Hello there,

A terrific Thursday to you as markets turn upwards and oil prices come down as the Biden administration greenlights U.S. oil companies to do whatever it takes to bring more supply on tap.

In brief (TL:DR)

• U.S. stocks recovered on Wednesday with the Dow Jones Industrial Average (+2.00%), S&P 500 (+2.57%) and the Nasdaq Composite (+3.60%) all up.

• Asian stocks joined forces in a global equities rebound Thursday as dip-buyers leaned into speculation that weeks of market gyrations may have priced in the economic impact of the conflict in Ukraine.

• Benchmark U.S. 10-year Treasury yields rose to 1.93% (yields rise when bond prices fall) as risk appetite increased.

• The dollar steadied after sliding on the improved risk appetite.

• Oil pared a pullback with April 2022 contracts for WTI Crude Oil (Nymex) (+0.59%) at US$109.34.

• Gold held losses after falling from a 19-month high with April 2022 contracts for Gold (Comex) (-0.53%) at US$1,977.60.

• Bitcoin (+4.71%)rose to US$41,000 after a sharp rally in digital tokens sparked by optimism about an impending U.S. overhaul of cryptocurrency oversight that could provide regulatory clarity for investors before retracing below US$40,000 again.

In today's issue...

1. Airlines Face Fresh Headwinds from Geopolitical Challenges

2. A Shift to Clean Energy Also Requires Russian Nickel

3. The World’s Biggest Hedge Funds are Betting on Cryptocurrencies

Market Overview

Reversals are the latest twist in volatile markets as investors assess the risk of an inflation shock that could derail global growth against the continuing war in Ukraine.

Uncertainty prevails over the sustainability of the surge in commodity prices sparked by Russia’s international isolation since its invasion of Ukraine.

Market sentiment picked up Wednesday after a top foreign policy aide to Ukraine’s president said the country is open to discussing Russia’s demand for neutrality as long as it’s given security guarantees, potentially creating an expedited path to end hostilities.

Asian markets rose Thursday with Tokyo's Nikkei 225 (+3.91%), Sydney’s ASX 200 (+1.36%), Hong Kong's Hang Seng Index (+1.87%)and Seoul's Kospi Index (+2.16%) were all up.

1. Airlines Face Fresh Headwinds from Geopolitical Challenges

• The world’s airlines are now facing fresh headwinds from the Russian invasion of Ukraine and the biggest closure of airspace facing airlines that could prove even more severe than the pandemic.

• Investors rotating out of battered tech stocks towards value stocks like airlines and hospitality may be in for a surprise – higher energy costs affect consumption across the board and the demand side of the equation may mean that airline stocks have more to fall.

“If you want to be a millionaire, start with a billion dollars first and launch a new airline.”

– Sir Richard Branson

Having survived pestilence, the world’s airlines are now facing fresh headwinds from the Russian invasion of Ukraine and the biggest closure of airspace facing airlines that could prove even more severe than the pandemic.

With Russia’s invasion of Ukraine already sending the price of oil skyrocketing to a 14-year high, putting pressure on margins, an unprecedented series of flight tit-for-tat flight bans around the world is putting pressure on barely recovering airlines.

Airline shares, especially European airlines, have been hit hard by the latest global crisis in as many years.

While airlines may be used to dealing with geopolitical shocks, the industry which is estimated to have lost over US$260 billion from the pandemic, may now be at risk of a hit to demand for post-pandemic travel from the Russian invasion.

Even if demand returns, the bigger challenge will be the soaring price of oil, which is already proving to be a financial problem for many European airlines which changed their fuel hedging policies after being stung by the collapse in the price of oil and flying demand as a result of the pandemic.

Many airlines either abandoned their hedging policies altogether, or reduced the amount of their hedges, believing that the low price of oil would persist, only to be greeted with prices hitting close to US$140 a barrel.

And even if airlines hedge going into the future, these hedges will cost, because traders continue to believe that oil prices could hit as high as US$200.

The last time oil was this high was in 2008 when the U.S. Federal Reserve and other major central banks hadn’t started flooding the financial system with liquidity yet.

This time may be different, as more dollars chase less product, there is every prospect that oil could continue to rocket higher unless clear and readily sources to make up for Russia’s shortfall appear.

And while some airlines may fair better than others, a Moody’s estimate has Ryanair (+5.17%) and Lufthansa (+12.02%) hedged at 80% and 65% respectively for the next 18 months at prices between US$60 and US$73 a barrel, the demand side of the equation may be the bigger problem.

With Russia and the U.S. and Europe closing off their airspace to each other, European flights headed to Asia will need to fly longer routes instead of taking a shortcut over Ukraine, Iran or Russia, increasing fuel burn.

Investors rotating out of battered tech stocks towards value stocks like airlines and hospitality may be in for a surprise – higher energy costs affect consumption across the board and the demand side of the equation may mean that airline stocks have more to fall.

2. A Shift to Clean Energy Also Requires Russian Nickel

• Renewable energy stocks have been among the few gainers in otherwise volatile markets, since Russia invaded Ukraine.

• So far, investors haven’t poured into electric vehicle or battery makers, but the sector is already richly-valued and prices remain vulnerable to slowing sales as inflation rises.

The logic is seductive in its simplicity – since oil is now skyrocketing, investors should start looking out for those companies involved in the renewable energy business, in particular electrification of vehicles.

But the inconvenient reality is that much of that electrification relies on an industrial metal that in recent days has soared to US$100,000, a ton and which Russia and Ukraine are major suppliers of – nickel.

Renewable energy stocks have been among the few gainers in otherwise volatile markets, since Russia invaded Ukraine, for instance Vestas Wind Systems (-6.33%) which makes wind turbines, has risen 37% since hitting a 20-month low just two weeks ago.

Both retail investors and hedge funds are pouring into clean energy stocks, according to data from VandaTrack on the assumption that demand for renewable-energy installations will surge as Europe learns to wean itself off Russian gas and oil.

But the problem with buying into that narrative is that many of the commodities that renewable energy companies rely on come from Russia and Ukraine, including nickel, iron and coal.

Nickel is an essential ingredient in batteries and while the recent surge in the metal’s price on the London Metal Exchange was mainly due to short-covering by a Chinese firm – Chinese nickel giant Tsingshan now faces a US$8 billion trading loss for betting against the price of nickel rising – the metal’s price is likely to remain elevated because of Western sanctions against Russia and Ukraine’s inability to access its ports.

The London Metal Exchange is currently closed to allow for the orderly settlement of trades, but when it does reopen, nickel is still likely to be expensive – it was already at a 10-year high even before the Russian invasion.

While Russia supplies only around 5% of the world’s nickel, it makes up a whopping 17% of high-quality nickel production, which is a key component of electric vehicles, because they are less likely to explode or catch fire.

The rising cost of nickel will crimp performance at big battery makers including LG Energy Solution (+4.02%), Panasonic (+6.98%), and Contemporary Amperex Technology (+4.91%) and be challenging for major consumers of such batteries, including Tesla (+4.19%) and Volkswagen (+10.66%).

So far, investors haven’t poured into electric vehicle or battery makers, but the sector is already richly-valued and prices remain vulnerable to slowing sales as inflation rises.

3. The World's Biggest Hedge Funds are Betting on Cryptocurrencies

• Some of the world’s biggest names in the hedge fund industry are doubling down on their cryptocurrency bets and now others are following suit.

• Larger trading volumes are needed to allow hedge funds to buy and sell without necessarily affecting the price and as cryptocurrency trading liquidity increases, it allows hedge funds to place larger bets.

Some of the world’s biggest names in the hedge fund industry are doubling down on their cryptocurrency bets and now others are following suit.

While Brevan Howard Asset Management and Paul Tudor Jones, the billionaire who runs Tudor Investment, were early adopters of cryptocurrency trading, they are now looking to expand their activities.

In January this year, Brevan Howard launched a cryptocurrency hedge fund that will now begin accepting outside investors, with the fund deploying multiple strategies, including directional bets on Bitcoin, Ether and other digital tokens, while also looking to arbitrage between tokens.

Brevan Howard’s cryptocurrency division BH Digital, created last September, already manages over US$250 million and has 12 portfolio managers, while Howard himself was an early investor in cryptocurrencies, blockchain and token-related businesses.

Early Bitcoin advocate Paul Tudor Jones has also been increasing his stake in Bitcoin, expanding that reach to other cryptocurrencies to hedge against rising inflation.

Howard and Tudor Jones may be the earlier high-profile names to have thrown their hat in the cryptocurrency ring but there are signs that Wall Street is warming up to the space as it continues to grow and provide sufficient critical mass for trading.

There is however a major difference between cryptocurrency trading and traditional activities in stocks or other commodities – most hedge funds are avoiding shorting cryptocurrencies, on concerns that they may shoot up in price suddenly, leading to large, crystalized losses.

Because the cryptocurrency space is led by retail traders and investors, the lesson of Melvin Capital which nursed massive losses after shorting the stock of GameStop (+2.12%) and triggering the meme stock craze will necessarily force hedge funds to be more cautious when it comes to short positions.

Most hedge funds for now have focused on buying tokens and trading futures and Coinbase Global (+10.48%), the largest U.S. cryptocurrency exchange claims that institutional investors as a whole traded US$1.14 trillion in cryptocurrencies last year, up almost 10 times from the US$120 billion the year before.

Larger trading volumes are needed to allow hedge funds to buy and sell without necessarily affecting the price and as cryptocurrency trading liquidity increases, it allows hedge funds to place larger bets.