A fantastic Monday to you as Asia stocks rise amid earnings optimism.

In brief (TL:DR) 

• U.S. stocks closed higher on Friday with the Dow Jones Industrial Average (+2.59), the S&P 500 (+2.46%) and the Nasdaq Composite (+2.87%) all in the green.

• Asian stocks tracked Friday’s gains in the US amid optimism over corporate earnings in the region.

• Benchmark U.S. 10-year Treasury yields advanced one basis point to 4.03% (yields rise when bond prices fall). 

• The dollar climbed as traders positioned for another large interest rate hike by the Federal Reserve this week. 

• Oil edged lower with December 2022 contracts for WTI Crude Oil (Nymex) (-0.58%) at US$87.39, as weak economic data from China fanned concerns about energy demand. 

• Gold headed for its seventh straight month of declines with December 2022 contracts for Gold (Comex) (+0.07%) at US$1,646.00.

• Bitcoin (-0.94) fell to US$20,559, struggling to breach US$21,000. 

In today's issue...

1. Chinese Stocks Are Giving Investors Whiplash from Wild Swings 

2. A Sudden Shift by the U.S. Federal Reserve Would Catch Traders Unawares 

3. Bitcoin Struggles to Breach US$21,000, Is the Top In? 

Market Overview

The yen fell against most of its major peers, with economists expecting the Fed to raise rates by another 75-basis-points, widening the policy divergence with the Bank of Japan. 

A core gauge of US inflation accelerated in September, bolstering the case for more tightening. 

Economists surveyed by Bloomberg expect Fed officials will maintain their hawkish stance, laying the groundwork for interest rates reaching around 5% by March 2023, potentially leading to a US and global recession.

Asian markets were higher on Monday with Tokyo's Nikkei 225 (+1.78%), Sydney’s ASX 200 (+1.15%) and Seoul's Kospi Index (+1.11%) up, while Hong Kong's Hang Seng Index (-1.66%) was down.

1. Chinese Stocks Are Giving Investors Whiplash from Wild Swings 

• A ramp-up of Covid restrictions and poor economic data worsened the outlook for the market which hammered Chinese shares early in the week. 

• Chinese tech shares surged following automaker BYD’s record earnings but property stocks plunged as there was no sign of relief for the embattled real estate sector, and few indications that Beijing was prepared to shore up the property market or loosen credit terms.  

While Chinese stocks have faced relentless selling pressure throughout most of the year, hammered by zero-Covid policies that have locked down entire urban centers and simmering tensions with the U.S., recent rebounds are forcing a second look, even for the most bearish views on the world’s second largest economy.  

Last week, Beijing imposed fresh lockdowns from Wuhan to the nation’s industrial belt on the east coast, following a pickup in cases. 

Meanwhile, Macau mandated residents to undergo three days of rapid Covid tests and locked down a casino resort over the weekend in response to fresh cases there. 

A ramp-up of Covid restrictions and poor economic data worsened the outlook for the market which hammered Chinese shares early in the week, made worse by the conclusion of a leadership conclave that has paved the way for unfettered one-man rule by President Xi Jinping which rattled sentiment.  

Down nearly 40% this year, the Hang Seng China Enterprises Index slumped as much as 2.2% early Monday, before erasing all losses. 

Meanwhile, the CSI 300 Index, a benchmark of onshore shares, fell as much as 1.3% before paring a bulk of the decline. 

Chinese tech shares surged following automaker BYD’s record earnings but property stocks plunged as there was no sign of relief for the embattled real estate sector, and few indications that Beijing was prepared to shore up the property market or loosen credit terms.  

Data showed on Monday that China’s factory and services activity contracted in October that signaled Covid curbs and an ongoing slump in the property market are continuing to pressure the world’s second-largest economy. 

Strategists named three issues that investors increasingly concerned – China’s reopening might take longer than expected, China’s social priorities may take precedence over the economy and Beijing’s emphasis on security means a higher risk premium.

2. A Sudden Shift by the U.S. Federal Reserve Would Catch Traders Unawares 

• The latest MLIV Pulse survey suggests that if the U.S. Federal Reserve Chairman Jerome Powell gives any dovish signals during this week’s press conference, he might send investors scrambling to catch up, a move that could see risk assets pop before the end of the year. 

• One of the a top concerns for investors is that distress and a pickup in default rates in credit markets are emerging as borrowing costs rise and the ensuing economic downturn eats into profits. 

For most investors, that the U.S. Federal Reserve will raise rates by 75 basis points this week is a foregone conclusion as the central continues its battle against relentless inflation. 

However, recent moves by Fed’s peers suggest a dovish surprise isn’t impossible, though somewhat unlikely. 

At their most recent policy meetings, the Bank of Canada and Reserve Bank of Australia each raised their benchmark rates by less than forecast while the European Central Bank was also perceived to have been less aggressive in its most recent measures. 

The latest MLIV Pulse survey suggests that if the U.S. Federal Reserve Chairman Jerome Powell gives any dovish signals during this week’s press conference, he might send investors scrambling to catch up, a move that could see risk assets pop before the end of the year. 

Almost half of 250 respondents in the survey said they were buying the dollar ahead of the next FOMC meeting, and about 78% expected two-year Treasury yields to go up. 

The bulk of respondents to the MLIV Pulse survey are neither buying the short nor the longer end of the Treasury yield curve in advance of the Fed meeting. 

One of the a top concerns for investors is that distress and a pickup in default rates in credit markets are emerging as borrowing costs rise and the ensuing economic downturn eats into profits. 

These bearish bets could go sour if Powell suggests a step down toward a 50 basis-point rate increase in December, or quarter-point moves to finish off the Fed’s hiking cycle in early 2023.

November may be more or less settled, but any hint of dovishness in December could mean a sudden reversal on bearish bets. 

Despite disappointing earnings from a number of U.S. tech giants, stocks have risen from their lows of earlier this month and the dollar is on pace for its first monthly decline since May, signaling  some traders may be attempting to front run a softening by the Fed.

3. Bitcoin Struggles to Breach US$21,000, Is the Top In?

• Weekend trading had initially produced an early return above the $21,000 mark, but was short-lived on the back of thin volumes as bulls failed to offer the critical mass to sustain higher levels.

• With on-chain indicators suggesting that the temptation would become considerable should Bitcoin pass US$21,000 more convincingly, profit-taking has been evident with some fatigued investors looking to cash out.

Bitcoin, the largest cryptocurrency by market cap, continued consolidating into the dying days of October as concerns over a deeper retracement became palpable and a lack of bullish momentum to take the benchmark token over the threshold remain elusive. 

On the daily chart, BTC/USD was up against the 100-day moving average (MA), having managed to beat out the 50-day MA over the week, but macro uncertainty may be causing some traders to take money off the table. 

Turning to the weekly and monthly charts, the end of this month looks to offer Bitcoin’s highest weekly candle close since mid-September. 

Weekend trading had initially produced an early return above the $21,000 mark, but was short-lived on the back of thin volumes as bulls failed to offer the critical mass to sustain higher levels.

Meanwhile, altcoins performed strongly through the weekend, notably led by Dogecoin, which was up another 25% on the back of expectations that Elon Musk’s takeover of Twitter would bode well for the meme token. 

With on-chain indicators suggesting that the temptation would become considerable should Bitcoin pass US$21,000 more convincingly, profit-taking has been evident with some fatigued investors looking to cash out.