Hello there,

A wonderful Wednesday to you as stocks wind downwards, with volatility increasing as the Russian invasion of Ukraine continues to rage.

In brief (TL:DR)

• U.S. stocks were lower Tuesday with the Dow Jones Industrial Average (-1.76%), S&P 500 (-1.55%) and the Nasdaq Composite (-1.59%) all down on risk-off sentiment.

• Most Asian stocks fell Wednesday as the war in Ukraine and sanctions on Russia stoke the cost of commodities including oil, hurting the economic outlook and bolstering demand for sovereign bonds.

• Benchmark U.S. 10-year Treasury yields rose three basis points to 1.76% (yields rise when bond prices fall) but Treasuries remain a haven asset amidst geopolitical uncertainty.

• The dollar retained much of its recent gains.

• Oil surged with April 2022 contracts for WTI Crude Oil (Nymex) (+4.25%) at US$107.81 as U.S. moves to tap strategic reserves failed to ease worries over supplies as penalties mount on resource-rich Russia for invading its neighbor.

• Gold held gains with April 2022 contracts for Gold (Comex) (-0.10%) at US$1,941.80.

• Bitcoin (+1.42%) jumped to US$43,954 as Russian and Ukrainian demand for cryptocurrencies continues unabated and with more investors seeing the value of a censor proof medium of exchange.

In today's issue...

1. Investors Double Down on Bets that Central Banks Won’t Tighten

2. U.S. Stock Sales Collapse as Companies Stay Private Longer

3. Bitcoin Burnishes Safe Haven Chops

Market Overview

The war and increasingly severe sanctions on Russia raise the risk of an economic slowdown and persistent price pressures culminating in a worst-case scenario of stagflation.

That backdrop puts the U.S. Federal Reserve and other key central banks in a bind as they try to fight inflation without derailing growth, with such uncertainty likely to stoke more violent market swings.

Markets have priced out any risk of a half-point March liftoff by the Fed and traders in the U.K. and Europe have also dialed back rate-hike bets.

Asian markets were mostly lower Wednesday with Tokyo's Nikkei 225 (-1.87%), Hong Kong's Hang Seng Index (-0.87%) and Seoul's Kospi Index (-0.02%) down, while Sydney’s ASX 200 (+0.05%) was slightly higher in the morning trading session.

1. Investors Double Down on Bets that Central Banks Won't Tighten

• While most investors still expect the Fed to raise rates by at least 0.25% in March, the pace of rate hikes thereafter is projected to moderate.

• And this could provide an unexpected boost for risk assets in the coming weeks and months, especially given that yields look to be compressed for longer.

Perhaps it was somewhat prescient that U.S. Federal Reserve Chairman Jerome Powell plotted a more nimble policy path for the central bank, given how uncertain the world is today.

Fresh off the pandemic, a tight labor market and robust economic growth and with the fastest pace of price increases in four decades, central bank policymakers had, prior to the Russian invasion of Ukraine, been on course for a dramatic normalization of monetary policy.

These plans however, even with the best intentions, may need to be delayed given soaring energy costs (oil has now shot past US$100) that threaten to derail the economic recovery, with aggressive policy tightening now likely to push economies into recession.

At least that is the position that more investors appear to be taking as government bonds surged yesterday, on increasing bets that the economic fallout from Russia’s Ukraine invasion will push central banks to raise rates and tighten more slowly than previously anticipated.

Germany’s benchmark 10-year bund yield sank below zero again, for the first time in a month as markets reacted to a string of comments from senior European Central Bank policymakers arguing against any dramatic policy shifts until the dust settles on how the Ukraine crisis and Russia’s economic isolation affect the eurozone economy.

Across the Atlantic, the benchmark U.S. 10-year Treasury yield fell to 1.72%, the lowest since late January.

While most investors still expect the Fed to raise rates by at least 0.25% in March, the pace of rate hikes thereafter is projected to moderate.

Rising energy costs thanks to the Russian invasion are giving central banks pause in their hawkish pivot, hiking rates too aggressively at this point may do little to reign in inflation while slowing economic growth further, paving the way towards stagflation (low growth and high inflation).

Economic growth will almost inevitably slow and the need for central banks such as the Fed, to provide liquidity as Russian counterparties increasingly become default risks, could see a prolonged delay to running out the central bank’s balance sheet.

And this could provide an unexpected boost for risk assets in the coming weeks and months, especially given that yields look to be compressed for longer.

2. U.S. Stock Sales Collapse as Companies Stay Private Longer

• Whereas the prospect of policy tightening was already dampening appetite for public offerings, the Russian invasion of Ukraine has since seen fresh U.S. stock offerings slump to their lowest in more than a decade last month.

• While other avenues of capital raising remain available for some companies, including debt or private equity, public stock sales are key to the broader recovery for the U.S. economy.

Even before Russia invaded Ukraine, many companies contemplating a public offering on U.S. exchanges were either choosing to stay private longer, raising capital through other means, or delaying listing plans altogether to cater to the softer market.

Whereas the prospect of policy tightening was already dampening appetite for public offerings, the Russian invasion of Ukraine has since seen fresh U.S. stock offerings slump to their lowest in more than a decade last month.

Initial and secondary public offerings all but collapsed to US$5.95 billion from a year earlier according to data compiled by Bloomberg.

And even where companies have managed to list, most have traded underwater, with as many as half of listing last year trading below their offering price.

The trend is worrying because access to equity financing is a cornerstone of the economy, enabling issuers to fund acquisitions for synergies, plug holes in their balance sheets, or fuel expansion.

Public offerings provide capital and prestige to companies, that helps to improve goods and services offerings thanks to more intense levels of scrutiny and attract and develop talent drawn to the jobs on offer at these listed firms.

Instead, investors have fled to haven assets like gold and U.S. Treasuries as Russia ups the ante in Ukraine and ratchets up the violence of its aggression.

That risk-off sentiment has led to a sharp decline in deal sizes, those companies that are continuing to list are doing so with far more conservative valuations and smaller offerings, while the listings calendar in the U.S. is close to empty.

While other avenues of capital raising remain available for some companies, including debt or private equity, public stock sales are key to the broader recovery for the U.S. economy.

3. Bitcoin Burnishes Safe Haven Chops

• Bitcoin led broad-based gains in cryptocurrencies as digital asset reasserted themselves as havens and emerged as a potential vehicle for ordinary people to get around sanctions, amid the intensifying conflict between Russia and Ukraine.

• Cryptocurrencies have proved at a time of crisis that they are immune to government control and therefore not beholden to any actions and more investors around the world are watching this narrative unfold in real life.

With shells raining down on Ukraine’s second largest city Kharkiv, investors are heading for cover and some have turned to Bitcoin as well as other cryptocurrencies.

Extending a two-day rally, Bitcoin led broad-based gains in cryptocurrencies as digital asset reasserted themselves as havens and emerged as a potential vehicle for ordinary people to get around sanctions, amid the intensifying conflict between Russia and Ukraine.

Part of the demand of course is the near-collapse of the Russian ruble as Western sanctions begin to bite.

Ordinary Russians who have seen their banks and ATMs emptied out of whatever cash that remains have been rushing to convert rubles into anything of value, from electronics to cryptocurrencies as the currency falls by 30%.

The Western freeze of the Russian central bank has hamstrung the ability of Moscow to prop up the ruble and rather than wait for something to be done, ordinary Russians, are buying more cryptocurrencies,

A recent study by the Kremlin suggests that as many as 12% of Russians already own cryptocurrencies, but the true number may be much larger.

Bitcoin pushed past US$44,000 and Ether crossed US$3,000 overnight before retracing breaking above their 50-day moving averages.

Burnishing the censor-proof credentials of cryptocurrencies, even centralized exchanges, which are the most vulnerable to regulatory intervention, have declined to freeze transactions of ordinary Russians, and only to those subject to sanctions.

Cryptocurrencies have proved at a time of crisis that they are immune to government control and therefore not beholden to any actions and more investors around the world are watching this narrative unfold in real life.

While many analysts had long suggested Bitcoin could serve as a useful assets during geopolitical turmoil, that theory had never been proved, until now.

Cryptocurrencies have outperformed amidst increasing volatility that has seen U.S. and European stocks fall and Wall Street’s “fear gauge” the VIX has also spiked to its highest level in weeks.

Speaking to Bloomberg, Mike Novogratz, CEO and founder of cryptocurrency platform Galaxy Digital noted,

“We’ve never had a group of nations in essence confiscate real estate from Russian tycoons, taking a country’s money. That’s why Bitcoin was created, because people don’t trust governments. This is a big deal – in a lot of ways, this is starting the acceleration of de-dollarization of the world.”

Nevertheless, Bitcoin’s correlation with stocks, in particular the S&P 500 remains elevated at 0.55, with 1.0 representing two assets moving in lockstep, according to data from Bloomberg.

But the association of cryptocurrencies with risk assets may have taken a breather for now, as they emerge as a nascent asset class and prove their value in a real world geopolitical crisis.