A magnificent Friday to you as stocks climb in options day as bond rout fades.

In brief (TL:DR)

• U.S. stocks opened higher on Friday with the Dow Jones Industrial Average (+1.18), the S&P 500 (+0.37%) and the Nasdaq Composite (+0.65%) all up.

• Asian stocks were lower Friday, with volatility showing no signs of abating.

• Benchmark U.S. 10-year Treasury yields was little changed at 4.24% (yields rise when bond prices fall). 

• The dollar was steady.

• Oil was higher with November 2022 contracts for WTI Crude Oil (Nymex) (+0.97%) at US$85.33.

• Gold rose with December 2022 contracts for Gold (Comex) (+0.62%) at US$1,646.90.

• Bitcoin (-0.95) fell to US$19,025, facing tough daily resistance as BTC price matches UK pound volatility.

In today's issue...

1. Washington Tightens the Screws on Denying Other Technologies to China

2. Investors Are Bracing for Even More Extreme Rate Hikes

3. Europe Leans on the U.S. to Lead with Cryptocurrency Regulations

Market Overview

The rebound Friday came after a two-day drop for equities and was led by energy, financial and industrial shares. 

Tech shares underperformed. Twitter Inc. tumbled, with the US weighing security reviews for Elon Musk’s deals. Snap Inc. plummeted on disappointing results.

Treasury two-year yields dropped, while the rate on 10-year notes was almost flat. The Japanese yen fell against the US dollar despite repeated intervention warnings from authorities.

Asian markets fell on Friday with Tokyo's Nikkei 225 (-0.43%), Hong Kong's Hang Seng Index (-0.42%), Sydney’s ASX 200 (-0.80%) and Seoul's Kospi Index (-0.22%) all in the red.

1. Washington Tightens the Screws on Denying Other Technologies to China  

• The Biden administration is exploring potential plans that would limit China’s access to some of the most powerful emerging computing technologies, including quantum computing and artificial intelligence software. 

• If these efforts of new export controls are implemented, it would follow separate restrictions announced earlier this month aimed at stunting Beijing’s ability to deploy cutting-edge semiconductors in weapons and surveillance systems. 

The U.S. has ramped up actions to stifle China’s ability to develop certain technologies that it sees as key in the competition with its top strategic rival. 

Washington has even taken the unprecedented step of limiting how American citizens and residents participate in Chinese tech firms in a fresh set of sweeping regulations released earlier this month. 

The Biden administration is exploring potential plans that would limit China’s access to some of the most powerful emerging computing technologies, including quantum computing and artificial intelligence software. 

Quantum computing is an experimental field with the potential to dramatically increase the power and speed of computing, enabling machines to solve problems beyond the capacity of the current generation of computers.

Because quantum machines could be powerful enough to decode passwords and circumvent current encryption security features, it’s expected to someday upend computer-security technology.

If these efforts of new export controls are implemented, it would follow separate restrictions announced earlier this month aimed at stunting Beijing’s ability to deploy cutting-edge semiconductors in weapons and surveillance systems. 

The U.S. is also working on an executive order for an outbound investment review mechanism that would scrutinize money heading to certain Chinese technologies, and quantum computing and artificial intelligence controls could be included. 

Expanding the wall around advanced technologies risks further antagonizing China and forcing other countries to pick sides between the world’s two top economies – it also could spell challenges for companies that have to straddle both countries. 

Taiwan Semiconductor Manufacturing Corporation and Samsung Technologies, the world's largest chipmakers, are at risk of being caught in the crossfire between the U.S. and China. 

Quantum computing and AI startups in the U.S. may also soon see themselves starved of funding from Chinese venture capital firms and investors.

2. Investors Are Bracing for Even More Extreme Rate Hikes

• Investors now expect the Fed to raise interest rates to 5% next year, suggesting that it will need to hammer the brakes on the economy harder than expected to tackle high inflation. 

• Investors hoping for a swift policy reversal ought not hold their breath as the odds of that happening are growing increasingly slim. 

After September’s consumer price index report showed an alarming acceleration in monthly price pressures across a broad array of everyday items and services in the U.S., expectations of rising interest rates and bets to hedge those expectations have quickly been rising. 

There is a high chance that the U.S. Federal Reserve would yet again opt for an aggressive interest rate increase at its next policy meeting in early November and deliver a fourth consecutive 0.75% rate rise. 

But where rates ultimately end up could have a major bearing on markets and it’s here where investors are growing increasingly worried that rates could get hiked to such an extent that a recession becomes almost inevitable. 

Investors now expect the Fed to raise interest rates to 5% next year, suggesting that it will need to hammer the brakes on the economy harder than expected to tackle high inflation. 

Traders have fully priced in the benchmark policy rate reaching 5% in May 2023, up from 4.6% before the latest inflation data released late last week, according to futures markets that track the federal funds rate. 

Elevated inflation figures, coupled with additional signs pointing to a resilient labour market, also fanned fears that the 0.75% rate hikes would be extended to December, with another half-point rise expected for February.

The move in rate expectations came after Canada and the UK reported this week that consumer prices rose more than expected in September, with the UK being hammered by double digit inflation.

Fed officials have said they need to see signs that inflation is beginning to ease on a monthly basis in order to slow the pace of its interest rate increases. 

The Fed will want to see substantive evidence that “core” inflation which strips out volatile items such as food and energy falling back towards the longstanding 2% target and that could take awhile. 

Recent U.S. personal consumption expenditures reveals that while food and fuel prices are moderating, the prices of durable goods and housing continues to rise, risking far more sticky inflation for far longer than policymakers have the stomach for. 

Investors hoping for a swift policy reversal ought not hold their breath as the odds of that happening are growing increasingly slim.

3. Europe Leans on the U.S. to Lead with Cryptocurrency Regulations 

• Europe is now calling for America to lead again – this time in the realm of cryptocurrencies.

• The European Union’s financial services chief is urging U.S. lawmakers to draw up sweeping new rules to govern the cryptocurrency industry that has been dubbed by U.S. Securities and Exchange Commission Chairman Gary Gensler as the “Wild West.” 

While the vast majority of Americans have ancestors who hailed from Europe, the path of regulations in both continents have developed at a different pace and for different purposes. 

The founding of the United States of America was in direct response to monarchies in Europe and globally, the U.S. continues to lead in financial innovation and regulation.

So it comes as no surprise that that Europe is now calling for America to lead again – this time in the realm of cryptocurrencies.

One of the key barriers to greater adoption of cryptocurrencies is perhaps the lack of a unified and clear regulatory framework for a nascent asset class that respects no borders. 

Which is why the European Union’s financial services chief is urging U.S. lawmakers to draw up sweeping new rules to govern the cryptocurrency industry that has been dubbed by U.S. Securities and Exchange Commission Chairman Gary Gensler as the “Wild West.” 

Speaking at a visit to Washington, the European Commission’s financial services commissioner Mairead McGuinness said that any regulation imposed on the cryptocurrency industry would need to be global in order to work. 

The same way that ICAO sets the standard that facilitates safe international air travel, if governments globally are serious about regulating cryptocurrencies, they will need a concerted and coordinated effort to develop regulations accordingly. 

Although U.S. President Joe Biden has spoken about the importance of regulating the cryptocurrency industry, members of Congress are divided of how such regulation should work and what needs to be done. 

The U.S. Securities and Exchange Commission has taken piecemeal action against select entities, but has stopped short of more consistent enforcement in the absence of overarching regulations that could determine the terms of engagement. 

In the absence of regulatory clarity, individual investors have even taken to vigilantism, with groups of investors who lost collectively billions of dollars in a variety of scams and the TerraUSD collapse, taking matters into their own hands. 

The TerraUSD collapse and that of its sister token Luna is estimated to have wiped out around US$40 billion of investor monies and disgruntled investors are said to be scouring the globe to find the whereabouts of Terra’s founder and creator Do Kwon. 

An Interpol Red Notice has been issued for the arrest of Do Kwon, but he remains at large. 

Other crypto personalities like Three Arrow Capital’s Zhu Su and Kyle Davies also remain incognito, even though liquidators and investors are said to be actively hunting them down as well. 

U.S. congressional members remain divided as to which agencies are the most appropriate to police the cryptocurrency sector, whether it’s the SEC or the Commodities and Futures Trading Commission, with individual agencies themselves constantly engaged in turf wars. 

For now, stablecoins are likely to be the first to be regulated, at least according to some members of Congress who are close to agreement of a first draft that would put stablecoins under the purview of the U.S. Federal Reserve and ban algorithmic stablecoins such as TerraUSD which arguably sparked off the Crypto Winter.