A wonderful Monday to you as investors await the next batch of earnings from some of the world’s biggest companies.

In brief (TL:DR) 

• U.S. stocks closed higher on Friday with the Dow Jones Industrial Average (+2.47), the S&P 500 (+2.37%) and the Nasdaq Composite (+2.31%) all up.

• Asian stocks fluctuated as a rout in Chinese shares weighed on sentiment .

• Benchmark U.S. 10-year Treasury yields declined two basis points to 4.20% (yields fall when bond prices rise). 

• The dollar edged higher.

• Oil fell with November 2022 contracts for WTI Crude Oil (Nymex) (-1.98%) at US$83.37.

• Gold was lower with December 2022 contracts for Gold (Comex) (-0.14%) at US$1,654.00.

• Bitcoin (+0.80) rose to US$19,341 with the lowest volatility in history.

In today's issue...

1. China’s Xi Jinping Tightens Grip on Power and Strangles Markets

2. Big Tech Sees Ad Sales Weaken in Another Blow for Investors

3. More Regulation for Cryptocurrencies is Welcome News

Market Overview

Stocks in Europe pared gains and US futures declined as a rout in Chinese shares weighed on sentiment while investors await the next batch of earnings from some of the world’s biggest companies.

Earnings this week from megacap technology companies -- among the key profit-growth engines for the S&P 500 -- may give more clues on the resilience of the US economy and the trajectory for stocks.

China’s yuan and the country’s stocks tumbled in Hong Kong to the lowest level since the depths of the 2008 global financial crisis even as economic growth data beat estimates. 

Asian markets were mixed on Monday with Tokyo's Nikkei 225 (+0.31%), Sydney’s ASX 200 (+1.54%) and Seoul's Kospi Index (+1.04%) up, while Hong Kong's Hang Seng Index (-6.36%) down sharply.

1. China’s Xi Jinping Tightens Grip on Power and Strangles Markets

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• Although the China’s key economic data released on Monday showed a mixed recovery, the onshore yuan continued to fall to the weakest level in 14 years and the CSI 300 slumped in all but one session last week.

Investors hoping for some form of reprieve from the hammering that has been hitting Chinese markets were instead left shaken and shocked by the shake-up at the Chinese Communist Party’s leadership conclave over the weekend. 

Under the pressure of a likely continuation of President Xi Jinping’s policies staked on Covid Zero and a return to prominence of state-driven companies, China’s yuan and stocks continued to tumble to their lowest level since the depths of the 2008 financial crisis in Hong Kong. 

On Monday morning, the offshore yuan weakened as much as 0.7% to 7.27 per dollar to approach a record low seen last week. 

Meanwhile, the Hang Seng China Enterprises Index, a gauge of Chinese stocks in the city, plunged more than 5% to its lowest since 2008 even as economic growth data beat estimates, and China’s benchmark CSI 300 Index fell as much as 1.9%. 

Tech giants Alibaba Group Holding (-11.42%), Tencent Holdings (-11.43%) and Meituan (-14.83%) all tumbled as investors remained skeptical that Xi and his allies will seek a rejuvenation of private enterprise or a return to power of China’s tech giants. 

With so many supporters surrounding him, Xi’s ability to enact policy will become unfettered and he is devoid of sounding boards that could challenge or question his decision making. 

And it is this unfettered power that investors are now concerned about, especially Xi’s penchant for enacting policies that unfriendly to markets and free enterprise. 

During the congress last week, Xi defended his zero-Covid policy, doubling down on an unpopular policy that has hammered the economy and given rise to spontaneous protests. 

Xi’s speech at the congress also focused primarily on security, suggesting more geopolitical tension with Washington and an assertiveness to retake Taiwan that could trigger invasion within the next decade. 

Making matters worse for investors, Xi’s speech fell short of offering stimulus to shore up the property market or any other measures that have been responsible for China’s revolutionary economic growth and expansion over the past several decades. 

Although the China’s key economic data released on Monday showed a mixed recovery, the onshore yuan continued to fall to the weakest level in 14 years and the CSI 300 slumped in all but one session last week.

Despite Covid restrictions and a property slump, the economy grew faster than expected in the third quarter with industrial activity improving, but retail sales weakened against a backdrop of faltering sentiment and real estate weakness.

China is at a major crossroads and the next decade will serve as a test of whether a reversion to one-man rule, has the potential to unwind and undo much of the economic progress that propelled the country to its current place as the world’s second largest economy. 

2. Big Tech Sees Ad Sales Weaken in Another Blow for Investors 

• The latest results out of Big Tech looks set to be weighed down by the soaring dollar and comparisons with very strong results recorded a year ago, along with a potential consumer slowdown and that could hit share prices in an already weak market. 

• The end of Big Tech’s period of unabashed growth has already forced some of these companies to act on expenses and heightened Wall Street’s attention to the sector’s profit margins.

Between U.S. Federal Reserve interest rate hikes and a rapidly slowing economy, U.S. tech giants are reeling from a third quarter that saw ad sales fall. 

America’s tech giants are set to face unfamiliar scrutiny on their costs when they report their latest earnings this week. 

The latest results out of Big Tech looks set to be weighed down by the soaring dollar and comparisons with very strong results recorded a year ago, along with a potential consumer slowdown and that could hit share prices in an already weak market. 

According to some estimates, growth in the combined revenues of the five biggest U.S. tech companies, Alphabet (+1.16%), Amazon (+3.53%), Apple (+2.71%), Meta (-1.16%) and Microsoft (+2.53%), is expected to have slowed to just under 10% in the third quarter. 

These estimates are for Big Tech are a pale shadow compared to a 29% jump for all of last year, when combined sales soared to US$1.4 trillion.

With online spending and digital advertising expected to continue a sharp deceleration already seen in the first half of this year, the earnings are being closely watched as a barometer of the wider consumer economy. 

Meta, formerly known as Facebook, is expected to report a 5% revenue slip for the third quarter. 

Shares in disappearing messaging chat and social media communications app Snap (-28.08%) tumbled by 28% last Friday after the company reported pressure on its advertising income.

One of the biggest digital marketers, Procter & Gamble (+1.25%), said last week that it had cut its advertising spending in response to falling volumes, even as higher prices continue to lift its revenues. 

Growth at Google parent Alphabet is expected to slow to 10% from 41% for all of 2021. 

Amazon, where growth slumped to 7% in the first half of the year from 22% in all of 2021, is expected to rebound slightly thanks to the addition of a second Prime Day in the third quarter to boost sales.

The end of Big Tech’s period of unabashed growth has already forced some of these companies to act on expenses and heightened Wall Street’s attention to the sector’s profit margins.

Besides hiring freezes, tech firms are also looking to cut headcount and contractors.

3. More Regulation for Cryptocurrencies is Welcome News 

• Investors are surprisingly saying they’re more likely to buy into cryptocurrencies following greater enforcement action, at least according to the MLIV Pulse survey. 

• According to the latest survey, most investors were slightly more optimistic about cryptocurrencies than when they were asked in July. 

In the latest MLIV Pulse survey, almost 60% of the 564 respondents viewed the recent spate of legal action in the embattled cryptocurrency sector as a positive sign for the asset class, whose trademark volatility has all but dissipated in recent months. 

Investors are surprisingly saying they’re more likely to buy into cryptocurrencies following greater enforcement action, at least according to the MLIV Pulse survey. 

A crackdown by the U.S. Securities and Exchange Commission and other watchdogs who have been investigating companies such as Three Arrows Capital, Celsius Network, as well as Yuga Labs, is providing an unexpected boon for the industry. 

Professional investors think that the more regulators can get cryptocurrencies out of the “Wild West” and into more mainstream channels, the better off it's going to be as they do need a regulated investment opportunity to get involved in the sector. 

According to the latest survey, most investors were slightly more optimistic about cryptocurrencies than when they were asked in July. 

Almost half of all respondents expect Bitcoin, the world’s largest cryptocurrency by market value, to continue trading between US$17,600 and US$25,000 until the end of this year, a relatively large range, but well within market expectations.  

Since March, Bitcoin has held a strong correlation to risk-on assets such as the S&P 500, barely changing its position in the last three months as investors painted cryptocurrencies with the same brush as everything else in an environment of rising interest rates.

Some 42% of respondents said they think crypto’s correlation with tech stocks will stay the same over the next 12 months, while only 43% said they would increase their exposure to digital assets over the same period. 

It has been chaos for crypto in 2022 with the bankruptcies of Voyager Digital and the US$40 billion wipeout of the Terra blockchain ecosystem shaking confidence. 

Roughly US$2 trillion in overall value was erased from the industry’s late-2021 record.

Nevertheless, investment into the cryptocurrency space continues unabated, on expectations that early bets now could help investors discover the Facebooks, Googles and Amazons of the future.

Many technologists believe that cryptocurrencies and the blockchain technology that underpins them could form the basis of so-called “web3” or the “internet of value” where transactions go beyond interactions and extend to involve the very underlying technology of the blockchain. 

The soaring U.S. dollar has also provided food for thought for many investors, who are wondering if the stronger greenback could be responsible for depressed cryptocurrency prices that would rebound sharply if and when the dollar moderates. 

More financial institutions are also keen to offer cryptocurrencies to investors, given the demand and though once skeptical, many appear to be coming onboard.