Weekend Edition 9-10 April 2022 (10-Minute Read)

Hello there,

A fantastic Friday to you as markets find their footing somewhat after digesting the minutes of the U.S. Federal Reserve's policy meeting in March.

In brief (TL:DR)

  • U.S. stocks slipped further on Friday with the Dow Jones Industrial Average (+0.40%) up as value stocks led the charge while the S&P 500 (-0.27%) and the Nasdaq Composite (-1.34%) fell further on losses led by tech firms.

  • Asian stocks reversed the morning's losses at the close on Friday

  • Benchmark U.S. 10-year Treasury yields soared to 2.715% (yields rise when bond prices fall) as traders continued to dump bonds on concerns that the U.S. Federal Reserve could soon flood the markets with unwanted Treasuries.

  • The dollar was flat.

  • Oil rebounded slightly with May 2022 contracts for WTI Crude Oil (Nymex) (+2.32%) at US$98.26.

  • Gold inched higher with June 2022 contracts for Gold (Comex) (+0.40%) at US$1,945.60.

  • Bitcoin (-2.67%) tumbled into the weekend at US$42,444 falling alongside tech shares which it has a strong correlation with.


In today's issue...

  1. Cruise Companies Counting on Coronavirus Comeback, Should You?

  2. The Food Crisis Isn't Going Away Anytime Soon

  3. Ethereum's Shift to Proof-of-Stake Could be Exactly What Crypto Needs Now


Market Overview

Global markets nursed their worst week since mid-March, led by tech shares which were hammered on the prospect of more aggressive U.S. Federal Reserve policy tightening, and taking down cryptocurrencies along for the ride.

Traders continued to dump U.S. Treasuries on Friday, following declines sparked by the U.S. Federal Reserve's plan to runoff its US$9 trillion balance sheet at a more aggressive pace and seeing benchmark U.S. 10-year Treasury yields inch ever closer to the psychologically problematic 3% level.

Investors remain skeptical on the Fed's ability to engineer a soft landing for the U.S. economy and concerns remain that it could instead tip it into recession through excessive tightening.

Signs of weakness are already being noticed in the U.S. mortgage market and borrowing costs have spiraled, adding to already rampant cost-of-living pressures from soaring inflation.

Asian markets reversed the morning's losses on Friday with Seoul's Kospi Index (+0.17%), Tokyo's Nikkei 225 (+0.36%), Hong Kong's Hang Seng Index (+0.29%)and Sydney’s ASX 200 (+0.47%) up at the close as Beijing announced a raft of measures to continue boosting its moribund economy, including looser monetary policy.



1. Cruise Companies Counting on Coronavirus Comeback, Should You?

  • Cruise operators are confident that their businesses will see a sharp rebound but fuel and labor costs are squeezing margins

  • Stocks of cruise operators have performed admirably in line with the "value" rebound, but inflation may hit demand as cruise passengers remain more sensitive to price increases

When the pandemic first hit, floating palaces, an homage to the decadence and luxury of cruising, became nothing more than gilded prisons.

Conjuring images of the end times, the world looked in horror as entire cruise ships with thousands of passengers and crew were denied berthing, almost as if doomed to roam the high seas, never to land ashore again.

Two years later and these images seem like a distant memory as last month, the 18-deck 7,000 passenger Wonder of the Seas, the world’s biggest cruise ship, set sail.

Owned and operate by Royal Caribbean, the Wonder of the Seas reflects growing confidence by cruise line executives about the prospects of an industry that for the past two years had to deal with deaths, hellish conditions from on-board quarantines and billions in losses.

The situation though may have taken a turn for the better.

According to Royal Caribbean rival Carnival, last week was said to be the busiest for bookings in its 50-year history and next month, the final ship in its 23-strong fleet will return to service, after having been laid up because of the pandemic.

But beneath the veneer of optimism, worries remain on the rebound of the cruise industry.

Fuel costs have been soaring, eating into margins and there has been a shortage of labor just as coronavirus infections are on the rise again.

The highly virulent Omicron variant hit bookings during the crucial January cruising season – the most popular time of year for customers booking a cruise.

But that hasn’t stopped investors from snapping up shares of cruise companies, in line with the so-called “value” rebound.

While the S&P 500 has struggled this year, the shares of operators like Norwegian Cruises, Carnival Corporation and Royal Caribbean Cruises have been on a tear.

Helping things along, the U.S. Centers for Disease Control and Prevention dropped its advice last week to avoid cruise travel.

Pent-up demand is also seeing revenues per passenger cruise day soar, including for everything from dining to entertainment and spa treatments.

But the Russian invasion of Ukraine has caused costs to soar, with food costs spiraling and pressure on wages forcing cruise operators to up staff salaries, which will crimp margins.

And as inflation bites, discretionary spending on things like cruises could also take a dent, with the U.S. contending with the fastest pace of price increases in forty years.

Higher interest rates could also dent the ability of cruise operators to gain access to cheap funding, providing another layer of risk for investors.

Investors looking to bet on a turnaround in the cruise industry may soon find that the going will not be as smooth sailing as they had hoped.



2. The Food Crisis Isn't Going Away Anytime Soon

  • Damaged Ukrainian agricultural infrastructure will take years to repair, meaning that shortages in key agricultural commodities will persist for some time

  • Climate change and inflation had already put pressure on food prices, but the Russian invasion of Ukraine will add to these pressures for years, even if the conflict were to end now

As Russian bombs land on Ukrainian cities, millions of dead lay scattered across the pockmarked landscape, but these aren’t Ukrainians, they’re chickens, dying of thirst and starvation as the invasion has wreaked havoc on Ukraine’s crucial agricultural sector.

Ukraine is a key global exporter of wheat, sunflower oil and other produce.

Dubbed the “breadbasket” of Europe, Ukraine is the world’s seventh-largest exporter of chicken eggs, according to market intelligence provider IndexBox and it also is responsible for providing 10% of global wheat exports, 14% of corn and about half of the world’s sunflower oil, according to the U.S. Department of Agriculture.

The Russian invasion of Ukraine has meant that these crucial commodity and agricultural exports have been absent from global markets, driving up prices from alternative sources.

Conflict has closed off ports, deprived Ukrainian farmers of fertilizer and fuel, destroyed equipment and displaced workers.

Soaring grain prices have already piled pressure on emerging market economies struggling with food-cost inflation.

While the Ukrainian government predicts that 25% less land will be planted this spring than usual, most experts say that forecast is too optimistic and by the time the last Russian soldier leaves Ukraine, its agricultural production could be less than half what it was before the invasion.

The destruction of Ukraine’s agricultural infrastructure will have lasting impact on commodity markets for years to come, and that’s not even accounting for Russia’s exclusion from global markets, where it is a key supplier of fertilizer and the materials used to make fertilizer.

According to the European Bank for Reconstruction and Development, as much as 60% of Ukraine’s annual economic output has been affected by the Russian invasion.

And even if the war ends now, which is unlikely, it will take years before Ukraine regains its pre-war agricultural production, which will mean that agricultural commodity prices are likely to remain elevated for some time.

The vacuum left in the wake of Ukraine’s absence from global agricultural commodity markets comes at a time when food prices had already been on the rise and food insecurity globally is at its highest levels.

Even before the first Russian tank rolled into Ukraine, global food prices had hit a record high in February, climbing 24% year-on-year, following a 4% month-on-month rise.

If Russia should cease its invasion of Ukraine, it will still take time for Ukraine to rehabilitate its heavily-damaged farmland, and that’s not including the clearance of thousands of unexploded ordinance covering the countryside.



3. Ethereum's Shift to Proof-of-Stake Could be Exactly What Crypto Needs Now

  • A successful upgrade of the Ethereum blockchain to the energy-lite proof-of-stake method of securing the blockchain and ordering transactions could provide the boost that cryptocurrencies need in moribund markets

  • Upgrade of Ethereum blockchain to proof-of-stake is fraught with risk but for long-term investors, if successful, could see the value of Ether, Ethereum's native cryptocurrency, soar

For all the attention garnered by Bitcoin, it’s the world’s second most valuable blockchain by market cap, Ethereum, that gets the work done.

Whereas Bitcoin is often seen as a store of value, thanks to its deflationary properties, with only 21 million Bitcoin ever capable of being created, Ethereum is the blockchain which powers decentralized applications, including everything from NFTs or non-fungible tokens, to decentralized finance.

And even as the prospect of U.S. Federal Reserve monetary policy tightening has seen Bitcoin’s price decline, Ether, remains relatively resilient, staying above US$3,200 even as Bitcoin inches closer to US$42,000, a key level of support.

Part of the reason for Ethereum’s strength is an upcoming “hard fork,” the biggest change to the Ethereum blockchain in its near-decade history that will see the cryptocurrency shift to a proof-of-stake system and reimagine how everyone views cryptocurrencies forever.

While “hard forks” which are periodic software upgrades for the Ethereum blockchain are a regular occurrence, none has been as ambitious or as significant as the one coming later this year.

Dubbed “the Merge” the Ethereum upgrade will replace the energy-intensive practice of converting computing power and electricity into security for the blockchain will be replaced by “stakers” who use their existing pools of Ether to secure the blockchain.

Proof-of-work blockchains like Bitcoin require miners to solve complex mathematical problems using specialized purpose-built hardware that consumes copious amounts of electricity and who receive Bitcoin in return for their effort if they solve these problems, as well as the right to secure transactions on the blockchain.

“The Merge” won’t just affect Ethereum’s blockchain, it will affect the millions of users who use it as and the thousands of businesses that operate on it as well, including over US$121.5 billion worth of cryptocurrency locked in various Ethereum decentralized finance or DeFi applications.

As with all software upgrades, any number of things could go wrong even on a small scale, but the stakes are even higher with a shift of this size, including anything from software bugs or unforeseen vulnerabilities.

In 2020, during an Ethereum network upgrade, a bug split the blockchain in two, wreaking havoc on DeFi applications, but the response and recovery from the bug was a testimony to the resilience of a Ethereum’s decentralized base of core developers.

But while miners who have been minting a fortune from proof-of-work may baulk at Ethereum’s impending shift to a more sustainable means to secure the blockchain, investors who can stomach the impending risk and volatility from “the Merge” could stand to benefit in a big way.

When Ethereum moves to a proof-of-stake chain, the amount of fresh Ether issued on Ethereum as a reward for ordering transactions may decrease by as much as 90% and the amount of Ether used for staking is expected to rise to by as much as 80%, reducing the Ether in circulation and potentially causing its value to soar.

Miners typically also create selling pressure for a cryptocurrency, to cover operating costs, whereas stakers are likely to hold their Ether for the long-term, reducing the available supply and possibly boosting prices.

Another way long-term Ether investors could benefit is that “the Merge” could see Ethereum’s energy consumption drop by a whopping 99%, making it within the realm of contemplation of institutional investors who have been hamstrung in their investments in cryptocurrencies because of their ESG mandates.

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