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Weekend Edition 26-27 March 2022 (10-Minute Read)

Hello there,

A wonderful weekend to you as stocks end higher for the second consecutive week, monetary policy comes into sharp focus and Washington hints to Russians that regime change is needed.

In brief (TL:DR)

  • U.S. stocks closed mostly higher on Friday with the Dow Jones Industrial Average (+1.02%), the S&P 500 (+1.43%) while the Nasdaq Composite (-0.16%) was down a touch as investors grow increasingly concerned over more hawkish posturing by the U.S. Federal Reserve.

  • Asian stocks remained steady Friday while Hong Kong saw profit-taking despite efforts by Beijing to shore up markets with reassurances.

  • Benchmark U.S. 10-year Treasury soared to 2.479% (yields rise when bond prices fall) as early indications suggest an even quickening pace of price increases for March.

  • The dollar held losses.

  • Oil gained with April 2022 contracts for WTI Crude Oil (Nymex) (+1.39%) at US$113.90 as U.S. President Joe Biden calls for regime change in Moscow.

  • Gold was flat with April 2022 contracts for Gold (Comex) (-0.40%) at US$1,959.80.

  • Bitcoin (+0.98%) edged higher to US$44,770 at the midpoint of the weekend, making an effort to test a key technical level of resistance which if breached, could see the benchmark cryptocurrency rise further.

In today's issue...

  1. U.S. Treasury Market is Pricing in Steeper Rate Hikes, Should You?

  2. Beijing Beefs Up Market with Boisterous Rhetoric, Is it Enough?

  3. Bitcoin Closing in on Technical Breakthrough

Market Overview

Expectations are high that U.S. jobs and wages probably kept growing robustly in March and a key inflation measure is likely to have hit a fresh 40-year high this month, factors which will be weighing heavily on the U.S. Federal Reserve at its next policy meeting and increasing the impetus to withdraw monetary stimulus.

To be sure, the American economy doesn't need any more additional liquidity to spur demand, and raising rates is the first necessary step towards a more normal monetary policy, but that could also spell trouble for equity markets and other risk assets.

Asian markets closed mostly higher Fridaywith Tokyo's Nikkei 225 (+0.14%), Sydney’s ASX 200 (+0.26%) and Seoul's Kospi Index (+0.01%) up, while Hong Kong's Hang Seng Index (-2.47%) finished down.

1. U.S. Treasury Market is Pricing in Steeper Rate Hikes, Should You?

  • U.S. Federal Reserve rhetoric becomes progressively more hawkish, hinting at far more aggressive rate hikes and Treasury markets are pricing that in

  • Equity markets remain relatively sanguine about rate hikes, with stocks posting their second consecutive week of gains

Forget about the posturing by central bankers as to where interest rates are headed to next, what matters is whether or not investors believe them.

And right now, it appears that the market believes the U.S. Federal Reserve will get far more serious on rate hikes than expected, prompting a massive selloff in U.S. Treasuries into the weekend.

The yields on the benchmark U.S. 10-year Treasury Note soared to 2.479% on Friday, the highest since May 2019 (yields rise when bond prices fall).

Treasury yields affect the cost of everything from mortgages to student loans not just in the United States, but across the entire world at a time when inflation and growth are not occurring in a uniform manner globally.

Yields have soared in the past week as top U.S. central bankers echoed U.S. Federal Reserve Chairman Jerome Powell’s recent comments that the Fed would need to step up its tightening of monetary policy.

That has raised the specter of a 0.50% rate hike at the Fed’s next rate-setting meeting.

But expectation of rate hikes don’t typically affect yields in isolation, higher borrowing costs usually serve as a headwind for risk assets as well and thus far, there’s no indication that equity markets are pricing in such an aggressive pace of tightening.

Into the weekend, major indices in the U.S. and Europe notched gains, albeit modest ones, although the more rate-sensitive tech sector did mark a slight decline.

Part of the reason of course is the lack of liquidity in Treasury markets, leading to outsized shifts in yield – there just isn’t a whole bunch of volume to cater for large trade sizes without moving the market.

That lack of liquidity is leading to more visceral swings in Treasury yields and that’s why for now at least, the equity markets haven’t responded in like manner.

While the Fed has communicated a more hawkish turn, even to the point of potentially becoming punitive, the reality is that it’s just too early to call right now.

The prospect of peace in Ukraine is increasing as Moscow is finding itself bogged down and appears to be in a face-saving move to redefine its victory conditions to just the eastern portions of Ukraine which it’s occupied for almost a decade now.

That could potentially pave the way for peace in Ukraine, rebuilding, and a return of the country’s supply of essential food crops such as wheat and sunflower oil.

But even if peace is wrought in Ukraine, the West hasn’t laid down the necessary preconditions for Russia to return to the market with its natural gas and oil – a factor which is continuing to put pressure on prices and stoke the fires of inflation.

Looking at equities last week, it appears that investors aren’t necessarily betting that the Fed is likely to strangle markets, with both the Nasdaq Composite and S&P 500 recording their second consecutive week of gains.

The Treasury markets may tell one story, but it’s hardly the entire one.

2. Beijing Beefs Up Market with Boisterous Rhetoric, Is it Enough?

  • Beijing pledges to maintain economic "stability" without necessarily defining what that stability looks like, Chinese shares have rebounded sharply

  • Range of challenges remains for China bulls, global investors have nonetheless withdrawn US$6 billion from Chinese equities

Up till last week, investors in Chinese equities have had a relatively hard time this past year.

Many global investors, shaken by everything from regulatory crackdowns by Beijing, to potential delisting of Chinese companies from U.S. exchanges have thrown in the towel, with some US$6 billion of outflows from shares of Chinese firms in the first three months of this year alone.

In a year where Chinese President Xi Jinping looks to coronate himself as leader-for-life, a flagging stock market is hardly the sort of red backdrop that he would like to have that ceremony being held under.

For Beijing, the only red should be on the flag, and not the Shanghai stock market’s ticker, which is why last week, China’s top economic tsar, Vice Premier Liu He stepped forward in a rare public intervention to shore up confidence in the markets.

And while the benchmark CSI 300 index which tracks the largest listed companies in Shanghai and Shenzhen rallied in response to Liu’s reassurances, China’s markets are far from out of the woods.

Confidence is a tricky thing, once lost, takes time to rebuild.

And in China’s case, there are just too many things going on at once.

From a debt crisis in China’s systemically important real estate sector to a crackdown on the private sector in general and Chinese tech firms in particular, there’s just so many things you can do to flog an economy before it decides to give up the ghost.

Exacerbating the challenge of turning sentiment around is the continued ill-advised lockdowns of entire cities, some of which are key to China’s manufacturing base, in an effort to stem the tide of coronavirus infections.

In comments to China’s financial stability and development committee, Liu’s words were also long on rhetoric and short on detail, providing cold comfort for investors who are looking for more substantive reassurances that the worst is over for the socialist “tweaking” of the world’s second largest economy.

Liu reminded investors of China’s goal to achieve economic stability, but “stability” does not equate to growth or a return to more free market principals, free from arbitrary regulatory actions.

Making matters worse, Beijing doesn’t actually hold much sway on whether its firms can continue to be listed on American exchanges – Washington does.

And while the People’s Bank of China can create more accommodative policy conditions, there’s a limit to how dovish it can afford to be given that the U.S. Federal Reserve is expected to raise rates aggressively, which would draw global investors to the dollar instead of Chinese assets.

Even if Liu’s talk came with a strong set of concrete measures to shore up the economy, the recent rebound in Chinese shares may be more likely a case of seller exhaustion, and less likely a durable recovery.

In this case, talk really is cheap, but it doesn’t hurt.

3. Bitcoin Closing in on Technical Breakthrough

  • Bitcoin has tested another key level of resistance at US$45,300 and could possibly breakout to US$50,000 purely based on technicals

  • Technical factors aside, sentiment remains mixed because of macro factors, including central bank tightening, the ongoing war in Ukraine and overall declining risk appetite

Cryptocurrencies have done relatively well this past week, all things being considered.

Rising alongside equities, Bitcoin is well above US$40,000 and taking efforts to test a key technical level of resistance at US$45,300.

Chart watchers are suggesting that Bitcoin is tracing a pattern that could see the benchmark cryptocurrency build on recent gains, forming a so-called pennant that suggests a momentum tailwind which could see it head towards US$50,000.

Using a popular technical analyst technique of Fibonacci extensions, Bitcoin’s performance over the past several months suggest that targets of between US$50,450 and US$54,000 are now in play.

Nevertheless, market sentiment continues to be weak, especially with the prospect of a tightening U.S. Federal Reserve monetary policy.

And policy tightening could feature more strongly than technical indicators in the coming week as even the narrative of cryptocurrencies being used by ordinary Russians to bypass sanctions, appears to be losing steam.

Examining flow data from blockchain analytics firm Chainalysis suggests that Russian ruble-cryptocurrency trading pairs on exchanges appears to be in decline, even as European regulators insist that Russians are using cryptocurrencies to evade sanctions.

Chainalysis data reveals that as recently as March 18, ruble-denominated cryptocurrency trading volume had dropped by more than half its recent peak of close to US$70 million on March 7.

Part of the reason of course is that Russians looking to trade in cryptocurrencies weren’t doing it to trade per se, they were looking to spirit money out of the country and away from Russian banks.

Ruble-denominated cryptocurrency trading isn’t even a significant source of volume either, at an estimated US$7.4 million, ruble trading volume only forms a fraction of global trading volume.

But that probably doesn’t tell the full story either because ruble-cryptocurrency trading pairs have never been popular to begin with, unlike dollar-backed stablecoins.

In all likelihood, Russians looking to leverage cryptocurrencies would have bought Bitcoin, Ether and stablecoins, but aren’t really looking to trade.

And with liquidity so low in ruble-crypto trading pairs anyway, it makes more sense for most Russians to buy and hold, which has little impact on price.



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