Hello there,

A terrific Thursday to you as investors start mulling the prospect that inflation has peaked, sending U.S. Treasuries soaring and putting a lid on Asian equities in early trading.

In brief (TL:DR)

• U.S. stocks were a mixed bag on Wednesday with blue chips on the Dow Jones Industrial Average (+0.71%) continuing their ascent while tech heavyweights on the S&P 500 (-0.06%) and the Nasdaq Composite (-1.22%) dragged down those indices.

• Asian markets were mixed on Thursday as the market starts to consider a burgeoning debate around whether inflation has peaked.

• Benchmark U.S. 10-year Treasury yields fell to 2.872% as demand for bonds rose on the prospect that that the worst of inflation may be over (yields fall when bond prices rise).

• The dollar was firmer.

• Oil was flat with May 2022 contracts for WTI Crude Oil (Nymex) (+0.19%) at US$102.75.

• Gold was flat as well with June 2022 contracts for Gold (Comex) (+0.06%) at US$1,956.70.

• Bitcoin (+0.82%) gained to US$41,700 suggesting that the prospect of declining yields and a possible moderation of inflationary pressures could see interest and appetite for the nascent asset class turnaround.

In today's issue...

1. Be Thankful if the Fed Only Delivers a 0.5% Rate Hike in May

2. Let's Netflix and Chill

3. Banking on Cryptocurrencies Proves Lucrative

Market Overview

The Kremlin appears to be taking a leaf out of the playbook of Pyongyang as Russia test fires a nuclear-capable ICBM in a warning to the U.S. and its allies.

But if markets or Western allies are concerned, this was not at all obvious, with Washington responding that the Russian ICBM did not exceed any capability that the U.S. already possessed.

If nothing else, Moscow's test-firing of an ICBM as its troops get bogged down in Ukraine are symptomatic of a regime that is in decline - real power is expressed through having a big stick but not needing to wave it around.

To be sure, Russia always had the capability to nuke targets in the West, having an "additional" ICBM that can do so isn't that big a deal and Western missile defense systems, while a laudable effort, are nothing close to some kind of impenetrable force shield.

Which is why markets are barely budging in response, but paying greater attention to the possibility that inflation may already have peaked.

It may seem disingenuous to believe that inflation is at its nadir but there is a growing view that the post-pandemic surge in demand and rehabilitated supply chains may be slowing the pace of price increases - controversial no doubt, but has been the fuel that is driving a sharp rebound in bonds.

Asian markets were mostly higher in Thursday's morning trading session with Seoul's Kospi Index (+0.59%), Tokyo's Nikkei 225 (+1.29%), Sydney’s ASX 200(+0.27%) in the green while Hong Kong's Hang Seng Index (-0.35%) continued to suffer a bout of selling as global investors grow increasingly concerned about Beijing's overreach into China's tech sector through fresh data laws.

1. Be Thankful if the Fed Only Delivers a 0.5% Rate Hike in May

• Money market managers have fully priced in the prospect of a 0.5% rate hike by the U.S. Federal Reserve at its next policy meeting.

• Median forecast for markets continues to price in a rates hitting between 2% and 2.5% by the end of this year, which is a neutral stance that could possibly engineer a soft landing for the U.S. economy.

With one of the U.S. Federal Reserve’s most hawkish policymakers rattling sabers and threatening a rate hike of as high as 0.75% at the central bank’s next meeting in May, investors are understandably concerned if the rebound in stocks has been premature.

At a virtual presentation to the Council on Foreign Relations on Monday, U.S. Federal Reserve Bank of St. Louis President James Bullard noted,

“More than 50 basis points is not my base case at this point, I wouldn’t rule it out, but it is not my base case here.”

Nevertheless, Bullard also said that the Fed shouldn’t rule out offhand rate increases of 0.75%, especially if it should need to move quickly on inflation.

U.S. stocks immediately buckled on that possibility, but rebounded alongside economic data that proved better-than-expected, especially for housing starts.

At this point, a rate hike of more than 50 basis points in May seems unlikely, at least according to money market traders who have fully priced in such a move by the central bank.

Fed officials including Chairman Jerome Powell have already signaled their openness and preparedness to raise rates in half-point increments if necessary, and money market traders are taking note.

But the repricing in money markets threatens to exacerbate a selloff in bonds, sending yields soaring and putting renewed pressure on equities, regardless of economic data.

For now at least, money markets have not gone the way of Bullard’s forecast of rates hitting as high as 3.5 by the end of this year, with traders betting that borrowing costs are likely to hit 2.28% by the end of 2022, in line with the Fed’s so-called “dot plot” that has rates rising to between 2% to 2.5% – a median course for the U.S. economy as the Fed tries to engineer a soft landing.

2. Let's Netflix and Chill

• Netflix (-35.12%) sees its shares hammered as a drop in subscriber growth has investors worried that worse is in store.

• Company that came to define the streaming market faces headwinds from competitors, the lifting of pandemic restrictions and may need to pivot again to find new sources of growth.

It’s easy to forget that not so long ago, Netflix was a mail order video rental service, before it pivoted to digital streaming and content creation.

Netflix arguably created the streaming business, becoming so indispensable during pandemic lockdowns that the firm’s name has become a verb.

But mimicry is the greatest form of flattery and as more content creators and owners rush to cash in on the increasingly saturated streaming market, it was only a matter of time before some of that market share was taken out of the incumbent Netflix.

On Wednesday, Netflix shed over US$46 billion in market value after grim quarterly subscriber figures saw a loss or around 200,000 subscribers, versus a forecast gain of 1 million.

And the outlook is looking particularly bleak for Netflix, as the firm conceded that it was harder to grow subscriber numbers, while it forecasts shedding another 2 million subscribers in the current quarter.

With the world opening up from pandemic restrictions, Netflix, once considered indispensable to cope with the boredom of lockdowns, is now increasingly looking like an unnecessary luxury in the face of rising costs for essentials.

Netflix is currently suffering from the double whammy of slowing content coming to screens because of delayed filming schedules during the pandemic, as well as increased competition from the likes of Disney+, Amazon Prime Video, Hulu and now Paramount Plus.

With more streaming content providers vying for fewer viewers, Netflix will need to rely heavily on its original content to keep its lead and it’s also ventured into video games to diversify its offering.

Whether or not Netflix can engineer a turnaround remains to be seen, but given its track record of having pivoted from a now-defunct industry, to reinventing a new one, it would be premature to write-off the company whose shares will become increasingly more attractive as they fall.

3. Banking on Cryptocurrencies Proves Lucrative

• Silvergate Capital (+3.34%) sees its shares soar as it delivers outsized quarterly performance versus other Wall Street banks by catering to the growing cryptocurrency industry.

• The bank is still susceptible to volatility in cryptocurrency prices and has seen its shares whipsawed alongside the broader movements in the cryptocurrency market.

While major Wall Street banks have been reporting sharp falls in their profits thanks to a steep reduction in dealmaking and capital raising, a tiny (by Wall Street standards) bank that caters to the crypto crowd has been making coin (no pun intended).

Shares of Silvergate Capital, one of the first few banks to open its doors to cryptocurrency companies that were treated like pariahs by other financial institutions, surged by the most in over a month this week as quarterly earnings came out well ahead of consensus forecasts.

Although 2022 has been a rough year for cryptocurrencies, Silvergate Capital was able to report earnings per share of US$0.79, almost double the average analyst estimate of just US$0.45, according to data compiled by Bloomberg.

Helping things along at Silvergate Capital has been the number of cryptocurrency customers which soared to over 1,500 from a year earlier, an increase of over a third.

Cryptocurrencies have had a rough first quarter, with Bitcoin losing around 7% and Ether around 18%, even though both have rebounded in the second quarter.

Nevertheless, greater institutional interest and participation in cryptocurrencies, as well as copious amounts of venture capital money flowing into the space has helped fuel cryptocurrency deposits at Silvergate Capital to a whopping US$14.7 billion.

Without being hamstrung by the strictures and stiff culture of Wall Street, the La Jolla, California headquartered bank has seen its Exchange Network Leverage program, which helps customers access capital through dollar loans collateralized by Bitcoin, soar to US$1.1 billion.

And earlier this year, the ever Bitcoin-hungry MicroStrategy (-4.69%) confirmed that it had received a US$205 million loan from Silvergate Capital, backed by about US$820 million in Bitcoin using Silvergate’s Exchange Network Leverage program.

Nevertheless, companies involved in the picks-and-shovels trade associated with cryptocurrencies are not immune from the volatility inherent in the nascent asset class.

Shares of companies like MicroStrategy, Silvergate Capital and Coinbase Global (-2.74%), have all swung wildly with the movement in cryptocurrency prices.