Hello there,

A magnificent Monday to you as threats from high inflation and slowing economic growth continue to shadow markets.

In brief (TL:DR)

• U.S. stocks ended mostly flat on Friday with the Dow Jones Industrial Average (-0.15%) and S&P 500 (-0.08%) down marginally, while the Nasdaq Composite (+0.12%) was up slightly as investors await further data on inflation.

• Asian stocks dropped along with U.S. equity futures Monday as the risk of more Covid curbs in China exacerbated overarching worries about the global economic outlook.

• Benchmark U.S. 10-year Treasury yields advanced one basis point to 3.09% (yields rise when bond prices fall) as concerns that a robust inflation print due out later this week would fuel another bout of selling.

• The dollar was back around its highest level since 2020 on inflation concerns and central bank tightening.

• Oil was lower with August 2022 contracts f WTI Crude Oil (Nymex) (-0.93%) at US$103.86.

• Gold fell with August 2022 contracts for Gold (Comex) (-0.25%) at US$1,738.00.

• Bitcoin (-4.04%) fell sharply to US$20,584 alongside other risk assets on heightened expectations that the U.S. Federal Reserve will remain resolute in its policy tightening.

In today's issue...

1. Musk Makes Billions by Walking Away from Twitter Deal

2. Don’t Bet on a Dovish Fed in July

3. Crypto Lender BlockFi Investors Brace for Haircuts

Market Overview

An inflation reading due from the U.S. later this week is expected to get closer to 9%, a fresh four-decade high, buttressing the U.S. Federal Reserve's case for a jumbo July rate hike and roiling risk assets.

Company earnings reports, meanwhile, will shed light on recession fears that contributed to an US$18 trillion first-half wipeout in global equities.

A solid U.S. employment report Friday eased some recession fears and buttressed expectations of more U.S. Federal Reserve monetary tightening.

Asian markets were mostly lower on Monday with Tokyo's Nikkei 225 (+1.57%) up, while Seoul's Kospi Index (-0.28%), Sydney’s ASX 200 (-0.48%) and Hong Kong's Hang Seng Index (-2.22%) all down in the morning trading session.

1. Musk Makes Billions by Walking Away from Twitter Deal

• Last Friday, Musk dropped a regulatory filing to walk away from the US$44 billion acquisition of Twitter, with many of the billionaire’s bankers receiving no notice of the move.

• Whilst this isn’t the first time that Musk has walked back on major deals that have had serious implications on the stock market, the Twitter deal went a lot further than previous runs.

Elon Musk has been known to leave his investment bankers hanging on deals and the acquisition of Twitter (-4.98%) likely isn’t the first or the last for the billionaire Tesla owner.

Last Friday, Musk dropped a regulatory filing to walk away from the US$44 billion acquisition of Twitter, with many of the billionaire’s bankers receiving no notice of the move.

Musk’s move to drop the Twitter acquisition was met with a mixture of disappointment and relief from his bankers, and the lucrative fees from the deal, with Goldman Sachs Group (-0.71%) and JPMorgan Chase (-0.31%) set to earn a combined US$133 million once the deal was sealed, now likely to receive a fraction of that amount.

Whilst this isn’t the first time that Musk has walked back on major deals that have had serious implications on the stock market, the Twitter deal went a lot further than previous runs.

In 2018, Musk tweeted about taking electric vehicle maker Tesla, private, sending shares of the firm soaring and was subsequently censured by the U.S. Securities and Exchange Commission, which he entered into a private settlement with.

It’s entirely possible that the entire Twitter acquisition episode could have been a ruse for the mercurial billionaire to have sold some of his Tesla stock, on the pretext of funding his Twitter acquisition.

In April this year, Musk sold US$8.5 billion worth of Tesla (+2.54%) stock at prices ranging from US$822.68 to US$999.13 a share, well above its price last Friday of US$752.29, impeccable if somewhat “convenient” timing.

Considering that Musk so far been able to solve some of the world’s most intractable problems, including cost-efficient spaceflight using reusable rockets and the electrification of vehicles, it would stand to reason social media ought to be a cake walk for the billionaire.

Yet for some reason Musk baulked at the idea, claiming that Twitter was rife with bots, something which early due diligence would have shown up, if true.

Some bankers are still hopeful that the Twitter deal won’t be scotched.

And Musk has been known to make numerous U-turns, deciding on one day that Bitcoin could be accepted payment for Tesla’s vehicles and then changing his mind just as abruptly.

2. Don't Bet on a Dovish Fed in July

• It’s not unfathomable that central bankers will still be hiking rates even after the U.S. economy is deep within a recession, but investors still have reason to be hopeful.

• Investors can remain somewhat optimistic that the third and fourth quarters of the year may provide some form of respite as the Fed allows time for its policy shift to course its way through the economy.

Robust employment figures released on Friday have provided further reason for the U.S. Federal Reserve’s to remain steadfast in its pursuit of aggressive monetary policy tightening and justification to continue hike interest rates by 75 basis points later this month to quell inflation.

In June, U.S. employers added 372,000 jobs, keeping unemployment steady at 3.6% for four consecutive months.

The month of May also saw average hourly wages climbing 0.3%, a notch lower from earlier this year and could help the U.S. economy avoid a dreaded wage-price spiral that would fan the flames of further inflation.

According to Atlanta Fed President Raphael Bostic, the June employment report just “reaffirms that the economy is strong, and there is a lot of momentum in the labor market.”

Earlier this year, at a Rotary Club luncheon, Bostic suggested that September may be a time when the Fed could “pause” its rate hikes, depending on the economic circumstances.

While the jobs report is no doubt relevant in the overall decision-making matrix of policymakers, central bankers will be looking out for last month’s Consumer Price Index print to set the path of rates.

Investors are looking for signs that the central bank is scaling down its rate hikes as recent data indicate a slowdown in U.S. consumer spending.

Aggressive policy tightening by the Fed and other central banks have sparked fears of recession, depressed commodity prices, and dampened investor outlook for future inflation, as reflected by yields on certain U.S. government securities.

Regardless of the CPI data for June due out this month, it’s highly unlikely that the Fed will U-turn its policy course for now – policymakers will want to see several months of inflation trending back to the long-term target of 2% for that to happen.

Investors hoping for a premature resumption of “business as usual” by central bankers will need to manage their expectations as a single inflation print does not a trend make.

U.S. Federal Reserve officials took almost a year before they acknowledged that inflation was not “transitory” and their policy shift is still relatively immature, meaning that this course of action still has some ways to run.

It’s not unfathomable that central bankers will still be hiking rates even after the U.S. economy is deep within a recession, but investors still have reason to be hopeful.

For one, the current Fed has proved somewhat more flexible than its predecessors, willing to acknowledge its limitations and able to reverse policy in the face of irrefutable data that current measures are inappropriate for the economic environment.

Investors can remain somewhat optimistic that the third and fourth quarters of the year may provide some form of respite as the Fed allows time for its policy shift to course its way through the economy.

3. Crypto Lender BlockFi Investors Brace for Haircuts

• BlockFi’s warrants were marked down to zero by Private Shares Fund, a fund managed by Liberty Street Advisors, in its most recent fund report, according to an analysis of data put together by Bloomberg.

• Last March, BlockFi attracted a valuation of as high as US$3 billion, which was reduced to US$1 billion in the weeks leading up to the recent crypto market meltdown.

BlockFi, which received capital from digital-asset exchange FTX US in the form of a bailout, has asked its equity investors to prepare for a significant markdown on their investments in the embattled crypto lender.

BlockFi’s warrants were marked down to zero by Private Shares Fund, a fund managed by Liberty Street Advisors, in its most recent fund report, according to an analysis of data put together by Bloomberg.

Cryptocurrency exchange FTX extended a lifeline to BlockFi at the end of June through a US$400 million credit facility with an option to acquire the company in an effort to pull BlockFi out of potential insolvency against a backdrop of recent liquidations and a broader market meltdown.

Private Shares Fund specializes in investing in late-stage private companies, and reduced its valuation of BlockFi’s preferred shares recently to an estimated US$20 a share, a sharp decline from US$77 at the end of April.

It’s been said that all investment rounds in BlockFi are treated ‘pari-passu’, meaning that all investors are treated equally, so FTX US’s injection would be treated the same as that of an earlier investor, and result in a dramatic haircut of the value of such an investment.

Last March, BlockFi attracted a valuation of as high as US$3 billion, which was reduced to US$1 billion in the weeks leading up to the recent crypto market meltdown.

FTX US’s transaction with the crypto lender now puts BlockFi’s market cap at around US$680 million, a dramatic reduction from even its most recent down round for funding.

Nevertheless, early investors in the crypto lender will have to stomach the haircut, especially if it raises the prospect that they could one day see their investments turnaround.

FTX is one of the biggest cryptocurrency exchanges in the world and is hugely profitable through its proprietary trading firm and market maker Alameda Research.

Buying up BlockFi at cents on the dollar would help shore up even more power and influence within the hands of FTX and could see BlockFi transformed in the years to come.

Cryptocurrencies have struggled for most of this year, amidst high inflation, central bank tightening and a Russian invasion of Ukraine.

Bitcoin continues to straddle US$20,000, although it has dipped well below this level several times this year.

Investors may see some respite towards the end of the year, on the outside chance that central bank policymakers take a pause from the relentless pace of rate hikes, which would ensure yields remain below inflation and could spark off a new round of risk-taking.