bath & Beyond’s shares, according to data from Vanda.

Monday’s market rally drove a group of 37-retail trader favorites tracked by Bloomberg higher by 3.3% and are leading many to wonder if a fresh meme stock frenzy is in store.

Much will depend on the U.S. Federal Reserve’s decision on interest rate policy due in the middle of this month.

While markets are generally pricing in a 0.25% rate increase, and equivocation from that level could see even meme stocks rally hard.

The Russian invasion of Ukraine is continuing to get bogged down by fierce resistance and Russian troops will be facing an even more formidable foe in the coming weeks if there is no speedy resolution – the springtime rains that will convert Ukraine’s fertile soils into gloppy mud that will suck down Russia’s tanks and armored vehicles, making them easy prey for Ukraine’s antitank weapons.

Given the likely continuation of hostilities – Moscow has said that it is prepared to stay the course, energy prices are expected to remain elevated and will hamstring central banks in their ability to tighten monetary policy.

Nevertheless, meme stocks remain down by about a fifth this year, with losses more than doubling those of the benchmark S&P 500 and short of there being significant injections of liquidity or airdrops of cash, it’s hard to see what would act as a catalyst to drive them higher.

The case of Bed Bath & Beyond may really be an opportunity for investors to buy into the story that the company can be turned around, but the experience of Sears (-22.50%) under successive activist investors may provide evidence that perhaps there are just some companies whose time is really up, regardless of retail investor interest.



2. Recession Nerves Rattled as the Market Moves the Economy

  • With the yield curve narrowing, soaring energy prices and stocks falling into a correction, the threat of a U.S. economic recession is real, or at least real in the minds of investors, judging by the move in stocks, bonds and commodities.

  • Never has the threat of stagflation become more apparent, low growth and high inflation, than it has at the present, as evidenced by the bond market – 10-year inflation breakevens just increased to their highest level since 2005.

Like a tank, the economy can take quite a lot of punishment before it inevitably caves, whether it’s rounds small arms fire like geopolitical tensions or a rocket-propelled grenade in the form of policy tightening, the economy gets shaken initially, before carrying on.

But throw everything and the kitchen sink at the economy and it’ll eventually grind to a halt just like a Russian tank struck by a Javelin missile.

With the yield curve narrowing, soaring energy prices and stocks falling into a correction, the threat of a U.S. economic recession is real, or at least real in the minds of investors, judging by the move in stocks, bonds and commodities.

While some observers will argue that such concern is misplaced, especially since the U.S. economy just generated 678,000 jobs in a single month, markets, being a kind of crystal ball into investor psyche, are sounding the alarm on the economy.

The benchmark S&P 500 slipped almost 3% on Monday and oil approached its highest level in a decade, while all of the commodities that make modern (or any) life livable, have soared.

Taken together, the message now suggests the threat of an economic retrenchment, increasing on the back of risks that the Russian invasion of Ukraine will spillover into a broader European conflict even as the U.S. Federal Reserve looks set to turn decidedly hawkish this month.

The risk and costs of policy mistakes at this stage is perhaps higher than ever and much will depend on how central bankers absorb, process and respond to the dynamic and increasingly dangerous geopolitical landscape.

Europe’s economy, barely on the mend after the pandemic, may be in for a renewed shock once Russian oil is withdrawn from the continent, sucking the lifeblood out of factories and homes.

Never has the threat of stagflation become more apparent, low growth and high inflation, than it has at the present, as evidenced by the bond market – 10-year inflation breakevens just increased to their highest level since 2005.

The yield curve – the spread between 10-year and 2-year Treasury yields, has narrowed to levels not seen since the pandemic – longer term borrowing costs should typically be higher given the opportunity cost of locking up money, but expectations that the economy will not grow as fast has meant that the yields on short- and long-term borrowing costs are closing.

A bloodbath for European and Asian stocks has meant that they are heading towards or are already in bear markets, with declines approaching 20% from their recent peaks for major indices.

And while the benchmark S&P 500 has fared better, thanks to America’s perceived haven status, there are worrying signs investors have priced in a recession as evidenced by several manufacturing PMI gauges.

Significantly, there comes a point where the stock and bond markets don’t reflect the economy but can contribute to a recession because people’s sense of wealth wanes and investment decisions are shelved.



3. Russian's Take to Cryptocurrencies

  • Russians are taking to cryptocurrencies to conduct transactions as even Visa and Mastercard have exited the Russian market in protest of the invasion of Ukraine.

  • Yet it’s only really a matter of time before Western governments move to close the cryptocurrency loophole that Russians may be using to avoid sanctions.

Given the comprehensiveness of Western sanctions on Russia, ordinary Russians (and perhaps some extraordinary ones as well) are taking to cryptocurrencies to conduct transactions as even Visa (-4.79%) and Mastercard (-5.39%) have exited the Russian market in protest of the invasion of Ukraine.

Data from blockchain analytics firm Kaiko show that ruble-denominated Bitcoin trading volume rose over the weekend to its highest level this year, with the average trade size hitting a high on cryptocurrency exchange Binance of around US$580, suggesting that it’s mainly retail demand that is driving the trade.

The other cryptocurrency that is highly sought-after by Russians are Tether or USDT, the dollar-based stablecoin that is allegedly backed 1 to 1 with the actual U.S. dollar.

Nevertheless, that uptick in Russian Bitcoin demand has failed to lift prices, which have been dragged down by global concern over the continued Russian invasion of Ukraine and soaring commodity and energy prices.

Russia only accounts for a fraction of the total volume of Bitcoin’s demand globally, although the true picture is probably harder to determine since Bitcoin wallet addresses and peer-to-peer trading on decentralized exchanges make determining geography of these transactions difficult.

According to Kaiko, Bitcoin trades on average between US$20 billion to US$40 billion daily, and over the weekend, the ruble pair with Bitcoin was around US$14.2 million, a drop in the ocean.

Globally only three cryptocurrency exchanges offer a ruble-denominated pair with Bitcoin, including Yobit, Binance and LocalBitcoins, according to Kaiko.

Yet it’s only really a matter of time before Western governments move to close the cryptocurrency loophole that Russians may be using to avoid sanctions.

U.S. President Joe Biden is set to sign an executive order some time this week that will outline his administration’s strategy for cryptocurrencies which may include mandatory reporting requirements that prevent evading sanctions using cryptocurrencies.

And Russians who have swapped real dollars for Tether may also be in for a surprise as last week, Tether’s CTO tweeted that his company, which issues Tether “has to comply with requirements of central authorities.”

Last year, following a hack of Poly Network, Tether unilaterally “unrecognized” around US$33 million worth of USDT, as part of a concerted grassroots-led effort to prevent the proceeds of the hack being exploited.

The information contained in this email communication and any attachments is for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals. The price and value of the digital assets and any digital asset allocations referred to in this email communication and the value of such digital asset may fluctuate, and allocators may realize losses on these digital assets, whether digital or financial including a loss of principal digital asset allocations. 

 

Past performance is not indicative nor does it guarantee future performance. We do not provide any investment, tax, accounting, or legal advice to our clients, and you are advised to consult with your tax, accounting, or legal advisers regarding any potential allocation of digital assets. The information and any opinions contained in this email communication have been obtained from sources that we consider reliable, but we do not represent such information and opinions as accurate or complete, and thus such information should not be relied upon as such. 

 

No registration statement has been filed with the United States Securities and Exchange Commission, any U.S. State Securities Authority or the Monetary Authority of Singapore. This email and/or its attachments may contain certain "forward‐looking statements", which reflect current views with respect to, among other things, future events and the performance of a digital asset allocation with the Novum Alpha Pte. Ltd. ("the Company"). Readers can identify these forward‐ looking statements by the use of forward‐looking words such as "outlook", "believes", "expects", "potential", "aim", "continues", "may", "will", "are becoming", "should", "could", "seeks", "approximately", "predicts", "intends", "plans", "estimates", "assumed", "anticipates", "positioned", "targeted" or the negative version of those words or other comparable words. 

 

In particular, this includes forward‐looking statements regarding, growth of the blockchain industry, digital assets and companies, the venture capital and crowdfunding market, as well as the potential returns of any digital asset allocation with the Company. Any forward‐looking statements contained in this email and/or its attachments are based, in part, upon historical performance and on current plans, estimates and expectations. The inclusion of forward‐looking information, should not be regarded as a representation by the Company or any other person that the future plans, estimates or expectations contemplated will be achieved. Such forward‐looking statements are subject to various risks, uncertainties and assumptions relating to the operations, results, condition, business prospects, growth strategy and liquidity of the Company, including those risks described in a separate set of documents. If one or more of these or other risks or uncertainties materialize, or if the underlying assumptions of the Company prove to be incorrect, actual results may vary materially from those indicated in this email and/or its attachments. 

 

Accordingly, you should not place undue reliance on any forward‐looking statements. All performance and risk targets contained herein are subject to change without notice.  There can be no assurance that the Company will achieve any targets or that there will be any return on a digital asset allocation with the Company.  Historical returns are not predictive of future results. The Company is intended to be a specialist digital asset allocation and trading vehicle in the early stage technology sector and digital assets. Allocation of digital assets in early stage technology carry significantly greater risks and may be considered high risk and volatile. There is a risk of total loss of all digital assets allocated with the Company – please refer to a separate set of documents for a details of risks. 

 

By accepting this communication you represent, warrant and undertake that: (i) you have read and agree to comply with the contents of this notice, and (ii) you will treat and safeguard this communication as strictly private and confidential and agree not to reproduce, redistribute or pass on this communication, directly or indirectly, to any other person or publish this communication, in whole or in part, for any purpose.