Hello there,

A terrific Thursday to you as markets tank hard on the prospect of more aggressive tightening as the U.S. Federal Reserve looks towards more aggressive policy measures and balance sheet runoff to reign in price pressures.

In brief (TL:DR)

• U.S. stocks closed lower on Wednesday with the Dow Jones Industrial Average (-0.42%), the S&P 500 (-0.97%) and the Nasdaq Composite (-2.22%) following another drop in tech as yields look set to soar.

• Asian stocks declined Thursday as investors evaluated the U.S. Federal Reserve’s plan to pare its balance sheet by more than US$1 trillion a year while hiking interest rates in a campaign to curb inflation that could see emerging market assets suffer.

• Benchmark U.S. 10-year Treasury yields fell three basis points to 2.57% (yields fall when bond prices rise) but are otherwise elevated.

• The dollar flirted with a three-week high as investors digested the minutes of the U.S. Federal Reserve's March meeting which has revealed strong appetite for tightening.

• Oil rallied with May 2022 contracts for WTI Crude Oil (Nymex) (+1.48%) at US$97.65 paring a slump that was triggered by the International Energy Agency’s decision to deploy 60 million barrels from emergency stockpiles.

• Gold was little changed with June 2022 contracts for Gold (Comex) (+0.10%) at US$1,925.10.

• Bitcoin (-4.07%)fell to US$43,340 in line with the broader fall in stocks and other risk assets on heightened concerns that risk assets in general could suffer from Fed tightening.

In today's issue...

1. The U.S. Government is Singing a Different Tune to the Fed

2. The Lights Fade in Hong Kong

3. Dubai Becomes a Beacon for Cryptocurrencies Rising Out of the Desert

Market Overview

The U.S. Federal Reserve’s plan to prune its near US$9 trillion balance sheet brings risks for economic growth and could point to more volatility in global markets as the move could potentially tip the U.S. economy into recession.

Meeting minutes of the U.S. Federal Reserve's last policy meeting signaled that the central bank is considering half-point rate increases from here on out and reducing its massive bond holdings at a maximum pace of US$95 billion a month to tighten financial conditions.

Investors are growing increasingly doubtful that the U.S. Federal Reserve can avoid tipping the world’s biggest economy into recession as it focuses on slowing activity to bring down price pressures.

Asian markets fell Thursday with Seoul's Kospi Index (-1.27%), Tokyo's Nikkei 225 (-1.91%), Sydney’s ASX 200 (-0.54%) and Hong Kong's Hang Seng Index (-0.04%) all down in the morning trading session.

1. The U.S. Government is Singing a Different Tune to the Fed

• Even as the U.S. Federal Reserve is warning markets of more aggressive tightening measures, with possible balance sheet runoff as soon as May, the U.S. Treasury Department is warning that the ongoing Russian invasion of Ukraine will have serious economic repercussions for growth.

• With inflation in the U.S. running white hot, and prices increasing at the fastest pace in over four decades, there is mounting pressure on the Fed to do more to reign in prices.

America’s institutions are bets understood by their different roles and checks and balances on each other.

Whereas it is the role of the U.S. Treasury Department to spend money, it’s the U.S. Federal Reserve’s role to enact monetary policy for a strong economy with maximum employment.

While both roles may sound similar, their execution and ideology differ tremendously and there are growing signs that their views on the economic outlook are starting to diverge.

Even as the U.S. Federal Reserve is warning markets of more aggressive tightening measures, with possible balance sheet runoff as soon as May, the U.S. Treasury Department is warning that the ongoing Russian invasion of Ukraine will have serious economic repercussions for growth.

According to a copy of remarks to be made by U.S. Treasury Secretary Janet Yellen before the powerful House Financial Services Committee,

“Russia’s actions, including the atrocities committed against innocent Ukrainians in Bucha, are reprehensible, represent an unacceptable affront to the rules-based global order, and will have enormous economic repercussions for the world.”

The alleged war crimes committed by Russian forces in Ukraine are solidifying resolve by Western nations including the United States, to impose a fresh round of even harsher sanctions on Russia.

The U.S., European Union and Group of Seven industrial nations are coordinating new sanctions on Russia, including a U.S. ban on investment in the country and a ban on E.U. coal imports following discovery of the massacre of civilians by Russian forces in Ukraine.

At the same time, the International Monetary Fund is preparing to cut its global growth forecast from an expansion of 4.4% earlier this year.

Deutsche Bank economists said on Tuesday that they now expect a recession in the U.S. within the next two years, the first major bank to take this view.

In signs that the U.S. Treasury Department is growing increasingly concerned about the strength of the U.S. economy against such strong headwinds, Yellen appears to be hinting to policymakers at the Fed that now may not be the most appropriate time to dial back support for the economy.

To be fair, the Fed has the deck stacked against it.

With inflation in the U.S. running white hot, and prices increasing at the fastest pace in over four decades, there is mounting pressure on the Fed to do more to reign in prices.

More market observers are preparing for a 0.50% rate hike in May, while U.S. Federal Reserve Governor Lael Brainard said that they central bank could begin runoff of its massive US$9 trillion balance sheet as soon as next month.

These measures, against an increasingly uncertain economic backdrop and with growth slowing in China could potentially tip the scales in favor of recession, a risk that neither the Treasury nor the Fed would want to take.

But because rhetoric and resolve have swung to the other extreme, in favor of tightening at the Fed, this may be Yellen’s chance to appeal to a more moderate and deliberate course for monetary policy from the Fed.

2. The Lights Fade in Hong Kong

• Today, fundraising in Hong Kong is a pale shadow of its heyday, with debut offerings, follow-on share sales and convertible bonds raising just US$4.9 billion in the first three months of this year, an 87% drop from the previous year, according to data from Refinitiv.

• In a world that has grown increasingly uncertain, the last thing that global investors want is to double down on uncertainty by going into Chinese shares, whether they’re listed in Hong Kong or not.

From stringent pandemic restrictions to tighter national security laws, the Hong Kong of today is starting to resemble the Shanghai of yesterday, and global investors aren’t sticking around to find out what tomorrow will look like.

Once one of the world’s most vibrant financial centers, the freewheeling capital markets of the fragrant harbor were a beacon for global investors who were looking to cash in on the economic miracle of China with the certainty of western-style rule of law and independent institutions.

Those assumptions have been severely tested from harsh pandemic lockdowns to regulatory actions by Beijing which have compounded losses for Chinese companies listed on Hong Kong’s stock exchange.

Today, fundraising in Hong Kong is a pale shadow of its heyday, with debut offerings, follow-on share sales and convertible bonds raising just US$4.9 billion in the first three months of this year, an 87% drop from the previous year, according to data from Refinitiv.

Not since the 2008 Financial Crisis, has Hong Kong’s capital markets looked so dour and highlights the reluctance by global investor to continue pumping fresh capital into Chinese companies at a time when coronavirus, regulatory uncertainty and the Russian invasion of Ukraine are clouding the outlook.

Foreign investors have already sold about US$4 billion worth of shares traded in China in the first quarter, while Hong Kong’s benchmark Hang Seng Index is down a whopping 30% from its recent high in February.

In a world that has grown increasingly uncertain, the last thing that global investors want is to double down on uncertainty by going into Chinese shares, whether they’re listed in Hong Kong or not.

Successive waves of regulatory crackdowns and a refusal by Beijing to budge on its economically-debilitating lockdowns of entire cities, compounded by the threat of slowing growth have all weighed heavily on investor sentiment and appetite for Chinese shares, regardless of the discount.

Not helping matters has been Beijing’s refusal to condemn Russia’s invasion of Ukraine, making money managers nervous about allocating to Chinese assets, in the event that some of Russia’s global pariah status could spillover to China as well and force liquidations at the most inopportune time.

The draconian pandemic restrictions in Hong Kong, a brain drain by both expatriates and locals and the recent resignations of United Kingdom judges from the territory’s highest court are also seriously undermining the attractiveness of Hong Kong and why global investors stopped over there to pick up Chinese assets.

3. Dubai Becomes a Beacon for Cryptocurrencies Rising Out of the Desert

• Leaders in Dubai now want to create a different type of city, one built in the Metaverse and home to some of the biggest names in cryptocurrency.

• The biggest “whale” in the cryptocurrency exchange arena Binance has chosen to call Dubai home, where it already has about 200 staff spread across three offices in the city.

Having missed the boat on Web 2.0, the Middle East has become a hotbed for the so-called Web3 revolution centered around cryptocurrencies and blockchain.

Nowhere is this willingness to embrace all things crypto more apparent than in Dubai, the shining city sitting on the Persian Gulf that just over two decades ago was nothing more than a sleepy fishing village.

Leaders in Dubai now want to create a different type of city, one built in the Metaverse and home to some of the biggest names in cryptocurrency.

Cryptocurrency firms from all over the world are racing to set up shop in Dubai after it started offering virtual asset licenses, making the Gulf state the latest (and arguably most attractive) jurisdiction to become a haven for the global cryptocurrency industry.

Major cryptocurrency exchanges like ByBit, Crypto.com, FTX and Binance have all made moves to either establish their global headquarters in Dubai, or to gain a foothold in the city, often leaving other jurisdictions like Singapore and Hong Kong.

While Singapore for a time looked like it could potentially have become a digital asset hub, such hopes have since faded as just a handful of firms were approved licenses under its Payment Services Act, and banned advertising of cryptocurrencies to retain investors.

One of the biggest departures has been Binance, who very publicly upped and left Singapore for Dubai which he has said has a “open mindset and a business friendly attitude.”

To be sure, Dubai also has a lot less to lose by doubling down on cryptocurrencies as it did not quite enjoy the status of a global financial center that Singapore and Hong Kong continue to burnish.

In many ways, Singapore has a lot more to lose should things go wrong on its bets when it comes to cryptocurrencies, and even government-owned DBS Bank has walked back plans to offer cryptocurrencies to retail investors that had initially been tabled for the end of this year.

A primary concern for existing financial centers of course is money laundering, and Dubai’s enthusiastic embrace of cryptocurrencies has raised alarm with the Financial Action Task Force, a global money laundering watchdog, which has placed the United Arab Emirates on its “gray list” of countries where enhanced monitoring procedures to prevent the illicit flow of monies is required.

Undeterred, Dubai has rolled out the red carpet to cryptocurrency companies, especially exchanges which provide good and well-paying jobs, as well as attracts the high-skilled workers that Dubai’s economy thrives on.

FTX Europe, the Swiss-based arm of the cryptocurrency exchange said last month it would establish a regional headquarters in Dubai after being granted a license to operate there.

Singapore-headquartered Crypto.com that renamed the famous Staples Center in Los Angeles, added an office in Dubai last week to serve as its Middle East base, but if things tighten further in Singapore, could soon become its global headquarters.

The biggest “whale” in the cryptocurrency exchange arena Binance has chosen to call Dubai home, where it already has about 200 staff spread across three offices in the city.