Hello there,

A terrific Tuesday to you as Russia celebrates the birth of two brand new countries, the Donetsk People's Republic and the Luhansk People's Republic as markets continue to be rattled by the prospect of a full scale invasion of Ukraine.

In brief (TL:DR)

• U.S. stocks closed lower on Friday with the Dow Jones Industrial Average (-0.68%), S&P 500 (-0.72%) and the Nasdaq Composite (-1.23%) all down and markets remain closed on Monday for a holiday, but could be under considerable pressure at the open, with days of geopolitical wrangling to cater to.

• Asian stocks declined Tuesday on intensifying tension between the West and Russia over Ukraine

• Benchmark U.S. 10-year Treasury yields dropped six basis points to 1.87% (yields fall when bond prices rise) as investors stayed keen on haven assets.

• The dollar ticked up as Russia launched its most provocative and aggressive move yet, short of a full scale invasion of Ukraine.

• Oil held gains with March 2022 contracts for WTI Crude Oil (Nymex) (+3.01%) at US$93.81 as traders weighed the risk of energy-supply disruptions if the situation deteriorates further and leads to Western sanctions.

• Gold was higher with April 2022 contracts for Gold (Comex) (+0.55%) at US$1,910.30 as investors sought safety in havens.

Bitcoin (-5.08%) fell to US$37,261 as risk appetite continued to come under pressure, with investors cashing out of the benchmark cryptocurrency and rotating into cash amidst heightened geopolitical uncertainty.

In today's issue...

1. Long Apocalypse, Short Humanity

2. US$96 billion Wipeout of Chinese Tech Stocks Demonstrate the Worst Isn’t Over

Bitcoin Falls Below US$40,000

Market Overview

Stocks declined Tuesday on intensifying tension between the West and Russia over Ukraine, a standoff that’s bolstering oil prices and leading investors to seek the relative safety of bonds.

President Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine and ordered the Defense Ministry to send what he called “peacekeeping forces” to the breakaway regions.

The unfolding security crisis in eastern Europe saddles global markets with the one thing they most dislike -- a large amount of uncertainty.

Geopolitical risks have already led investors to pare back bets on how aggressively the Federal Reserve may tighten monetary policy this year to fight inflation.

Asian markets continued to fall on Tuesday with Tokyo's Nikkei 225 (-2.17%), Seoul's Kospi Index (-1.77%), Hong Kong's Hang Seng Index (-2.97%) and Sydney’s ASX 200 (-1.65%) all down.

1. Long Apocalypse, Short Humanity

• Investors are understandably jittery that a perfect storm for all manner of risk assets is brewing on the horizon.

• War would add to inflationary pressures, while at the same time tighten financial conditions, potentially hurting European business and consumer confidence, which puts central bankers in a quandary.

Doomsday predictions are increasingly in vogue these days, with no shortage of soothsayers suggesting that investors make peace with their makers.

With Russian troops set to enter the newly-recognized Luhansk People’s Republic and the Donetsk People’s Republic in the coming hours or days ostensibly on a “peacekeeping mission,” all the pieces are in position for a full-scale invasion of Ukraine.

Against this backdrop and the threat of the largest European conflict since 1945, soaring inflation is putting increasing pressure on major central banks to use monetary policy tools to reign in the fastest pace of price increases in four decades.

Investors are understandably jittery that a perfect storm for all manner of risk assets is brewing on the horizon.

But consider what that trade means – an assumption that favorable financing conditions, strong labor markets and underleveraged consumers buoyed by strong corporate cashflows, and robust bank balance sheets have no value.

Data released yesterday showed that despite the geopolitical risks of a wider conflict sparked by Ukraine, factory output and service providers saw an improvement in performance in February.

Rising demand and a gradual easing of supply chain bottlenecks has underpinned stronger orders and job growth in Europe, according to purchasing manager indexes compiled by IHS Markit, a data service provider.

In normal times (whatever that means in today’s context), markets ebb and flow according to the latest economic statistics and earnings reports.

But over the past week, the price of oil, the Russian ruble as well as European and American stocks all gyrated wildly as the world’s money managers have adjusted their expectations of a war in Ukraine upward or downward.

While there has been no shortage of conflicts in the decades since the Second World War, the world has largely avoided the massive interstate battles that have ravaged entire continents and killed millions of people.

It’s easy to forget but the biggest financial crisis, even bigger than the Great Depression of 1929, happened on the eve of the First World War in 1914.

So severe was the liquidity crunch in 1914 as the diplomatic situation in Europe deteriorated that trading on all major global stock markets had to be suspended.

The New York Stock Exchange was closed from July 31, 1914 until December 12 of the same year and when stocks resumed trading, the Dow Jones Industrial Average plummeted 24.4% at the open.

The Cold War has long lured investors into the false sense of assurance that mutually-assured destruction would prevent nuclear powers from ever going into direct conflict with each other, instead relying on proxy wars to settle their ideological differences.

Markets mostly ignored both the threat of nuclear Armageddon and these numerous proxy wars, from Korea to Vietnam because what sort of trade would ultimately pay off in the event that the world was reduced to a nuclear wasteland?

Instead, investors bet on gold in anticipation of inflation, a trade that paid off handsomely in the 1970s, when then-U.S. President Richard Nixon abandoned the Bretton Woods link between the dollar and gold bled out those who were long on bonds and stocks.

When then-U.S. Federal Reserve Chairman Paul Volcker showed up to end inflation hiking interest rates to double digits, gold bugs were caught out and as the Cold War ended in the late 1980s with the collapse of the Soviet Union, fears of thermonuclear conflict faded from most investors’ minds.

A Russian invasion of Ukraine wouldn’t come close to 1914 and no one is obliged to defend the former Soviet state in the same way that the United Kingdom and France guaranteed Belgium’s sovereignty in 1914.

After the end of the Cold War, successive geopolitical conflicts, from the Gulf War, the Balkans, the Afghan and the Iraq invasions, have all largely been overshadowed by the relentless money-printing by central banks in the wake of the 2008 Financial Crisis.

But a major conflict in Eastern Europe would complicate matters for the world’s major central banks who already have no shortage of problems to deal with, having so badly underestimated the inflationary consequences of their relentless money-printing.

War would add to inflationary pressures, while at the same time tighten financial conditions, potentially hurting European business and consumer confidence, which puts central bankers in a quandary.

Tighten to cater for inflation and risk pushing the economy into a recession, do nothing and runaway prices could exert unbearable political pressures domestically.

Alternatively, a best-case scenario for policymakers would be where prices naturally subside, because supply chains sort themselves out, and there is less of a pressure on monetary policy to combat inflation, with a more gradual pace of rate rises.

2. US$96 billion Wipeout of Chinese Tech Stocks Demonstrate the Worst Isn't Over

• A fresh crackdown by Beijing has obliterated some US$96 billion of market cap in just two days.

• The latest selloff is a wake-up call for the legions of investors who were hoping (some betting), that the worst for China’s tech darlings was finally over.

Just when investors thought it was safe to pick up stock of some of China’s biggest tech companies, a fresh crackdown by Beijing has obliterated some US$96 billion of market cap in just two days.

The latest selloff is a wake-up call for the legions of investors who were hoping (some betting), that the worst for China’s tech darlings was finally over.

On Friday, Beijing declared that online food-delivery platforms should reduce the fees that they charge to businesses, sending shares of the food-delivery giant Meituan (-5.82%) tumbling, while China’s National Audit Office is demanding that state-owned enterprises declare their financial exposure to Alibaba Group Holdings (-4.00%), Ant Group and Tencent Holdings (-1.93%), in a sign of more regulatory pain to come.

A slowing Chinese economy, coupled with Chinese President Xi Jinping’s relentless “common prosperity” drive has forced Beijing to take action wherever considered necessary and in this regard there are no sacred cows.

Behind Beijing’s latest move against delivery services is a tacit recognition that China’s small businesses are suffering a long and rough winter as the government’s zero-tolerance coronavirus strategy bites.

Similar to the rest of the world, China’s small businesses, which tend to be in retail, food and beverage and tourism, have suffered disproportionately compared with the rest of the economy, amid repeated pandemic lockdowns.

The latest quarterly survey of 15,569 small businesses by Peking University and Ant Group Research Institute paints a grim picture – sales are weak and profits more imagined than real, with most mom-and-pop outfits lacking the cash reserves to survive extended lockdowns.

With no fresh sources of revenue, most small businesses will only survive another three months.

Which is why Beijing is doing whatever it can to make life easier for these small businesses, by forcing platform providers to cut fees, from delivery apps to e-commerce platforms.

And the redistribution of wealth through mandated means could ultimately prove durable, with investors looking to buy the dip on China, perhaps drinking from their own Kool-Aid.

To be sure, China hasn’t turned against its capitalists, but given the slowing economy, it’s having to rifle through the couch cushions to find spare change to support economic growth and right now, tech giants remain firmly in the crosshairs because they still have a license to print money.

Until such time that the pandemic is dismissed to the dustheap of history, China’s biggest and (for now) most profitable tech companies will not be off the hook.

3. Bitcoin Falls Below US$40,000

• Bitcoin is failing to live up to its role as a hedge against inflation, falling alongside stocks as escalating tensions between Russia and Ukraine sapped risk appetite.

• It would appear that Bitcoin isn’t so much a replacement for gold as it is a competitor to it.

Tensions in the Ukraine are feeding the narrative that Bitcoin is more risk asset than safe haven.

Despite the U.S. suffering from the fastest pace of price increases in four decades, Bitcoin is failing to live up to its role as a hedge against inflation, falling alongside stocks as escalating tensions between Russia and Ukraine sapped risk appetite.

The benchmark cryptocurrency dropped to as low as US$36,200 at the time of writing, soon after Russian President Vladimir Putin signed a declaration formally recognizing two breakaway provinces in eastern Ukraine as independent states.

Bitcoin dipped below US$40,000 in weekend trading but rebounded shortly on the prospect that U.S. President Joe Biden and Russian President Vladimir Putin would meet to resolve tensions in Ukraine.

But even as flows from Bitcoin are leaving, that money has poured into gold, which has reached its highest level since June last year, confirming the negative correlation between gold and Bitcoin.

It would appear that Bitcoin isn’t so much a replacement for gold as it is a competitor to it.

Last year, record outflows from gold ETFs coincided with inflows into Bitcoin and the slew of freshly launched Bitcoin products, including the ProShares Bitcoin Strategy ETF.

Nonetheless, CME Group’s cash-settled Bitcoin futures has seen a surge in open interest, suggesting that the recent bout of geopolitical instability in Ukraine has shaken investors, but not shoved them out completely on the Bitcoin trade.

With U.S. Consumer Price Index data at 7.1% and prices rising at the fastest rate in four decades, some investors are hedging their bets with Bitcoin and a 20% increase in Bitcoin futures contracts was seen in January compared to December last year.

There is still a significant trader base that sees cryptocurrencies as insulated from monetary policy and a haven from price pressures.