Hello there,

A happy Monday to you as most markets remain closed for the Easter long weekend and Tuesday's return to the trading desk a true reflection of the broader 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 ahead of the Easter break.

• Asian markets declined Monday as a jump in energy costs again highlighted that inflation concerns are weighing on the global economy.

• Benchmark U.S. 10-year Treasury yields rose about three basis points to 2.86% on the prospect of rapid U.S. Federal Reserve monetary tightening to curb price pressures (yields rise when bond prices fall) when markets reopen on Tuesday.

• The dollar climbed amid a cautious mood in Asian trading.

• Oil advanced with May 2022 contracts for WTI Crude Oil (Nymex) (+0.72%) at US$107.72 on continued supply concerns.

• Gold rose with June 2022 contracts for Gold (Comex) (+0.59%) at US$1,986.50 as uncertainty regarding the state of geopolitics weighs on sentiment.

• Bitcoin (-3.53%) fell to US$38,943 on thin volumes as traders remain away from their desks.

In today's issue...

1. U.S. Treasuries have a friend in Tokyo

2. War & Inflation Will Hit Corporate Profits and the Economy

3. Bitcoin’s Price Unreflective of its Potential

Market Overview

China’s Covid-linked restrictions are snarling supply chains and stoking global inflation pressures which were already exacerbated by disruptions to commodity flows due to the war and Russia’s isolation.

Concern is growing that the U.S. economy faces a downturn from the U.S. Federal Reserve's pivot toward aggressive policy tightening to contain the cost of living.

Asian markets were lower on Monday with Seoul's Kospi Index (-0.19%) and Tokyo's Nikkei 225

(-1.83%) down, while Hong Kong and Sydney were closed for the Good Friday holiday.

1. U.S. Treasuries have a friend in Tokyo

• With a staggering US$1.3 trillion worth of U.S. Treasuries, Tokyo is the biggest backer of America after the U.S. Federal Reserve.

• Japanese appetite for Treasuries could be a huge boon for U.S. equities which have been hammered on the prospect of policy tightening and soaring yields.

Contrary to popular belief, the biggest creditor of the United States (other than itself), is not China, but Japan.

With a staggering US$1.3 trillion worth of U.S. Treasuries, Tokyo is the biggest backer of America after the U.S. Federal Reserve.

And with Japan sticking to an accommodative monetary policy, a weakening Japanese yen relative to the dollar will make U.S. Treasuries even more appealing with Japanese investors looking primed to boost purchases of U.S. debt.

Japanese appetite for Treasuries could be a huge boon for U.S. equities which have been hammered on the prospect of policy tightening and soaring yields.

Some of Japan’s biggest investors are also some of the most conservative, with life insurers and pension funds likely to reaffirm their position as the biggest foreign holder of U.S. debt, after heavy selling of Treasuries in recent months.

Although yields on Japanese government bonds have climbed to 6-year highs, the premium offered by U.S. Treasuries has soared even more as the monetary policy of the Japanese and American economies diverges.

The yen is already trading at a 20-year low to the dollar, making dollar-denominated assets far more attractive to Japanese investors and with Japanese life insurers nursing total assets of over US$3 trillion, there is plenty of dry powder to move Treasury yields.

And if the buying is set to start soon, that could put a lid on how much more Treasury yields have left to run, and potentially provide an incentive for more yield-hungry risk-taking in other assets like U.S. equities.

2. War & Inflation Will Hit Corporate Profits and the Economy

• With reporting season now under way, just how badly American companies listed on the S&P 500 have been hit by a quarter marked by supply chain woes, soaring commodity costs and conflict in Ukraine, will soon become apparent.

• Although revenues at S&P 500 companies have continued to grow, high inflation and sharp increases in energy prices have crimped margins.

Like watching a car crash in slow motion, a combination of factors look set to roil the otherwise ebullient mood for U.S. equities – from conflict to costs, once fat margins may soon be squeezed.

With reporting season now under way, just how badly American companies listed on the S&P 500 have been hit by a quarter marked by supply chain woes, soaring commodity costs and conflict in Ukraine, will soon become apparent.

Data from FactSet suggests that the companies which have come to represent the American economy are set to report average earnings per share growth of just 5.2%, a sharp pullback from the 32% growth in the fourth quarter of last year and the most sluggish pace of expansion since the final three months of 2020, when the pandemic was raging.

Although revenues at S&P 500 companies have continued to grow, high inflation and sharp increases in energy prices have crimped margins.

The energy sector has been the standout of the S&P 500, as surging oil prices have helped boost revenue and earnings, with the industry forecast to report a whopping 255% earnings growth and revenue predicted to rise by 45% compared to a year earlier.

If forecasts for the past quarter are on target, this would only be the third time in the last three decades that contracting net margins met double-digit sales growth, with the last two being recessionary periods in 2008 and the fourth quarter of 2011, according to Goldman Sachs.

That all is not well has been reflected by economically-sensitive bank stocks, with JPMorgan Chase (-0.93%), Citigroup (+1.56%), Goldman Sachs and Morgan Stanley (+0.75%) all reporting declines in profits as dealmaking activity slowed and lenders bolstered provisions for potential credit losses.

3. Bitcoin's Price Unreflective of its Potential

• As the U.S. Federal Reserve raised interest rates, Bitcoin trading volumes on major cryptocurrency exchanges started to subside as well.

• What’s interesting though is that while the trading volumes for Bitcoin have receded, its price hasn’t move all that much, trading within a razor-thin band that straddles US$40,000, with a channel between US$37,500 and US$45,700.

It’s been said that when the tide washes out, you can see who’s been swimming without shorts.

And now with the prospect of policy tightening by the world’s major central banks on the horizon, those who were trading Bitcoin as opposed to investing in it for the long-term, are becoming more apparent.

As the U.S. Federal Reserve raised interest rates, Bitcoin trading volumes on major cryptocurrency exchanges started to subside as well.

According to data compiled by FRNT Financial, the aggregate 30-day moving average volume for Bitcoin across Coinbase, Bitfinex, Kraken and Bitstamp is at its lowest since August 2021.

And over the past month, the aggregate daily volume on those same exchanges was just US$1 billion, or almost 60% lower than the US$2.57 billion that changed hands for Bitcoin in May 2021.

What’s interesting though is that while the trading volumes for Bitcoin have receded, its price hasn’t move all that much, trading within a razor-thin band that straddles US$40,000, with a channel between US$37,500 and US$45,700.

A quick analysis of the Bitcoin blockchain also reveals that traders of Bitcoin are increasingly becoming “hodlers” with around 75% of the cryptocurrency held in illiquid wallet addresses that are associated with long-term holding as opposed to short-term trading.

Which means that the swings in Bitcoin’s price that are visible, reflect a small, but psychologically-significant trading minority which are more susceptible to macroeconomic uncertainty, including everything from soaring yields to rising interest rates.

Bitcoin exchange outflows last week reveal more “hodlers” as opposed to traders as well, with some US$1.2 billion being taken out of circulation, compared with around US$532 million from a week earlier.

Part of the reason for this increase in “hodling” could be that more investors are subscribing to the narrative that Bitcoin serves as an inflation hedge, in which case as more supply is taken out of circulation, stuffed into long-term cold wallets (unconnected to the internet), prices could rise.