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Risk Assets Suffer Amid Global Uncertainty

April was a busy month for global markets. Russia’s war on Ukraine entered its third month, France held a presidential election, and Tesla founder Elon Musk acquired Twitter.

The escalating conflict in Ukraine continues to impact global economic growth, stability, and inflation, particularly through its impact on the commodities markets. EU officials are in talks to embargo Russian oil but face division due to Germany and Hungary’s heavy dependence on energy imports from the country. Gazprom has cut off gas supplies to Poland and Bulgaria over their refusal to pay in rubles. RUB/USD has continued to perform well after rebounding in March from its sharp February losses. It is now trading above 0.0140, approximately 7.5% higher than its pre-war level in early February. However, this strong exchange rate is somewhat artificial due to capital controls imposed by the Central Bank of Russia to prevent ruble owners from selling the currency.

France reelected Emmanuel Macron with 58.5% of the vote on 24 April. He beat the far-right National Rally presidential candidate Marine Le Pen who won 41.5% of the vote. Macron’s victory will ensure political and economic continuity in France for at least the next five years. Following Angela Merkel’s retirement as Germany’s Chancellor last year, Macron now has the potential to become the EU’s de facto leader. EUR/USD surprisingly fell following Macron’s victory, possibly indicating that investors sold off their positions after the election having preemptively anticipated the result.

US equities have performed poorly over April, with losses led by tech stocks. The S&P 500 fell by as much as 8.8%, closing the month down by approximately 400 points at 4,131.93. This was the S&P’s worst April since 1970. The tech-focused Nasdaq Composite fell by as much as 13.3%, closing the month at 12,334.64. Netflix saw a particularly sharp fall in its share price following the company’s release of disappointing earnings figures. As COVID-19 restrictions continue to be lifted worldwide, fewer consumers are using the streaming platform. On 19 April, Netflix announced that it had lost 200,000 subscribers in 1Q2022, causing its share price to fall by as much as 37% in 24 hours. Similarly, Amazon shares fell by as much as 14% on 29 April following disappointing revenue projections. Amid tumbling US tech stock valuations, Elon Musk has struck a deal to buy Twitter for $44 billion.

As well as equities, crypto markets have traded poorly in April. Following the risk-off environment in the wake of Russia’s invasion of Ukraine, the crypto markets experienced a brief recovery period of strong positive price action in the second half of March. However, in April, BTC and ETH have trended downward, taking the rest of the market down with them.

A hedge against inflation?

BTC/USD fell by as much as 17% in April, closing at 38,714.14. This price action is part of a continued downtrend in crypto markets following the all-time-high prices of both BTC and ETH in November last year. Investors expected global growth to pick up strongly in 2022 as COVID-19 lockdown measures were relaxed and markets reopened. However, the war in Ukraine has threatened global growth, increased inflation, and lessened the investor appetite for risk assets. China, one of the markets with the most anticipated growth for 2022, is currently enforcing strict lockdown measures in Shanghai and other major cities due to an increase in COVID-19 cases.

An ongoing debate among crypto enthusiasts and critics alike is whether Bitcoin should be viewed as a risk asset or a safe-haven hedge against inflation. Current price movements could indicate the former, but in previous times of economic uncertainty, the price of Bitcoin has acted differently. When the COVID-19 pandemic hit in 2020, Bitcoin’s price increased amid economic chaos and plunging equity markets, bolstering the ‘hedge against inflation’ or ‘digital gold’ thesis. However, on 23 February after Putin announced his intentions to invade Ukraine, BTC/USD fell by as much as 11% in less than 24 hours to below 35,000. At the same time, gold increased in price by approximately 4% to US$1,972 per ounce.

The difference in price movement between Bitcoin and gold was seen by some as evidence of Bitcoin failing the digital gold test. However, despite BTC/USD’s short-term decline, it recovered quickly and increased by as much as 30% from its local bottom of 34,700 on 24 February to 44,800 on 2 March.

US CPI hit a 40-year high in March at 8.5% YoY. If Bitcoin is indeed a hedge against inflation, then it should benefit if high CPI figures continue to persist over the coming months. Investors expect a 50bps rate hike following the FOMC’s meeting on Wednesday 4 May. The Fed has a difficult decision to make given that inflation is high while productivity is low, with US GDP declining by an annualised 1.4% pace in 1Q2022. Avoiding persistent stagflation will be a key priority for Fed officials. Higher than expected rate hikes could pose a further risk to the prices of assets including Bitcoin.

Ethereum Merge delayed

Like Bitcoin, ETH/USD fell by as much as 17% in April, closing at 2,730.19. As well as the global macro picture contributing to this fall, the revenue generated through NFT art sales on the Ethereum blockchain has been on the decline since its peak in September last year. With less demand for NFT art, there will likely be less demand for ETH which is usually required to purchase the art.

Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) has also been delayed. The merge was expected to come in 2Q2022, but Ethereum core developer Tim Beiko confirmed last month that it will not be ready until after June. Some investors expect the value of ETH to increase following its transition to PoS as there will be a decreased issuance rate of ETH, it will enable higher staking yields, and there will be lower gas fees on the Ethereum blockchain.

In other news…

  • On 1 May crypto exchange and card provider greatly reduced its staking and cashback rewards. Following the announcement, the platform’s native token CRO has fallen in value by as much as 24%.
  • Investment management company BlackRock has launched its first blockchain ETF, enabling its clients to invest in companies that utilise blockchain technology and digital assets. 
  • Fidelity Investments has also launched crypto and metaverse ETFs alongside an interactive metaverse experience aimed at encouraging financial education.
  • In the ongoing brain-drain of talent from traditional firms to crypto-native companies, crypto exchange-traded product startup 21Shares has hired former Uber executive Karan Chawla as its VP of product.
  • In a new report, investment bank Citi has valued the metaverse at between $8 trillion and $13 trillion globally by 2030.

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