Daily Analysis 19 September 2022 (10-Minute Read)

A terrific Monday to you as equities are coming off their worst week since mid June.


In brief (TL:DR)

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  • U.S. stocks closed lower on Friday with the Dow Jones Industrial Average (-0.45%), the S&P 500 (-0.72%) and the Nasdaq Composite (-0.90%) all down.

  • Asian stocks declined in a cautious start on Monday as investors await a slew of interest rate decisions in the days ahead.

  • Benchmark U.S. 10-year Treasury yields was little changed at 3.45% (yields rise when bond prices fall).

  • The dollar was little changed.

  • Oil slid with October 2022 contracts for WTI Crude Oil (Nymex) (-1.59%) at US$83.76 amid the downbeat sentiment.

  • Gold edged lower with December 2022 contracts for Gold (Comex) (-0.78%) at US$1,670.40.

  • Bitcoin (-7.85%) fell to US$18,495, weighed by pre-Fed jitters.

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In today's issue...

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  1. Singapore Dollar May be Last One Standing Against the Almighty Dollar

  2. Central Bankers are Playing Dice with the Economy

  3. Cryptocurrencies Continue to Crash as Fed Rate Hike Looms

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Market Overview

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Stocks declined in a cautious start on Monday as investors await a slew of interest rate decisions in the days ahead and after global equities notched their worst week since hitting this year’s low in June.

The weakness in markets reflects expectations for an outsized interest rate hike from the Federal Reserve on Wednesday and worries that its aggressive tightening to quell inflation will trigger a recession.

Asian markets were lower on Monday with Sydney’s ASX 200 (-0.28%), Hong Kong's Hang Seng Index (-1.04%) and Seoul's Kospi Index (-1.14%) all in the red while Japan is closed for a holiday.



1. Singapore Dollar May be Last One Standing Against the Almighty Dollar

  • Singapore dollar has established itself as Asia’s most resilient currency against the greenback this year although it’s down more than 4%.

  • Strategists are betting on more strength on the currency if inflation forces the Monetary Authority of Singapore to tighten its exchange-rate policy again.

With the U.S. Federal Reserve set on an aggressive rate hike cycle, almost every major currrency has been hammered against the dollar.

But the Singapore dollar has established itself as Asia’s most resilient currency against the greenback this year although it’s down more than 4%.

Strategists from Goldman Sachs, Citigroup and MUFG Bank are betting on more strength on the currency if inflation forces the Monetary Authority of Singapore (MAS) to tighten its exchange-rate policy again next month as core inflation in the city-state hit a 14-year high in July.

MUFG forecasts a gain of more than 1% for the Singapore dollar versus the U.S. dollar over the coming months and a rise to 1.38 SGD against the dollar by year-end.

The Singapore dollar slumped to its lowest in over two years earlier this month, before paring its 2022 decline to 4.1% by the end of last week.

Unlike most central, the MAS responds to core inflation by guiding the local dollar higher against a basket of other currencies of its major trading partners.

MAS, Singapore’s central bank, focuses on the level of the Singapore dollar’s nominal effective exchange rate, which it allows to move within a policy band to manage imported inflation.

Singapore’s core CPI for August will be released on Friday, which is forecast to increase 5% from a year earlier but the Singapore dollar could come under pressure if inflation slows and expectations for further MAS tightening slide.



­2. Central Bankers are Playing Dice with the Economy

  • Since the start of this year, around 90 central banks have raised interest rates, with half of them hiking by at least 75-basis-points at every round, in what appears to be the race to the bottom of the economy.

  • Uncertainty is being exacerbated by the fact that there is a lag between the hiking of interest rates and its impact on the economy.

God may not play dice with the universe but it appears that central bankers are more than happy to play dice with the economy.

Even when economists were warning that excessively prolonged loose monetary policy risked sparking off inflation, policymakers remained stone-faced and steely-eyed in their resolve to keep things as is.

And when their economies starting to show some fledgling signs of price pressures, central bankers brushed off these warnings, dismissing them as “transitory” and blaming it on pent-up pandemic demand.

Which is why it should come as no surprise that since inflation has proved far from transitory and as populations grow increasingly restive because of stubbornly high prices, central bankers appear prepared to tank their economies to tame the inflationary beast.

Since the start of this year, around 90 central banks have raised interest rates, with half of them hiking by at least 75-basis-points at every round, in what appears to be the race to the bottom of the economy.

The consequence of such a broad hiking cycle has been the tightest monetary conditions in over 15 years, a clear departure from the cheap money era post-2008 Financial Crisis, which investors and markets had come to view as the new normal.

Uncertainty is being exacerbated by the fact that there is a lag between the hiking of interest rates and its impact on the economy.

Making matters worse, supply shocks mean that even if the Fed hikes rates, it’s unclear if that can solve some of the more intractable problems, for instance natural gas supply in Europe and the food stocks that remain off global markets because of the war in Ukraine.

Odds are that central bankers, since they’ve set the course, can’t really afford to turn back now because that could risk a repeat of the start-stop policymaking reminiscent of the 1970s, leading to far more economic pain.

Instead, the risks are now tilted heavily towards a sharp selloff in risk assets, and until inflation looks to be convincingly under control, odds are that the U.S. Federal Reserve and its counterparts will continue to hike borrowing costs decisively.

To be sure, the global economy hasn’t seen such monetary conditions in decades and it’s hard to predict how long and how durable the damage will be, but staying in cash, especially the dollar, appears to be the least bad option in a sea of poor choices.



­3. Cryptocurrencies Continue to Crash as Fed Rate Hike Looms

  • Cryptocurrencies extended their slide on Monday and continue to come under pressure.

  • Meanwhile, investors are bracing for volatility from the jumbo interest-rate hike expected this week from the U.S. Federal Reserve to fight price pressures.

With the likelihood of a Fed hike of 75 basis points expected this week and a further drop in the second-largest token Ether, in the wake of its successful software upgrade, cryptocurrencies extended their slide on Monday and continue to come under pressure.

While Bitcoin shed about 5% to fall below US$19,000, Ether fell as much as 5.6% to a two-month low and was trading around US$1,300 at the time of writing.

Other major altcoins have also struggled as investors await the latest U.S. central bank interest rate decision.

An Ether jump since mid-June that was spurred by hype around a software upgrade known as “The Merge” that would slash energy usage, is rapidly unwinding now that it has been successful.

In any event, outside of the sharp reduction in energy usage, the full impact of The Merge may not be readily apparent for some time.

For now, Ether and other cryptocurrencies seem vulnerable to the same macroeconomic forces that have been affecting stocks and other risk assets for months.

Central bank tightening has left global stocks lower wiping out a rebound since mid-June while a dollar gauge pushed higher as investors shunned risk.

Meanwhile, investors are bracing for volatility from the jumbo interest-rate hike expected this week from the U.S. Federal Reserve to fight price pressures.

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