The cracks are starting to show…

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The unravelling of the Terra-Luna stablecoin ecosystem caused a panic sell-off in the cryptocurrency market and even dragged down the stock markets when investors were getting spooked.

This may not be the last episode of panic and drama that we will see in the weeks ahead. Typically, when the US Federal Reserve embarks on a hiking cycle, asset markets which have been enjoying the boost of cheap money will start to crack.

In traditional financial markets, this usually happens in emerging market countries which have not implemented sound policies but just took advantage of the easy credit conditions when interest rates are ultra-low.

All boats float in the rising tide, and with the tide receding, the punishment that will be meted by markets is often fast and swift.

Any money-making schemes that looked too good to be true but were working in the past, will likely start to fail in the weeks ahead. Tread carefully.

TRADING TIP

The market is not out to get you…

Though it may feel like it when your trades are all going against you for no good reason, the market doesn’t really know or care about your trades. It is not out to get you!

The only course of action when you start to feel that way, though, is to reduce your risk and regroup. Cut the low conviction trades and focus just on the ones that have been working.

Live to fight another day and there will always be more opportunities just around the corner.

DAY AHEAD

Nothing noteworthy on the horizon today. Risk sentiment will be driven by Federal Reserve official, Mester. (current voter, hawkish) who is scheduled to speak today.

TRADING PLAN

1. Currencies:

EUR — Short the EUR. EUR continues to weaken..

2. Commodities: Uranium & Energy — Stay the course, but caution is warranted as the market is now in full risk aversion mode.

3. Stocks:

US Stock Index: The US stock market had yet another volatile day. Stock futures all traded lower due to the panic in the cryptocurrency market but recovered as the trading session in US hours progressed. Intraday swings were wide as investors jostled to adjust their positions. Deep losses of almost 2% in the major indices were trimmed towards the end of the day and that is a good improvement in risk sentiment. The short-term bottom might have been made if the recovery continues today.

Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.

Key risks: US Federal Reserve policymakers’ comments will dictate how the market perceives future policy path for now. The Ukraine-Russia war rages on, but the market impact is limited for now.

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WHAT HAPPENED YESTERDAY

Market Movement As of New York Close 12 May 2022
  • US Producer Price Index (PPI) showed that wholesale prices for manufacturers increased 11% on an annual basis (vs 10.7% expected and 11.5% prev) and 0.5% on a monthly basis as expected (vs 1.6% prev). Inflation remains at elevated levels and should remain a cause of worry for markets.
  • US Initial Jobless claims saw an increase to 203k (vs 195k expected) from last week’s 202k. This shows a slightly weaker than expected job market but should not be a cause of worry for now.
  • US Treasury Yields saw a significant decline across the board as investors started to price in fears of a recession. The US 2 year Treasury Bond yield dropped -0.10% while the 10 year yield fell -0.07%.
  • The US stock market remained turbulent intraday as uncertainty about the path forward lingers. The S&P 500 dipped -0.13% (intraday high and low: +0.75% and -1.94%), the Dow Jones Index fell -0.33% (intraday high and low: +0.23% and -1.89%) while the Nasdaq decreased -0.18% (intraday high and low: +1.33% and -2.30%). With the stock indices fighting back from significant intraday declines, the weakened risk sentiment improved slightly as the possibility that the market is now oversold increased.
  • The crypto market continues to be torn down by the UST drama. Bitcoin dipped -0.4% to 28,991 (intraday low: -7.9%; 26,801 ), remaining relatively unscathed and showing its stability as the crypto with the largest market cap. Ether plunged -6% below 2,000 (intraday low: 18%; 1,701). The rest of the crypto market saw substantial losses with Solana falling 10%. Luna and UST which caused the panic continued with the death spiral. Luna which was trading above $80 just 2 days ago is now at less than $0.01 while the UST stablecoin which was supposed to be pegged at $1 is now trading at $0.10. The losses in the other cryptocurrencies were pared after the panic ebbed with the recovery in the US stock market.

HEADLINES & MARKET IMPACT

Powell says he can’t guarantee a ‘soft landing’ as the Fed looks to control inflation

Notable Snippet: Powell said he couldn’t promise a so-called soft landing for the economy as the Fed raises interest rates to tamp down price increases running near their fastest pace in more than 40 years.

“So a soft landing is, is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now, for a couple of reasons,” the central bank chief said in an interview with Marketplace.

He noted that with a tight labour market pushing up wages, avoiding a recession that often follows aggressive policy tightening will be a challenge.

“So it will be challenging, it won’t be easy. No one here thinks that it will be easy,” he said. “Nonetheless, we think there are pathways … for us to get there.”

WHAT WE THINK: Powell has changed his tone from weeks back. We are in for a tumultuous ride from now. Stay safe and get on the sidelines soon.

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Russia threatens ‘retaliatory steps’ if Finland joins NATO

Notable Snippet: Russia has slammed Finland’s plans to apply to join NATO imminently, claiming it would “be forced” to retaliate if the long-neutral country joined the military alliance.

“Finland joining NATO is a radical change in the country’s foreign policy,” the Russian Foreign Ministry said in a statement Thursday. “Russia will be forced to take retaliatory steps, both of a military-technical and other nature, in order to stop threats to its national security arising.”

It is the strongest sign yet that Finland will make a formal application to join NATO. Membership would be historic for the Nordic country, which has had a decades-long policy of military neutrality.

WHAT WE THINK: It will be important to see how Putin will retaliate. What we are seeing is a Western Bloc being more united than ever and Russia being further weakened on the world stage. Will he do a last hurrah knowing that his war efforts were in vain or will he finally be humbled and reverse policy course given the chance?

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Crypto meltdown deepens as stablecoin Tether drops below dollar peg

Notable Snippet: The meltdown in TerraUSD, one of the world’s largest stablecoins, sent shockwaves through cryptocurrency markets on Thursday, pushing another major stablecoin Tether below its dollar peg and sending bitcoin to 16-month lows.

Stablecoin TerraUSD has been hit by the turmoil and broke its peg to the U.S. dollar, which led to it falling as low as 31 cents on Wednesday. On Thursday it was trading around 47 cents.

Tether slipped below its 1:1 dollar peg, hitting a low of 95 cents around 0724 GMT on Thursday, based on CoinMarketCap data.

“The lack of transparency provided by Tether on the quality of commercial paper they hold to back the peg made it the obvious next target,” said BCB Group’s Usher.

“However, Tether is a very different animal to Terra, with a more proven ecosystem and I have far more confidence that when volatility subsides it can regain its peg and stability,” he said.

WHAT WE THINK: The crypto winter is here and it is hitting harder than ever. We may be in for a bear season similar to that after the crypto crash in 2017–2018 as confidence is lost in the market. However, going back to the price levels then is highly unlikely. Additionally, we can start to usher in regulations in the market soon as policymakers start to notice the dangers these stablecoins pose.

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SENTIMENT

FX

STOCK INDICES

Best,
Phan Vee Leung
CIO & Founder, TrackRecord

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