A magnificent Wednesday to you as investors seek safer assets amid an expected super-sized rate hike from the Federal Reserve.

In brief (TL:DR)

• U.S. stocks were lower on Tuesday with the Dow Jones Industrial Average (-1.01%), the S&P 500 (-1.13%) and the Nasdaq Composite (-0.95%) all down.

• Asian stocks fell on Wednesday, following European and US stocks.

• Benchmark U.S. 10-year Treasury yields slipped four basis points to 3.52% (yields fall when bond prices rise).

• The dollar traded near a record high amid the market jitters.

• Oil jumped with October 2022 contracts for WTI Crude Oil (Nymex) (+3.03%) at US$86.48 as investors reacted to Putin’s vow to use all means necessary to defend the “territorial integrity of Russia".

• Gold edged higher with December 2022 contracts for Gold (Comex) (+0.63%) at US$1,681.70.

• Bitcoin (+1.27%) rose to US$19,294.

In today's issue...

1. Soaring Bond Yields Make Bonds Great Again

2. Quants Are Back Again

3. Nasdaq Makes Big Push into Cryptocurrencies

Market Overview

­

Fed officials are about to put numbers on the “pain” they’ve been warning of when the central bank publishes new economic projections Wednesday. Treasuries, gold and the dollar led gains in haven assets after Russian President Vladimir Putin stepped up his war against Ukraine, rattling markets that were already bracing for a super-sized rate hike from the Federal Reserve. Asian markets were lower on Wednesday with Tokyo's Nikkei 225 (-1.36%), Sydney’s ASX 200 (-1.56%), Hong Kong's Hang Seng Index (-1.79%) and Seoul's Kospi Index (-0.87%) all in the red.

1. Soaring Bond Yields Make Bonds Great Again

• Fixed income is dangling the biggest rewards relative to equities in more over a decade.

• As the U.S. Federal Reserve makes headway in its inflation battle, the hope is that bonds will have more capacity to hedge stock meltdowns.

While equities are crumbling ahead of Wednesday’s U.S. Federal Reserve gathering where officials are expected to boost interest rates by 75 basis points for the third time in a row, short-term U.S. Treasury yields are trading above 4% for the first time since 2007.

The 1-year U.S. Treasury yield has already shot past 4% and the 2-year yield is around 3.75%, both of which are highly sensitive to rate hikes, even as the yield curve remains highly inverted, with the benchmark 10-year U.S. Treasury yielding 3.54%, portending a recession.

Fixed income is dangling the biggest rewards relative to equities in more over a decade and it’s now tempting big money managers from BlackRock to Amundi on the conviction that the asset class will deliver hedging properties in a recession.

It’s believed that bonds are now in a better position to eke out gains in any economic downturn ahead although it won’t solve the problem of near double-digit losses in debt portfolios experienced so far.

Some corners of Wall Street are wagering that the much-maligned 60/40 stock and bond portfolio strategy will stage a comeback thanks to higher starting yields and according to a Bloomberg index, is on course for its first quarterly gains this year as stocks recoup some of their losses from June.

During most years when the 60/40 portfolio delivered negative returns of more than 1%, the successive three to five years produced double-digit annualized gains.

As the U.S. Federal Reserve makes headway in its inflation battle, the hope is that bonds will have more capacity to hedge stock meltdowns.

2. Quants Are Back Again

• Machine-powered funds are making money consistently again this year, while the likes of discretionary hedge funds and speculative day traders crater in the market crash.

• According to Dow Jones market-neutral indices, five of the most popular factor styles - value, momentum, quality, size and low volatility - have all have made money in 2022.

With rising interest rates on historic inflation bringing an abrupt end to the leadership of Big Tech, quantitative traders, who use complex mathematical models to divine price patterns are making hay while uncertainty shines.

Having taken a big beating in the cheap-money era when everyone and their uncle was minting money from the markets, quant returns were lackluster in comparison.

Machine-powered funds are making money consistently again this year, while the likes of discretionary hedge funds and speculative day traders crater in the market crash.

Strategies that bid up low-volatility or high-momentum companies are in the green and value shares - those with low prices relative to some fundamental indicator like earnings - are extending their post-lockdown comeback.

According to Dow Jones market-neutral indices, five of the most popular factor styles - value, momentum, quality, size and low volatility - have all have made money in 2022.

Meanwhile, S&P Global data show that the performance gap between the winners and losers in the S&P 500 has jumped to the most in over a decade.

While many long-only factor strategies have struggled to escape this year’s market rout, they’re still beating the market handily.

Energy companies typically favored by long-only value funds have also been the biggest winners against a backdrop of inflation.

While factor investors come in all shapes and size, the more diversified performance in the market is good news for quants overall, whose complex and algorithm-driven strategies are navigating the volatility deftly.

Although it’s still early days, there are signs the end of the low-rate era will kickstart an extended bout of outperformance for the multi-trillion-dollar factor industry.

3. Nasdaq Makes Big Push into Cryptocurrencies

• Nasdaq announced that it was launching a digital assets services business that would begin with custody of cryptocurrencies for institutional investors.

• Nasdaq’s push comes hot on the heels of other big Wall Street names which are introducing cryptocurrency services.

One of the biggest bugbears of institutional investors has been the struggle to find custodians who could properly secure digital assets in a compliant manner.

And while Wall Street has increasingly taken an interest in cryptocurrencies, citing growing demand for Bitcoin and other digital assets from the institutional market, institutional-grade custodians still elude the sector.

Enter Nasdaq, the world’s second-biggest stock exchange which is placing a big bet on digital asset growth in hopes by throwing its hat in the ring when it comes to custodial services.

Yesterday, Nasdaq announced that it was launching a digital assets services business that would begin with custody of cryptocurrencies for institutional investors.

Nasdaq said it was also considering rolling out trading of digital assets and said the custody of digital assets could lay the foundation for trading services in the future.

According to Nasdaq, it would be able to employ its other capital market services, such as surveillance, market abuse and financial crime software, which is widely used by traditional financial institutions, in an effort to bring greater institutional-grade security to the cryptocurrency market.

Nasdaq’s push comes hot on the heels of other big Wall Street names which are introducing cryptocurrency services.

Blackrock, the world’s largest asset manager, recently announced that it had partnered with Coinbase and launched a Bitcoin trust fund last month to help its wealthy clients get access to cryptocurrencies.

Fidelity also said it would allow investors to add cryptocurrencies to their portfolios in 401(k) retirement schemes.