Hello there,

A fantastic Friday to you as markets flounder into the Easter Weekend with Beijing failing to deliver on proposed stimulus and concerns over tightening monetary policy overhanging sentiment.

In brief (TL:DR)

• U.S. stocks ended lower on Thursday with the Dow Jones Industrial Average (-0.33%), the S&P 500 (-1.21%) and the Nasdaq Composite (-2.14%) all down.

• Asian stocks fell in Asia as China unexpectedly against cutting a key policy rate to support an economy hamstrung by Covid lockdowns.

• Benchmark U.S. 10-year Treasury yields jumped 13 basis points to 2.83% Thursday (yields rise when bond prices fall).

• The dollar rose against all its Group-of-10 peers, with the yen struggling.

• Oil rose with May 2022 contracts for WTI Crude Oil (Nymex) (+2.59%) at US$106.95 as Russia conducted air raids and missile strikes across Ukraine in retaliation for the sinking of the Moskva battlecruiser.

• Gold was lower with June 2022 contracts for Gold (Comex) (-0.49%) at US$1,974.90.

• Bitcoin (-3.47%) fell to US$39,983 alongside U.S. equities (at the time of writing) but is likely to rebound over US$40,000 again as has been the regular habit over the past week, every time it dips below the key level of support.

In today's issue...

1. As Goes Goldman Sachs So May the Economy

2. Are investors pricing the Fed’s path wrongly?

3. Bitcoin Bounces Briefly Over US$41,000

Market Overview

The gyrations in bond markets remain center stage for investors, reflecting the ebb and flow of concern over when inflation will peak and the potential economic damage from tighter monetary policy across much of the world.

In Europe, policy makers are forming a consensus around raising rates in the third quarter to tackle record inflation, according to people familiar with the matter.

The Asian weakness follows a technology-led retreat in U.S. shares on concern about faster inflation and aggressive Federal Reserve monetary tightening.

Asian markets were mixed on Friday with Seoul's Kospi Index (-0.72%) and Tokyo's Nikkei 225 (-0.64%) down, while Hong Kong's Hang Seng Index (+0.67%) and Sydney’s ASX 200 (+0.59%) were up in the morning trading session.

1. As Goes Goldman Sachs So May the Economy

• Take global banking giant Goldman Sachs for instance, which saw a whopping 42% drop in profits in the first quarter, as the first sign of trouble.

• Overall capital raising activity in the first quarter of this year has slowed, and Goldman Sachs is hardly alone in suffering a major drop in profit from its lucrative dealmaking unit.

It’s been said that an experienced farmer knows well in advance what the next season is likely to bring because Mother Nature provides plenty of signs.

From the early departure of specific birds to the subtle change in humidity, being successful in agriculture is all about paying attention to the signals that the natural world provides.

And perhaps the same goes for markets, with the first signs that all is not well in the global economy.

Take global banking giant Goldman Sachs for instance, which saw a whopping 42% drop in profits in the first quarter, as the first sign of trouble.

While the drop in profits at Goldman Sachs was smaller than analyst forecasts, the bigger concern is how equity issuance came to an almost standstill as the prospect of tighter U.S. Federal Reserve monetary policy was met with the Russian invasion of Ukraine.

Overall capital raising activity in the first quarter of this year has slowed, and Goldman Sachs is hardly alone in suffering a major drop in profit from its lucrative dealmaking unit.

JPMorgan Chase (-0.93%), the first major Wall Street bank to report earnings for the first quarter also saw investment banking revenue drop by 32%, comparable to the 36% fall in similar revenues experienced by Goldman Sachs.

Although Wall Street had braced itself for a slowdown in dealmaking as pandemic-era stimulus measures wound down, it has been worse than expected, which some executives are attributing to Russia’s invasion of Ukraine and general risk aversity.

But it also means that companies looking to fund expansion or raise capital are either choosing to delay such endeavors, given the soft market conditions, or postpone them indefinitely, which does not portend well for the overall health of the economy.

Companies typically look to raise capital through share issuances or acquisitions when they have an optimistic view on economic conditions and are looking to grow, whereas a significant fall in dealmaking suggests that the outlook is far less sanguine than current data suggests.

Instead, it looks like more American companies are seeking to preserve cash, dialing back on expansion plans and capital spending, or are simply not as bullish on the current market conditions for capital raising.

2. Are investors pricing the Feb's path wrongly?

• BlackRock strategists suggest the Fed will raise borrowing costs to around 2% this year, but not much further because an overly aggressive path of rate hikes to combat soaring inflation may actually backfire.

• BlackRock believes the Fed will live with inflation, because much of that has to do with supply constraints rather than demand.

By now, most investors have braced themselves, at least mentally, for a sharp and aggressive tightening by the U.S. Federal Reserve, which has sent risk assets lower and Treasury yields soaring.

But could the market be wrong?

Possibly, at least according to some strategists at the world’s biggest asset manager BlackRock (-3.85%) who are challenging bets that the Fed will raise rates to around 3% this year.

Instead, BlackRock strategists suggest the Fed will raise borrowing costs to around 2% this year, but not much further because an overly aggressive path of rate hikes to combat soaring inflation may actually backfire.

BlackRock Investment Institute estimates that had the Fed brough inflation last year down to its target 2%, unemployment could have soared to almost 10%, based on the historical relationship between inflation and employment – a scenario that the Fed would not want.

Rather, BlackRock believes the Fed will live with inflation, because much of that has to do with supply constraints rather than demand.

And there may be some evidence to support BlackRock’s view.

Last month, U.S. Consumer Price Index data rose at its fastest pace since 1981, but when volatile food and fuel prices were stripped out, so-called “core inflation” was actually slowing, thanks to a moderation in the increase in used vehicle prices.

The Fed’s latest projections for rate hikes also seems to suggest that while the central bank is serious on inflation, it’s not prepared to destroy demand or jobs just to keep prices in check, especially if inflation should ultimately prove to ease later on.

It’s entirely possible then, that markets have swung too far to the opposite side of the curve, with fears of overly aggressive tightening by the Fed triggering a premature selloff in bonds especially near-dated Treasuries, that briefly caused the yield curve to invert earlier this month.

A yield curve inversion is often seen as a warning sign, with near-term borrowing yielding more than long-term borrowing, suggesting that investors believe the Fed won’t just kill inflation, but economic growth as well.

To be fair, the Fed has a lot to take in, and before its rate hike in March, U.S. Federal Reserve Chairman Jerome Powell did emphasize the need for the central bank’s “nimbleness” in adjusting policy to the ever-changing economic circumstances.

Right now, there are growing signs that the risks for recession are increasing, versus the risk of runaway inflation.

As first quarter corporate earnings start coming in this month, investors will have a clearer picture of what the economic outlook looks like, and so far, it’s not been great.

Some of Wall Street’s biggest banks have reported significant falls in revenues from capital-raising activities, a sure sign that businesses are less optimistic of the outlook than a year ago, and denting profits for banks which are generally favored to perform in a strong economy.

Investors are also shifting into consumer essentials and utilities as they build increasingly defensive portfolios, yet another signal that sentiment is leaning towards the downside.

While the Fed isn’t driven by what happens in the market, it does take into consideration a slew of data when it comes to determining policy, and does not obsess about inflation alone, even if that appears to be the biggest challenge at the moment.

It’s entirely possible BlackRock may be right, in which case a strong reversal in languishing sectors of the stock market might be in the offing.

3. Bitcoin Bounces Briefly Over US$41,000

• Bitcoin rebounded briefly over US$41,000 alongside equities as China indicated that it was set to loosen monetary policy and as risk assets saw a broad-based rebound, but the recovery was short-lived.

• Not helping matters is that Bitcoin’s correlation with tech stocks is stronger than ever, and so long as the latter remains sensitive to rate hikes, so will the cryptocurrency.

Bitcoin rebounded briefly over US$41,000 alongside equities as China indicated that it was set to loosen monetary policy and as risk assets saw a broad-based rebound, but the recovery was short-lived.

While technical traders who watch charts suggest that a short-term rebound to as high as US$51,000 remains possible, this also assumes that the benchmark cryptocurrency is able to break above its 200-day moving average at US$48,000 and so far, there appear to be few signs of that happening.

Investors remain concerned that central bank policy will play a keener role with cryptocurrencies, and despite plenty of evidence that at current prices, Bitcoin has been oversold, it still remains largely rangebound between US$37,500 and US$47,500, with few (if any) catalysts to take in either direction.

Not helping matters is that Bitcoin’s correlation with tech stocks is stronger than ever, and so long as the latter remains sensitive to rate hikes, so will the cryptocurrency.

But Bitcoin’s strong correlation with tech stocks cuts both ways, enjoying rallies and retreats based on rate-sensitive sentiment.

Nevertheless, China’s State Council, which hinted that it will be rolling out measures to support the country’s moribund economy, has provided some tailwinds for Bitcoin and blockchain flow data seems to suggest that there is evidence of investors “buying the dip.”

And while Bitcoin makes headlines as more institutional participation makes it susceptible to macro factors, other cryptocurrencies, referred to as “altcoins” appear to be breaking their correlation with the benchmark digital asset.

Over the past month, Ether, which has until fairly recently had a dependable correlation with Bitcoin, has somewhat “decoupled” itself, with Ether rallying 24% over the past month versus just 7% for Bitcoin.

Nevertheless, momentum traders may be the best placed to ply the cryptocurrency markets in their current conception, with rallies likely to be as short-lived as retreats.

Bitcoin has dipped below US$40,000 on repeated occasions this week, with some suggesting that it will head lower to its secondary level of support, a scenario that has thus far failed to play out.

Each time Bitcoin has dipped below US$40,000, it has rebounded soon after to well over the psychologically-significant level of resistance and support.

In that sense, neither bulls nor bears have fully captured the narrative when it comes to Bitcoin.