A terrific Thursday to you as stocks slip amid elevated yields and growth worries.

In brief (TL:DR) 

• U.S. stocks closed lower on Wednesday with the Dow Jones Industrial Average (-0.33), the S&P 500 (-0.67%) and the Nasdaq Composite (-0.85%) all down.

• Asian stocks fell Thursday with investors concerned that strong inflation and hawkish monetary policy will further slow the global economy.

• Benchmark U.S. 10-year Treasury yields advanced one basis point to 4.14% (yields rise when bond prices fall). 

• The dollar was steady.

• Oil advanced with November 2022 contracts for WTI Crude Oil (Nymex) (+1.67%) at US$86.98 as Chinese officials debated easing some Covid rules, a policy that has weighed on its economy and energy demand.

• Gold was near a three-week low with December 2022 contracts for Gold (Comex) (+0.35%) at US$1,640.00.

• Bitcoin (-0.44) fell to US$19,178, remaining stuck inside a tight range, searching for that elusive breakout. 

In today's issue...

1. Oil Prices are Rising to Create a Perfect Storm

2. Stocks Get Hammered on Weaker Earnings

3. The Once-Hot Market for Metaverse Land Is Attracting Risky Bets

Market Overview

A generally strong start to the third-quarter earnings season has bolstered sentiment toward equities.

But investors are having to balance signs of corporate resilience against fears about the impact of persistent inflation, hawkish moves by the Federal Reserve and other central banks and threats to the economy.

Investors are closely monitoring events in the UK where Liz Truss’s chaotic premiership looked close to imploding as backbench Conservative lawmakers openly said she should resign and even Cabinet ministers discussed her future. 

Asian markets fell on Thursday with Tokyo's Nikkei 225 (-0.92%), Hong Kong's Hang Seng Index (-1.40%), Sydney’s ASX 200 (-1.02%) and Seoul's Kospi Index (-0.86%) all in the red.

1. Oil Prices are Rising to Create a Perfect Storm 

• In a speech on Wednesday, Biden confirmed that the U.S. is releasing 15 million barrels from the nation’s strategic reserve in order to tame energy prices but stopped short of any other fresh steps that might pull back prices, such as plans to curb fuel exports. 

• Against this backdrop oil continues to rise as traders shrugged off Biden’s remarks with West Texas Intermediate futures rising 3.3% to settle above US$85 a barrel, in a sign that traders lack confidence of Biden’s ability to do anything about the energy crisis. 

U.S. President Joe Biden can rail all he wants against a sea of seemingly never ending troubles, but rhetoric will do little to rein in oil prices as he has come to discover. 

Oil prices have traded within a narrow band since late-September amid fluctuating risk sentiment in broader markets but have remained persistently elevated, contributing to the White House’s struggle against inflation ahead of key midterm elections. 

In a speech on Wednesday, Biden confirmed that the U.S. is releasing 15 million barrels from the nation’s strategic reserve in order to tame energy prices but stopped short of any other fresh steps that might pull back prices, such as plans to curb fuel exports. 

Biden is hamstrung because on the one hand, curbing fuel exports would help the domestic situation, but threatens to ignite already volatile fuel prices offshore, especially for the eurozone which is struggling from one crisis to the next, exacerbated by Russia’s invasion of Ukraine. 

Against this backdrop oil continues to rise as traders shrugged off Biden’s remarks with West Texas Intermediate futures rising 3.3% to settle above US$85 a barrel, in a sign that traders lack confidence of Biden’s ability to do anything about the energy crisis. 

For now, markets are caught between bullish OPEC+ production cuts and a major slowdown in global growth that’s continued to weigh on prices. 

While global inventories remain tight, the macro backdrop is arguably the weakest in a decade with China, the world’s largest importer of oil, still bogged down economically by its strict adherence to a zero-Covid policy. 

Forthcoming European Union sanctions on Russian oil exports could send shockwaves through the global tanker market, and have already caused some Indian refiners to halt spot purchases before the latest sanctions take effect in early December. 

The U.S. Energy Information Administration said Wednesday that crude stockpiles dropped 1.73 million barrels last week while four-week seasonal demand for distillate fuels soared to the highest since 2007 and inventories remain at the lowest point on record for this time of year.

With winter fast approaching, investors hoping for a brief respite in energy prices may instead need to brace themselves for a crude oil price shocks that threaten to make things even more challenging for central banks navigating the Scylla of recession and the Charybdis of inflation.

2. Stocks Get Hammered on Weaker Earnings 

• Global stocks dipped on Wednesday in response to mixed corporate earnings that could be the first hint of trouble as companies look to downsize and demand starts to decline. 

• In government debt markets, the yield on the 10-year US Treasury note rose 0.13% to 4.13% as bonds were hammered (yield increases when bond prices fall). 

With interest rates and inflation soaring, it was only a matter of time before earnings got compressed and investors started seriously considering the prospect of a recession. 

Which is why global stocks dipped on Wednesday in response to mixed corporate earnings that could be the first hint of trouble as companies look to downsize and demand starts to decline. 

Reporting third-quarter earnings on Wednesday, consumer groups Procter & Gamble (+0.93%) and Nestlé (-0.32%) became the latest companies to fall victim to inflation with both groups experiencing falling sales volumes in the three months to September while simultaneously having to grapple with higher energy and labor costs and the strength of the dollar. 

Central banks led by the U.S. Federal Reserve have been aggressively tightening monetary policy this year in an effort to rein in price rises but, the speed and scale of interest rate hikes have raised fears that economies will be pushed into recession. 

In the U.S, the Fed has increased borrowing costs by 0.75% at each of its past three meetings and is expected to do the same again at its next meeting with inflation still running white hot. 

Meanwhile, annual inflation in the United Kingdom accelerated in September to 10.1%, up from 9.9% in August, on the back of higher food prices, and putting continued pressure on the Bank of England and the current government. 

In government debt markets, the yield on the 10-year US Treasury note rose 0.13% to 4.13% as bonds were hammered (yield increases when bond prices fall). 

Yield on the equivalent 10-year UK instrument fell to 3.88% but mainly thanks to expectation of intervention by the Bank of England.

The pound shed 0.9% against the dollar to US$1.12, while the greenback added 0.7% against a basket of six peers and the yen touched a new 32-year low against the US currency of ¥149.89, just a whisker away from the psychologically-important 150 level. 

The risk-reward outlook for markets has become unfavourable in the near term, reflecting a combination of persistent inflation, rising rates, falling growth estimates, and heightened financial stress.

And many of the themes already challenging markets appear to be in overdrive, with the war in Ukraine dragging on, few signs that China has paved a path out of the pandemic and continued inflation and interest rate hikes in the U.S. 

3. The Once-Hot Market for Metaverse Land Is Attracting Risky Bets 

• As cryptocurrency prices sank this year, many speculators fled the virtual real estate space, with prices for virtual land plummeting. 

• What others have seen as a market heading towards a prolonged downturn is being seen by others as an opportunity to get in on the cheap. 

Perhaps nothing encapsulates the swashbuckling risk-taking free money ethos of a backdrop of loose monetary policy quite as much as virtual land in a virtual world, maybe except for NFTs.

Combine NFTs and virtual land and the speculative stew that is the metaverse is starting to cook again as despite prices having tumbled alongside a dip in the cryptocurrency markets, virtual property has become an investment strategy for some. 

As cryptocurrency prices sank this year, many speculators fled the virtual real estate space, with prices for virtual land plummeting. 

According to data compiled by analytics company WeMeta, average prices for land in Decentraland and The Sandbox, two popular blockchain-based online worlds, declined roughly 80% between early November 2021 and the beginning of this month, in line with a broader decline in the digital asset markets. 

The number of sales for virtual land has also tumbled. 

In November 2021, The Sandbox and Decentraland had more than 6,000 transactions combined, but sales have since dried up to just 1,000 last month. 

What others have seen as a market heading towards a prolonged downturn is being seen by others as an opportunity to get in on the cheap. 

For plucky investors, snapping up land in the metaverse on the cheap is one way to bet on big returns later on, especially if virtual worlds become as valuable as the real one. 

Aside from the speculative risks of betting big on meta-land, there are also regulatory concerns. 

Last week, the U.S. Securities sand Exchange Commission investigated Yuga Labs, creator of the Bored Ape Yacht Club collection of NFTs and warned that fractionalized NFTs, assets broken down into units to be bought and sold, could be classified as unregistered securities. 

For all the metaverse hype, blockchain-based digital realty has a long way to go before revolutionizing daily life and investors and businesses are still trying to wrap their heads around the prospect or promise of the metaverse.