Hello there,

A fantastic Friday to you as markets show signs of flattening after initial euphoria at lower than expected headline inflation in the U.S. were tempered with recession concerns.

In brief (TL:DR)

• U.S. stocks were stable on Thursday with the Dow Jones Industrial Average (+0.08%) little changed, while the S&P 500 (-0.07%) and the Nasdaq Composite (-0.58%) down slightly.

• Asian stocks were lifted by Japan on Friday and investors assessed how far the U.S. Federal Reserve must jack up interest rates to ensure high inflation keeps cooling.

• Benchmark U.S. 10-year Treasury yields were at 2.88% (yields rise when bond prices fall).

• The dollar edged higher.

• Oil was lower with September 2022 contracts for WTI Crude Oil (Nymex) (-0.53%) at US$93.84.

• Gold was little changed with December 2022 contracts for Gold (Comex) (-0.07%) at US$1,805.90.

• Bitcoin (-1.69%) fell to US$24,078, reversing an earlier rally that seemed headed towards US$25,000, a key level of resistance.

In today's issue...

1. Gas, Gas, Gas, Gas!

2. Markets May be a-Turning

3. BlackRock Bolsters Bitcoin by Betting Big on Institutional Client Appetite

Market Overview

Stocks this week have cheered the possibility that ebbing price pressures will take the pressure off the U.S. Federal Reserve to keep hiking rates sharply, making a soft economic landing more likely.

Global shares are set for the longest streak of weekly gains since 2021, paring their retreat this year to about 14%.

The bond market seems more skeptical about a soft landing with the ongoing Treasury yield curve inversion hinting at concerns that only a recession can curb the cost of living.

Price pressures may not be going up quite as fast, but inflation remains elevated.

Asian markets rose on Friday with Tokyo's Nikkei 225 (+2.62%), Seoul's Kospi Index (+0.16%) and Hong Kong's Hang Seng Index (+0.46%) up, while Sydney’s ASX 200 (-0.54%) was down.

1. Gas, Gas, Gas, Gas!

• In further signs that inflation, at least in respect to gas prices in America, may be plateauing, prices at the pump have now fallen below the key psychological level of US$4.

• And the slide in gasoline prices isn’t confined to the U.S. as jitters over an impending global economic slowdown have offset some of the effects of the Russian invasion of Ukraine.

Gas, Gas, Gas, Gas, Gas,

Gas, Gas, Gas, Gas, Gas,

Everybody!

In further signs that inflation, at least in respect to gas prices in America, may be plateauing, prices at the pump have now fallen below the key psychological level of US$4.

With the Republicans holding out five-dollar gasoline as a war cry ahead of the midterm elections, that battle cry is looking increasingly hollower as fears of a looming recession have put the kybosh on once soaring fuel markets and cooling a major component of headline inflation.

In the fastest decline since the 2008 Financial Crisis, gas prices are now down by about a fifth from their high of US$5 in mid-June.

And the slide in gasoline prices isn’t confined to the U.S. as jitters over an impending global economic slowdown have offset some of the effects of the Russian invasion of Ukraine.

U.S. gasoline demand has also slipped, with the Energy Information Administration reporting that demand over the last four weeks is 6% lower than from the same time a year ago, in further signs that consumers are becoming more conservative in their expenditure.

Nevertheless, headline inflation in the U.S. remains high and rhetoric from the U.S. Federal Reserve continues to be hawkish, suggesting that policymakers will want to see several consecutive months of reduced price pressures before pivoting to less aggressive rate hikes.

Americans consume about a fifth of the world’s oil, despite only being home to 4% of the world’s population, so decreased demand in a country where 92% own at least one vehicle, will help to ease inflation globally as well.

To be sure, the Biden administration has also taken measures to release record volumes of crude oil from America’s emergency stockpile and leaned on producers to pump more, but it’s unclear if that has had significant effect in bringing down pump prices.

More importantly, the price of diesel, crucial for logistics via trucking and agriculture, will also help manufacturers and farmers cut costs of operation, and hopefully bring down price pressures.

2. Markets May be a-Turning

• If certain signals keep flashing in the realms of automated trading, stock market bears may soon be licking more than just wounds, but nursing some serious losses.

• As equity positioning has been cut to a bare minimum, even the slightest good news, such as a slowing pace of inflation, has the ability to trigger a sharp rebound.

Contrary to popular belief, the vast majority of equity trades on the likes of Wall Street aren’t executed by French-cuff-wearing Gordon Gecko types but rather, row after rows of silently whirring high-performance computers, commandeered by sophisticated software programs with literally millions of lines of code.

And if certain signals keep flashing in the realms of automated trading, stock market bears may soon be licking more than just wounds, but nursing some serious losses.

An estimate by JPMorgan Chase suggests that volatility target funds and similar strategies such as risk parity are currently buying anywhere between US$2 billion and US$4 billion of stocks per day.

Trend-following funds have also added fuel to the recent rally in equities, while benchmark indices such as the S&P 500 have shot past key trendlines like the 100-day moving average.

Combined, these automated trading strategies that are based on price and volume action, could conspire to knockout even the most fervent bear.

Hedge funds and mutual funds have slashed their equity exposure to the lowest levels since the 2008 Financial Crisis, and sentiment remains sour on concern that the U.S. Federal Reserve’s aggressive rate hikes will thrust the economy into recession.

As equity positioning has been cut to a bare minimum, even the slightest good news, such as a slowing pace of inflation, has the ability to trigger a sharp rebound.

3. BlackRock Bolsters Bitcoin by Betting Big on Institutional Client Appetite

• The world’s largest asset manager BlackRock is now offering its first ever investment product directly in Bitcoin, marking a significant move into the cryptocurrency markets.

• The US$8.5 trillion asset manager’s move into cryptocurrencies is emblematic of a broader shift towards the nascent asset class by Wall Street’s biggest players.

Although the Grayscale Bitcoin Trust was the first regulated security offering that enabled professional investors to gain exposure to Bitcoin, there have been a slew of other products since, including futures-backed Bitcoin ETFs and spot-based ones in places like Canada and Europe.

Not one to be left behind, the world’s largest asset manager BlackRock (+0.54%) is now offering its first ever investment product directly in Bitcoin, marking a significant move into the cryptocurrency markets.

The private Bitcoin trust looks to track the price of the benchmark cryptocurrency and will respond to demand from large institutional clients seeking exposure to the asset, despite a sharp plunge in its price over the past year.

Bitcoin is down over 70% from its all-time-high last year and is roughly 50% lower today than where it started the year.

Professional investors nonetheless remain positive in the prospect of the cryptocurrency, preferring to buy when the asset is cheap, rather than retail which often dives in when an asset is expensive.

BlackRock’s Bitcoin trust product, is the asset manager’s second foray into cryptocurrencies this past week and comes hot on the heels of its partnership with cryptocurrency exchange Coinbase Global.

The US$8.5 trillion asset manager’s move into cryptocurrencies is emblematic of a broader shift towards the nascent asset class by Wall Street’s biggest players.