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Weekend Edition 2-3 April 2022 (10-Minute Read)

Hello there,

A wonderful weekend to you as markets rebounded into the weekend on strong jobs data, but bulls were held back by bears on concerns that a robust U.S. labor market could see the U.S. Federal Reserve become more aggressive on policy tightening.

In brief (TL:DR)

  • U.S. stocks were higher on Friday with the Dow Jones Industrial Average (+0.40%), the S&P 500 (+0.34%) and the Nasdaq Composite (+0.29%) all slightly higher on a strong jobs report and confidence in the strength of the U.S. economic recovery.

  • Asian stocks finished lower on Friday after their worst quarter since the pandemic bear market, buffeted by economic risks from tightening U.S. Federal Reserve monetary policy and Russia’s war in Ukraine.

  • Benchmark U.S. 10-year Treasury yields continued to rise to 2.385% (yields rise when bond prices fall) and the yield curve inverted on expectations that the Fed would hike interest rates more aggressively.

  • The dollar gained.

  • Oil continued its decline with May 2022 contracts for WTI Crude Oil (Nymex) (-1.01%) at US$99.27 buffeted by the U.S. release of its strategic reserves, concerns over Chinese demand and signs that the war in Ukraine could possibly be winding down.

  • Gold was lower with June 2022 contracts for Gold (Comex) (-1.55%) at US$1,923.70.

  • Bitcoin (-0.46%)fell to US$46,340 but clawed back some losses from the end of last week as investors sought the opportunity to buy a dip, while chart watchers point to the fact that the cryptocurrency remains mired in a tight channel that has seen it struggle to breakout higher.

In today's issue...

  1. Shifting Into Neutral - What's the Fed's Strategy?

  2. Singapore's Property Market Just Heated Up Again

  3. Bitcoin Slips Back into Tight Trading Range

Market Overview

U.S. stocks managed to eke out slight gains on Friday after a strong U.S. jobs report convinced investors of the resilience of the U.S. economy, but also worried bears that the strong U.S. labor market would embolden the U.S. Federal Reserve to get more aggressive on inflation.

U.S. employers added 431,000 jobs in March, the 11th straight monthly gain over 400,000 and bringing the unemployment rate down to 3.6% from 3.8%, closing in on the pre-pandemic level of 3.5%.

Investors are growing increasingly concerned that the strong U.S. labor market as well as inflation at its fastest pace in four decades will give policymakers the confidence to hike rates more aggressively in May, at the central bank's next policy meeting.

Asian markets ended mostly lower Friday with Seoul's Kospi Index (-0.65%), Tokyo's Nikkei 225 (-0.56%) and Sydney’s ASX 200 (-0.08%) all lower, while Hong Kong's Hang Seng Index (+0.19%) was the only standout with a minor gain.

1. Shifting Into Neutral - What's the Fed's Strategy?

  • U.S. Federal Reserve Bank of New York President suggests that the central bank could adopt a more systematic and measured means to return the Fed to a neutral monetary policy

  • A median neutral monetary policy would see interest rates hiked to 2.4%, from 0.25% to 0.50% currently and would be an attempt to engineer a soft landing that has never been achieved before

“Money for nothing and your chicks for free,” may be the line to a popular strong by pop band Dire Straits, but it can hardly be the mantra for monetary policy.

Which is why the U.S. Federal Reserve is struggling to chart a middle course to wean markets accustomed to the largesse of the central bank’s put to face the reality of a more neutral monetary policy.

Where policymakers are struggling though is what that path to a neutral course should look like.

In a speech at Princeton, New Jersey over the weekend, U.S. Federal Reserve Bank of New York President John Williams said,

“Clearly, we need to get something more like normal or neutral, whatever that means.

Do we need to get there immediately? No. We can do this in a sequence of steps.”

Projections from the Fed so far suggest that the median (as opposed to average) policymaker expects to lift rates to 1.9% by the end of the year and 2.8% by the end of next year.

Theoretically, a neutral rate, that neither speeds up nor slows down the economy is 2.4%, but again, that’s a “best guess” because of the unprecedented number of uncertainties that the Fed is facing which could drag the economy one way or the other.

The Fed remains cognizant that overly aggressive rate hikes have the potential to push the economy into recession, although the risks are more heavily weighted towards inflation at the moment.

A U.S. jobs report last week missed expectations slightly, but overall unemployment declined to 3.6% in March, close to pre-pandemic levels.

For investors trying to interpret the Fed’s next move, Williams does provide some clues, noting,

“I anticipate inflation readings will begin to decline later this year, although this process will take time to fully play out. For 2022 as a whole, I expect PCE inflation to be around 4%, then decline to about 2.5% in 2023, before returning close to our 2% longer-run goal in 2024.”

There are signs that the Russian invasion in Ukraine may be winding down, but that does not immediately guarantee a resumption of commodity shipments out of these two primary product export giants.

Russia supplies around a tenth of the world’s high-purity nickel, is the world’s largest oil supplier behind Saudi Arabia and is a major supplier of key components of fertilizer.

Ukraine, often referred to as Europe’s breadbasket, has spent most of the tail end of winter fighting off the Russians instead of planting crops for the next harvest season.

These factors will continue to haunt global commodity markets for at least a year or two even after the last shot has been fired, and that assumes that the last shot will be fired soon.

If the Fed takes a more measured approach, it may find itself behind the curve when it comes to inflation, even though that will mean a stronger rebound for equities and other risk assets.

What the market doesn’t want then, is for the Fed to play catch-up with a series of aggressive rate hikes to tamp down price pressures.

2. Singapore's Property Market Just Heated Up Again

  • Demand for Singapore property gets an unexpected boost from expatriates fleeing Hong Kong's harsh zero-Covid policies and restrictions

  • Property cooling measures may see Singapore's rental market heat up, but Singapore continues to be an attractive destination for real estate investors

Despite repeated attempts to cool its white-hot real estate market, Singapore’s government is now having to contend with fresh demand from expatriates fleeing the harsh pandemic restrictions in Hong Kong.

After over two years of suffering under some of the world’s most restrictive coronavirus measures, expatriates working in Hong Kong have finally had enough, with many of them moving south towards Singapore, which recently eased pandemic restrictions further.

While Beijing locks down its cities, many in Hong Kong fear that the territory will follow suit and that may be good news for Singapore’s leading real estate website which lost a fifth of its market cap soon after listing via a special purpose acquisition company.

PropertyGuru (-13.47%), a property website headquartered in Singapore, and listed on the New York Stock Exchange via a SPAC, has seen its market cap hammered in recent times, alongside a decline in risk appetite and concerns over tightening monetary policy.

The Singapore real estate portal charges agents higher fees to list more expensive properties favored by expatriates, and could stand to gain with a fresh influx of expatriates from Hong Kong looking to escape the territory’s draconian pandemic measures.

While there were early signs that Beijing may have been looking to loosen up pandemic restrictions, reversing course on its zero-Covid policy, authorities have since tightened their grip further, putting megacities like Shenzhen and Shanghai into lockdown.

Expatriates living in Hong Kong have now had enough and are moving out in droves to other parts of Asia, especially rival financial center Singapore where jobs in financial services, startups and information technology are well-paid and plentiful.

Singapore recently eased many pandemic-era restrictions, including group sizes and the ability to serve alcohol past 10.30 pm.

A stroll down Boat Quay, a popular watering hole amongst Singapore’s expat community, on a weekday evening sees bars packed with expatriates and a vibe reminiscent of pre-pandemic times.

Lam Kwai Feng on the other hand, the Hong Kong equivalent of Boat Quay, was a veritable ghost town.

Expatriates who were willing to remain in Hong Kong however were rewarded with the prospect of promotion and higher salaries, but many have conceded that enough is enough as their quality of life has deteriorated considerably.

And that’s driven demand for both rental properties as well as new homes in Singapore, where many have decided to relocate to.

Attracted to Singapore’s stable politics, strong economy and independent legal system, many expatriates who had been mulling a move from Hong Kong to the city-state have now taken the leap driving demand for properties in areas popular amongst expatriates.

Areas near to popular international schools and expatriate enclaves like Bukit Timah, Tanjong Pagar and the East Coast have been particularly hot, while other non-core regions have seen their prices flatten mainly due to government cooling measures.

3. Bitcoin Slips Back into Tight Trading Range

  • Bitcoin's 10% rally towards the end of March has since seen it return back to its previous trading range, with no sign of shooting past US$50,000 at the moment

  • Macro headwinds and the lack of visible catalysts to propel Bitcoin further will prevent the benchmark cryptocurrency from busting out of its tight trading range that has both bulls and bears lined up equally on both sides

Despite a last-minute bump that saw Bitcoin rally by 10% in the last week of March, the benchmark cryptocurrency has slipped back into a trading range that has dogged it for most of this year.

Into the weekend, Bitcoin was hovering around US$46,000, above the technical resistance at US$45,300 but showing signs that it’s taking a breather from its most recent gains.

Chart watchers suggest that a pullback and consolidation is preferred because it allows for momentum to gather and there may be some logic to that argument.

The faster Bitcoin rallies, the less sustained these rallies tend to be and as the cryptocurrency matures as an asset class, it would be good for Bitcoin to shed at least some of the volatility that marked and marred its early development.

Fundamentally though, there are challenges to even the most optimistic Bitcoin bull.

The highest pace of inflation in 40 years and a robust labor market mean that pressure will be increasing on the U.S. Federal Reserve to quicken its pace of monetary policy tightening, with the prospect of a 0.50% interest rate hike at the next Fed meeting in May greater than ever.

While there are signs that Russia may be looking for an exit to the war in Ukraine, a lack of clarity as to how that post-invasion landscape will look like for commodities means that higher prices are likely to persist for some time.

Right now at least, there is nothing visible on the horizon that could act as a strong catalyst to push Bitcoin’s price northwards in a sustained fashion.

Depending on which narrative an investor subscribes to, excess liquidity in the market is often used to explain the advent and growth of Bitcoin and cryptocurrencies.

As central banks revert to a more normal monetary policy, it’s entirely possible that the tide going out will bring down Bitcoin and cryptocurrencies along with it.

On the other hand, there are also signs that the U.S. Federal Reserve intends to hold its cards close to its chest and would like to engineer a soft landing for the U.S. economy, even as it runs off its balance sheet and hikes interest rates.

Some analysts are also pointing to the level of stablecoins in the system – a key conduit through which cryptocurrencies are purchased and which can portend rallies or declines.

In a note last week, JPMorgan Chase strategist Nikolaos Panigirtzoglou wrote,

“The share of stablecoins in total crypto market cap no longer looks excessive and as a result we believe that any further upside for crypto markets from here would likely be more limited.”

“This share currently stands below 7% which brings it back to its trend since 2020.”

It’s no surprise then that Bitcoin continues to trade range bound.

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