Hello there,

A fantastic Friday to you as market continue to flounder with traders betting on the rising risk of inflation and growing concern that the U.S. Federal Reserve will tip the economy into a recession.

In brief (TL:DR)

• U.S. stocks tanked Thursday with the Dow Jones Industrial Average (-3.12%) , S&P 500 (-3.57%) and the Nasdaq Composite (-4.99%) all down sharply on recession fears.

• Asian stocks slid with bonds Friday as inflation, rising borrowing costs and China’s Covid lockdowns depressed sentiment.

• Benchmark U.S. 10-year Treasury yields rose three basis points to 3.06% (yields rise when bond prices fall) as fear gripped the market.

• The dollar rose.

• Oil edged up with June 2022 contracts for WTI Crude Oil (Nymex) (+0.57%) at US$108.88.

• Gold fell with June 2022 contracts for Gold (Comex) (-0.02%) at US$1,875.40.

• Bitcoin (-8.19%) fell to US$36,469 (at the time of writing) as 1,000 point Dow correction marks the worst trading day since 2020.

In today's issue...

1. Blood on the Streets – US$1.3 Trillion Stock Rout

2. China’s Not a Capitalist Paradise in Communist Clothing

3. Bitcoin Bleeds Alongside Rest of Market April was Bad, May Could be Worse

Market Overview

Stocks slid with bonds Friday and the dollar rose as inflation, rising borrowing costs and China’s Covid lockdowns depressed sentiment.

Risk aversion has swept away a relief rally in the wake of the U.S. Federal Reserve decision Wednesday.

The U.S. central bank raised interest rates by the most since 2000 while pushing back against talk of super-sized increases.

That led traders to pare back rate-hike bets but sentiment remains vulnerable to ebbing liquidity, illustrated by sharp losses for speculative assets such as Bitcoin.

Asian markets were mostly lower Friday with Tokyo's Nikkei 225 (+0.69%) up, while Seoul's Kospi Index (-1.23%), Hong Kong's Hang Seng Index (-3.57%) and Sydney’s ASX 200 (-2.16%) were all down sharply.

1. Blood on the Streets - US$1.3 Trillion Stock Rout

• Traders decided yesterday that the central bank will fail to achieve any of its policy objectives and struggle to fight inflation amidst the lingering threat of recession.

• The benchmark S&P 500 lost a whopping 3.6%, wiping out about US$1.3 trillion in market value while the tech-heavy Nasdaq bled 5.1%, the most since September 2020.

The party was barely getting started when the police arrived.

Barely a day after investors cheered a less-than-aggressive U.S. Federal Reserve monetary policy tightening schedule, traders decided yesterday that the central bank will fail to achieve any of its policy objectives and struggle to fight inflation amidst the lingering threat of recession.

Investors sold off everything, stocks, bonds, cryptocurrencies – anything and everything collapsed in a sea of red in a blood bath that left traders slack-jawed at the depth and extent of the crash.

The benchmark S&P 500 lost a whopping 3.6%, wiping out about US$1.3 trillion in market value while the tech-heavy Nasdaq bled 5.1%, the most since September 2020.

Leading the losses were the most speculative corners of the market, including expensive software stocks and loss-making tech firms, while Bitcoin, that bellwether of speculation, that had earlier tested US$40,000 slipped to US$36,000 at the time of writing.

While the fear is palpable, it’s also slightly bizarre when you consider that the Fed did everything within its power to prevent such a situation.

For starters, the Fed clearly communicated it’s expected rate hikes and stuck to it – there were no surprises.

Not only that, but the central bank also made clear that no jumbo-sized hikes could be expected in the next two meetings, which ought to have calmed even the most frayed nerves.

So, what gives?

One possibility of course is that traders took the rally after the Fed policy meeting as an opportunity to exit their positions, take some money off the table, and that fed into a self-fulfilling spiral as algorithmic traders piled into an increasingly crowded trade.

When one domino falls, the rest is likely to go as well.

While some analysts believe that inflation will need to ease before there can be any durable rally, many of the concerns plaguing markets before the Fed meeting are still there – high labor costs, soaring inflation, the ongoing Russian invasion of Ukraine.

Nothing’s really changed.

And it’s entirely possible that when one market participant sneezes, everyone catches a cold.

Given the number of variables at play in the markets now, there’s just too much uncertainty to call a bottom or a top, but it may be a great time for long-term investors to dollar-cost average on some names that are durable, while keeping some cash for more buying opportunities down the line.

2. China's Not a Capitalist Paradise in Communist Clothing

• Never in human history has so much been achieved starting with so little and credit goes to the Chinese people for whom entrepreneurship and the desire for a better life became the driving force that transformed an impoverished country with over a billion people into a superpower.

• Investors may find some solace in the series of stimulus measures which Beijing will drip out in the coming weeks, but assumptions about the durability of any sharp turnaround or any interim rally would be misplaced.

In the over four decades since market reforms were instituted by then-Chinese leader Deng Xiaoping, China has achieved the seemingly impossible, lifting hundreds of millions of people out of poverty and recreating itself as the world's second largest economy.

Never in human history has so much been achieved starting with so little and credit goes to the Chinese people for whom entrepreneurship and the desire for a better life became the driving force that transformed an impoverished country with over a billion people into a superpower.

But any student of China’s history will know that the arc of Chinese progress eventually reverts to the mean.

Whether it’s the Song dynasty or the Han dynasty, the Qin or the Qing, a combination of complacency and corruption tend to coalesce into eventual and inevitable decline.

Thus goes China – periods of decentralization leading to progress, leading to centralization, leading to decline and so on and so forth, ad infinitum.

Global investors who were less familiar with China’s past assumed that China had finally shaken off the baggage of its seemingly never-ending periods of ascent and decline and embraced a capitalistic system, albeit with Chinese characteristics.

Such assumptions are increasingly looking questionable especially as Beijing has shaken the core belief that at its core, the Chinese Communist Party is pragmatic.

It is not.

According to that belief, the CCP would never do anything to harm the economy, given the social compact that the CCP has with the Chinese people – they would facilitate the economic goodies as long as they looked the other way on personal freedoms.

But Chinese President Xi Jinping’s China has made clear that no such social compact exists, if it ever did – hewing to the doctrine that “north, south, east, west, the Party rules all.”

Despite the devastating effects of pandemic lockdowns, there are few signs that Xi, who’s staked his personal and political reputation on avoiding mass deaths because of the coronavirus, will back down.

So determined is Xi, and the power structure that supports him, to ensure that the President doesn’t lose face or appear to have made a mistake, that Beijing is willing to let China take a significant economic hit rather than accept foreign mRNA vaccines or lift lockdowns.

If this sounds even remotely familiar, that’s because not so long ago, another Chinese leader allowed the same thing to happen – Mao Zedong.

During the Cultural Revolution, an estimated 100 million Chinese lost their lives through starvation as Mao’s ill-conceived plan to industrialize an agrarian nation achieved neither of Mao’s goals – the steel that Chinese farmers were forced to make was of poor quality and essentially unusable, while the land that ought to have been worked was left fallow.

Investors may find some solace in the series of stimulus measures which Beijing will drip out in the coming weeks, but assumptions about the durability of any sharp turnaround or any interim rally would be misplaced.

3. Bitcoin Bleeds Alongside Rest of Market April was Bad, May Could be Worse

• Dropping by over 10% to as low as US$35,600 at one point, Bitcoin erased its previous day gain of over 5%, taking other cryptocurrencies along with it.

• Not helping matters, Bitcoin has become increasingly correlated with U.S. equities, possibly because of increasing U.S. institutional presence in markets that trade Bitcoin.

In a market that is devoid of confidence, investors would not expect to find a haven in cryptocurrencies, so it’s no surprise then that Bitcoin has tumbled the most since January as the rout in equities and bonds deepens over recession fears.

Dropping by over 10% to as low as US$35,600 at one point, Bitcoin erased its previous day gain of over 5%, taking other cryptocurrencies along with it.

One theory is that traders are wary the U.S. Federal Reserve’s tightening schedule will tip the economy into a recession, but if so, that fear does not square with the market’s initial reaction to the central bank’s rate-setting meeting on Wednesday.

Initially, markets responded to the Fed’s 0.50% rate hike with a sharp rally, especially since policymakers suggested the next two meetings would see similar rate rises and a move away from any prospect of jumbo hikes.

Yet somehow on Thursday, traders woke up to decide that the Fed would not be achieving anything close to a soft landing and fears of recession are being bandied about.

But given that Bitcoin has been unable to break out of its tight trading band in a meaningful way, investor fatigue has taken over at a time when confidence is in short supply.

Not helping matters, Bitcoin has become increasingly correlated with U.S. equities, possibly because of increasing U.S. institutional presence in markets that trade Bitcoin.

Given that there’s nothing to be bullish about in the immediate future when it comes to Bitcoin, some investors are understandably taking money off the table.

Many institutional and professional investors recognize that this is an asset class that they can’t ignore, but at the same time, there’s no need to try and call the lowest low or the highest high and understandably they would want to sit it out until things are clearer.

On the flipside, blockchain data suggests that the amount of Bitcoin being siphoned off to cold wallets has increased, suggesting that most investors have turned to long-term holders and are neither in a rush to buy or sell.

For now, most of the trading activity in Bitcoin is amongst those who don’t want to take a long-term view one way or the other, which has (so far) prevented a capitulation for Bitcoin below US$35,000 but is also why it’s hard for the cryptocurrency to break out above US$40,000.

There’s simply too much uncertainty in the market right now that it’s completely understandable if investors just want to cling on to cash.