Hello there,

A magnificent Monday to you as markets remain mired due to a mass of macro headwinds that are preventing a breakout on the upside.

In brief (TL:DR)

• U.S. stocks ended mostly lower 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 fell Monday on worries about inflation and tightening monetary policy.

• Benchmark U.S. 10-year Treasury yields rose two basis points to 2.72%, around the highest since 2019 (yields rise when bond prices fall) as traders continued to dump bonds.

• The dollar advanced.

• Oil retreated with May 2022 contracts for WTI Crude Oil (Nymex) (-2.76%) at US$95.55, sapped by risks to demand from China’s worsening Covid outbreak and an extensive lockdown in Shanghai.

• Gold was little changed with June 2022 contracts for Gold (Comex) (-0.02%) at US$1,945.20.

• Bitcoin (-1.29%) tumbled into the week at US$42,219 and remains under pressure as yields rise and appetite for risk assets wanes.

In today's issue...

1. Europe’s Breadbasket Empties Elevating Food Prices for Years

2. The Era of Zero Real Yields May Already be Over

3. Bitcoin – The Investment Choice of a New

Market Overview

Market sentiment continues to be shaped by the hawkish U.S. Federal Reserve and inflation pressures from commodity-market disruptions caused by Russia’s invasion of Ukraine.

Investors have been fretting about the implications of a victory for French President Emmanuel Macron’s nationalist rival Marine Le Pen in the midst of the the war in Ukraine, given her longstanding sympathies for Russia as they run a tight race.

China’s Covid lockdowns threaten to exacerbate already stretched supply-chain snarls, further stoking costs and adding more fuel to the inflation pyre.

Asian markets were mostly down on Monday with Seoul's Kospi Index (-0.52%), Tokyo's Nikkei 225 (-0.76%) and Hong Kong's Hang Seng Index (-2.67%) down, while Sydney’s ASX 200 (+0.12%) was up slightly in the morning trading session.

1. Europe's Breadbasket Empties Elevating Food Prices for Years

• Early estimates suggest that as much as half of Ukraine’s most important export crops could be halved this year (a somewhat modest projection) exacerbating already tight global supplies.

• Even where Ukrainian farmers can plant, they are switching away from export-focused crops, that create less of a delivery strain during harvest time.

Even in the best of times, farmers have to contend with unpredictable weather conditions exacerbated by climate change and the regular vagaries of an agricultural life, but invading troops can make the already challenging task of farming, impossible.

Early estimates suggest that as much as half of Ukraine’s most important export crops could be halved this year (a somewhat modest projection) exacerbating already tight global supplies.

The irony is that in some cases, Ukraine’s granaries are bulging but a Russian naval blockade is preventing grains from getting to their markets.

Russia’s invasion of Ukraine is also happening at the worst possible time for Ukraine’s farmers who have just started planting corn and sunflowers, an endeavor which has been hobbled by field mines and a lack of fuel and fertilizers.

Wheat that was sown months before the invasion now sits beneath the boots of Russian soldiers and tracks of Russian armor.

Already record high global food prices are unlikely to receive respite any time soon.

A farm isn’t a factory, which generally have far more flexibility in production – a shortage of fuel means that Ukrainian farmers can’t plant large areas of land and a lack of seeds and fertilizers means that even where they can plant, they have nothing to plant.

Even as Russian forces head east for what appears to be a final showdown with Ukraine in the Donbas region, it is unclear how much of Ukraine’s crops will make it to world markets this year or the next.

Rail shipments are accelerating to alleviate some of the issues, but given that the bulk of Ukrainian grains and oilseeds went by sea, it could take as long as two years to clear the backlog if done purely by rail, according to estimates from the Ukrainian Agribusiness Club.

Even where Ukrainian farmers can plant, they are switching away from export-focused crops, that create less of a delivery strain during harvest time.

2. The Era of Zero Real Yields May Already be Over

• With the U.S. Federal Reserve hoovering up Treasuries like every market day was Black Friday, real yields for the risk-free asset turned negative.

• But now, real yields are approaching a place that had been considered hitherto unreachable – zero.

A low yield environment had been used as justification for the valuing practically ever manner of risk asset in the period since the 2008 Financial Crisis.

But when real yield (yield from a U.S. Treasury less inflation) turned negative because of the pandemic was when risk assets really got supercharged.

With the U.S. Federal Reserve hoovering up Treasuries like every market day was Black Friday, real yields for the risk-free asset turned negative.

But now, real yields are approaching a place that had been considered hitherto unreachable – zero.

To be sure, all U.S. Treasury yields have climbed this year as the Fed took the first of what is expected to be a series of aggressive rate hikes aimed at cracking down on inflation, but that climb has now spilled over in the past two weeks to Treasury Inflation Protected Securities or TIPS.

TIPS yields are considered “real” because they represent the rates that investors will accept if coupled with extra payments to offset inflation and for borrowers, represent something akin to the “true cost” of money.

For 10-year loans, the “true cost” of money has been negative since early 2019, in other words you’d be silly not to take out a loan and make another bet on some other asset, anything would do.

But 10-year real yields on TIPS surged to -0.15% from -0.49% over the past week and are closing in on that point where it might actually cost money to borrow money and force a re-examination of asset valuations, from equities to cryptocurrencies.

A TIPS index, which tracks the prices of TIPS, has lost 3.3% in the first three months of this year for a total return of -4.7% in the year to March 23, while comparable non-inflation protected Treasuries have been hammered, losing -7.8% over the same period.

U.S. Treasuries have outperformed in the past two weeks though, losing just 2.4%.

But investors can expect that both Treasuries and TIPS yields will become even more volatile in the coming weeks.

As Russia gears up for a final showdown in Ukraine’s eastern regions, a rout of Russian forces could either escalate the conflict towards nuclear Armageddon, or force a détente akin to when the Finns drove the Russians out of Finland.

When the Fed expanded its balance sheet in response to the pandemic, TIPS accounted for a larger share of its outstanding securities and if the Fed no longer buys, yields could become positive again.

Although stocks nursed a week of losses in the first week of April, it’s entirely possible that they will rebound, given their relative resilience and the time that the markets have now had to digest the prospect of the pace at which the Fed is running off its balance sheet (not replacing maturing Treasuries and mortgage-backed securities with fresh ones).

Investors are wading deeper and deeper into uncharted territories, because the Fed hasn’t tightened solely because of inflation since the 1980s and that uncertainty is being reflected not just in TIPS and yields, but in market volatility as well.

3. Bitcoin - The Investment Choice of a New Generation

• Despite Bitcoin being well off its all-time-high, now appears to be the time to buy for Robinhood’s users who are accustomed to the “buy the dip” mantra.

• But Robinhood Markets (-6.88%) isn’t just pushing to make Bitcoin more tradeable, it’s also making inroads to make it more spendable.

With over 22.7 million customers and more than US$102 billion in assets, Robinhood Markets has captured the imagination and investments of Millennial and Gen Z investors, who, according to the digital trading app, want cryptocurrencies, primarily Bitcoin.

Despite Bitcoin being well off its all-time-high, now appears to be the time to buy for Robinhood’s users who are accustomed to the “buy the dip” mantra.

Speaking at the Bitcoin 2022 conference in Miami last week, Robinhood Markets Chief Product Officer Aparna Chennapragada told a cheering audience that Bitcoin was the top recurring “buy” order amongst its users, whose average age is just 31.

Robinhood Markets revolutionized zero-commission trading and forced a legion of legacy brokerages to follow suit.

Half of Robinhood Markets users are either first-time investors or new to the trading app, and this past year, have been buying Bitcoin which signals where they see the future of investment going.

Retail investors made waves earlier last year as they used zero-fee trading apps like Robinhood and SoFi to snap up shares of meme stocks like GameStop and AMC Entertainment, causing billions of dollars in losses for short sellers and hedge funds betting against these companies.

And retail investors could drive cryptocurrency prices higher if they keep up the momentum when it comes to doubling down on a digital asset future.

Although Wall Street has been making tentative steps into cryptocurrencies, retail investors have been major drivers in the markets since the first cryptocurrency exchanges were organized with professional money managers having to play catch up.

Last week, CME Group, working with CF Benchmarks, announced that it would be providing reference prices for an additional 11 other cryptocurrencies outside of Bitcoin and Ether, which would facilitate the creation of more Wall Street-type products and allow for greater institutional participation.

But Robinhood Markets isn’t just pushing to make Bitcoin more tradeable, it’s also making inroads to make it more spendable.

Last week, Robinhood Markets enabled full functionality for the over 2 million customers who were on the waitlist for external cryptocurrency transfers, enabling customers to now send and receive Bitcoin from external Bitcoin wallets, a long-sought feature for cryptocurrency purists who oppose the abstraction of this key functionality.

The move would allow Bitcoin wallets administered by Robinhood Markets to also “spend” Bitcoin the way any other regular Bitcoin wallet could as opposed to the walled garden approach that PayPal and other fintechs take, which do not give users full access and control over their Bitcoin wallets.