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Weekend Edition 12-13 March 2022 (10-Minute Read)

Hello there,

A wonderful weekend to you as stocks continue to bleed into the weekend, with signs that things could get a lot worse, and a lack of clarity as to how they could get better.

In brief (TL:DR)

  • U.S. stocks continued to flounder on Friday with the Dow Jones Industrial Average (-0.69%), S&P 500 (-1.30%) and the Nasdaq Composite (-2.18%) all down and sharp falls in tech stock dragging down the tech-heavier indices, with few investors in the mood to buy.

  • Asian stocks closed down on Friday as a broad risk-off mood took hold amid hot U.S. inflation data and continued negative news out of Ukraine continued to weigh on sentiment.

  • Benchmark U.S. 10-year Treasury yields inched higher to 1.998% (yields rise when bond prices fall) with traders betting that central banks will be forced to tighten more aggressively in the wake of soaring inflation.

  • The dollar held gains, hitting a 5-year high against the yen and euro amidst worsening turmoil in Ukraine.

  • Oil rallied with April 2022 contracts for WTI Crude Oil (Nymex) (+3.12%) at US$109.33 as Russia's obstruction of nuclear deal with Iran poses challenge for that supply coming on tap.

  • Gold continued to sink, with April 2022 contracts for Gold (Comex) (-0.77%) at US$1,985.00.

  • Bitcoin (+1.31%)rebounded to US$39,131 into the weekend as traders took to buying the dip.

In today's issue...

  1. How much more have Chinese tech stocks to fall?

  2. Recession Risks are Rising

  3. Biden’s Crypto Plan is Long on Rhetoric and Short on Clarity

Market Overview

A perfect storm is brewing for the global economy - from soaring prices of commodities to rising inflation, Moscow had to throw in a spanner in the works by invading Ukraine in a war that now looks to keep dragging on.

While Russia's US$1.6 trillion economy is not large by global standards, it's responsible for 17% of global natural gas exports, 16% of global coal and 11% of global oil - taking all of that offline in a hurry will have significant ramifications for businesses everywhere.

And it's not like alternatives are readily available in such short order.

Making matters worse, Ukraine is a major food exporter, including wheat and sunflower oil.

The only standouts this week were energy companies. Long in the doghouse, investors have been pouring into them as it looks likely the supply-side issues will persist in what appears to be a long drawn-out Russian invasion of Ukraine that will soon get bogged down in the spring rains.

Asian markets closed down on Friday with Tokyo's Nikkei 225 (-2.05%), Sydney’s ASX 200 (-0.94%), Hong Kong's Hang Seng Index (-1.61%)and Seoul's Kospi Index (-0.71%)all in the red.

1. How much more have Chinese tech stocks to fall?

  • Chinese tech stocks continue to come under heavy selling pressure as it becomes apparent not all of them will be able to delist from the U.S. to relist in Hong Kong

  • Uncertainty over Beijing's regulatory crackdown and continued pressure to squeeze margins on profitable tech platforms could mean that the prospects for Chinese tech stocks looks challenging for years to come

Global investors trying to figure out when it’s safe for some value buying in China’s otherwise lucrative tech stocks were whipsawed yet again on renewed regulatory purges from Beijing.

On track for their worst week in almost a year, forced delistings in the U.S. and emerging complexities of relisting in Hong Kong saw heavy selling of China’s tech stocks.

Some of China’s biggest names in technology have been ensnared by a pincer movement, with Washington calling for greater scrutiny of foreign listings on its bourse, while Beijing continues to crackdown on its overseas-listed tech firms, on national security concerns.

The sharp correction affected even China’s most profitable tech giants, including Tencent, maker of the ubiquitous WeChat, and e-commerce giant Alibaba.

Yet investors wanting to try and catch the bottom on Chinese tech stocks may also want to note that the larger concern isn’t profits, it’s politics.

Beijing is deeply concerned that its firms are able to raise cash in overseas capital markets, giving them a level of independence but also increased scrutiny by foreign regulators, which may become privy to accounting practices and ownership stakes that may prove inconvenient.

Some Chinese tech giants like Alibaba and Tencent have managed secondary listings in Hong Kong which have drawn billions, but newer firms may struggle to meet some of the territory’s more stringent listing requirements.

Electric vehicle maker Nio was not approved to do a share sale by Hong Kong’s bourse and entered that market via an “introduction, while ride-hailing app Didi Global, which arguably set off the tech crackdown through its listing and subsequent delisting in New York, had to suspend its Hong Kong attempt because of regulatory issues as well.

Given that investors simply can’t know which will be the next shoe to drop, investing in Chinese tech firms especially may be akin to navigating a minefield.

Chinese tech firms are still likely to be reliable performers even as China’s economy slows, but as the economy slows, there will be growing pressure from Beijing to reduce platform fees and redistribute wealth, which means that the prospects for China’s tech companies is cloudy.

More significantly though, investors intending to wade into Chinese tech waters need to consider that they may end up being like the Hotel California – you can check out anytime you like, but you can never leave – and that may be reason enough to search for opportunities elsewhere.

2. Recession Risks are Rising

  • A larger number of Americans are cutting back or delaying consumption, especially for non-essential items in the wake of soaring inflation

  • More Americans are relying on tax refunds to help to cope with price pressures, and some are resorting to borrowing to fund heightened expenditure

Despite a tight labor market and rising salaries, more Americans are reporting that their wages are no longer able to keep up with the increasing cost of living.

According to a recent report by the Capital One Insights Center, less than 9% of lower income Americans, defined as those from households who earn less than US$25,000 a year, reported that their wages were able to keep up with higher prices.

And across all wage levels, barely 18% believed that their wages were able to match the rising cost of living.

While higher income earners reported being less affected by rising costs, the overall picture for consumption is increasing worries that a recession may be on the horizon.

With up to 70% of the U.S. economy based on consumption, any major belt-tightening against a backdrop of tightening monetary policy could very easily tip the scales towards a slowing economy and the dreaded double whammy of high inflation and low growth – stagflation.

Earlier this month, a U.S. Labor Department report revealed that although employment was increasing, wages had fallen sharply.

More than half and just under half of lower- and middle-income earners respectively are now looking for tax relief to cope with rising costs.

Over 62% of Americans said inflation had affected their spending, while 38% said that they intended to spend less or cut back on non-essential spending like vacations and restaurant outings or delaying them.

While 42% of Americans said that they would save less or dip into savings or borrowed money to fund consumption.

Americans by and large still have a substantial war chest of savings built up in the decade after the 2008 Financial Crisis, when many household balance sheets were decimated, but there are signs that most of those savings are already being deployed to fund current cost increases.

And that could be the biggest risk to the U.S. economy at the moment – falling consumption.

The U.S. Federal Reserve isn’t in a good position to do much about it either, as loosening monetary policy is simply not an option with the pace of inflation hitting a fresh 40-year high.

3. Biden's Crypto Plan Long on Rhetoric, Short on Clarity

  • U.S. President Joe Biden's Cryptocurrency Executive Order shows an openness to consider the technology and acknowledges its benefits, which is positive for the development of the sector

  • Lack of clarity and request for competing agencies to present further research later this year means that broader and more mainstream adoption of cryptocurrencies within a certain regulatory framework, could still be some time away

When then-U.S. Securities and Exchange Commission Chairman Jay Clayton had too faceoff initial coin offerings and other novel fund-raising mechanisms in 2017, his agency’s piecemeal approach towards regulating the emergent cryptocurrency sector left much to be desired.

An appointee of the Trump administration, cryptocurrencies were far down the list of priorities for Clayton, whereas the current SEC Chair Gary Gensler, was previously teaching a course on blockchain and cryptocurrencies at the MIT Sloan School of Management before his current appointment and has taken a far more proactive approach to a sector that is gaining scrutiny.

As Western sanctions were brought to bear on Russia, in the wake of that country’s invasion of Ukraine, many rushed to cryptocurrencies, both as a buffer against the precipitous fall in the value of the ruble, as well as to cling on to a means to send money out of the country.

The challenge facing many Russians now, with their banks being ejected from the SWIFT international banking messaging system, essential for cross border transactions, is that the Kremlin may decide to cease all dollar deposits or foreign currencies to stem capital flow.

For Washington and its allies, the prospect of cryptocurrencies being used to circumvent sanctions pressed forward the urgent need to regulate the sector.

U.S. President Joe Biden’s Executive Order on cryptocurrencies was therefore highly anticipated.

In a sector not known for regulatory certainty, it was hoped that the Biden administration would push forward plans for more comprehensive regulation that could help to grow the cryptocurrency industry and encourage broader participation.

While Biden’s executive order acknowledged the benefits of cryptocurrencies, which saw a rebound in Bitcoin and other digital tokens, the rally was short-lived as it became apparent that there was still plenty of work to be done.

Making matters worse, a regulatory turf war between the U.S. Securities and Exchange Commission and the Commodities and Futures Trading Commission is heating up, with companies and individuals looking for compliant ways to participate in the sector caught in the crossfire.

Far from settling the turf war, the Biden administration is instead calling for the sparring agencies to research various topics instead, the results of which will be due out later this year.

With midterm elections looming on the horizon and odds that the Republicans will win both the House and the Senate, it’s less clear how far Biden can get with his cryptocurrency legislative proposals.

There is bipartisan accord on the need for cryptocurrency regulation, but both Republicans and Democrats are divided on the extent of that regulation.

Yet investors can remain hopeful, buoyed by the swift bipartisan response to the Russian invasion of Ukraine, there is room to believe that lawmakers can work together if urgency requires.

And given that cryptocurrencies have the potential to circumvent sanctions, lawmakers may see the urgency to develop more comprehensive regulations to oversee the sector, which should bode well for long-term adoption.

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