Hello there,

A wonderful Wednesday to you as markets wind their way higher but U.S. futures appear to waver on stagflation concerns.

In brief (TL:DR)

• U.S. stocks rose on Tuesday with the Dow Jones Industrial Average (+0.80%), S&P 500 (+0.95%) and the Nasdaq Composite (+0.94%) all higher as bond yields fell, but American markets look set to waver at the open later today.

• Asian stocks closed higher across the board on Wednesday as the dollar pulled back and yields were stable.

• Benchmark U.S. 10-year Treasury yields fell to 3.032% (yields fall when bond prices rise) but remain elevated, putting substantial pressure on stocks.

• The dollar was stable in Asian trading.

• Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+2.54%) at US$120.48 surpassing an important psychological level and increasing risks on the side of stagflation with a fresh energy crisis.

• Gold fell with August 2022 contracts for Gold (Comex) (-0.20%) at US$1,848.40.

• Bitcoin (+2.30%) was more or less flat at US$30,247, but could once again dip below US$30,000 as U.S. stocks look set to waver on stagflation concerns at the open.

In today's issue...

1. Forget Inflation, Stagflation May be the Bigger Threat

2. Chinese Tech Firms Stage a Sparkling Recovery, Should You Bite?

3. Market Making Giant Citadel Throws its Hat into the Cryptocurrency Circus

Market Overview

Investor worries are shifting from inflation to stagflation as the World Bank revises global growth estimates, with emerging markets likely to be hit particularly hard.

Oil has surged beyond the psychologically-important US$120 level and could fuel fears of a fresh energy crisis and perpetuate concerns that stagflation (low growth and high inflation) may be on the cards.

Risk appetite waned and U.S. markets look set to falter at the open.

Asian markets closed mostly higher with Tokyo's Nikkei 225 (+1.04%), Hong Kong's Hang Seng Index (+2.24%) and Sydney’s ASX 200 (+0.36%) closing up on Wednesday, while Seoul's Kospi Index (-0.01%) was flat.

1. Forget Inflation, Stagflation May be the Bigger Threat

• World Bank is warning of stagflation, cuts global growth forecast for 2022.

• Stagflation risks are intensifying especially as inflation appears to be persistent and challenges to growth are increasing.

This decade has not been kind to the human race.

From a crippling global pandemic to a war of aggression and spiraling inflation, it seems that no matter which corner investors turn, there’s a new reason to be pessimistic and stuff our heads in the sand.

Understandably investors may want to hunker down with cash stuffed in mattresses and wait it out before resurfacing but even that has its costs – no less than 6.3% per year, depending on which measure of dollar inflation one selects.

And now, the World Bank is cutting its global economic expansion forecast for 2022 further, warning that several above-average years of inflation and below-average years of growth lie ahead.

The World Bank reduced its global growth estimate for this year to 2.9% from 4.1% in January and down from 3.2% in April, due to a surge in energy and food prices, supply disruptions triggered by Russia’s invasion of Ukraine and central bank tightening.

World Bank officials are increasingly concerned that the world is plunging into a period of stagflation (low growth and high inflation) reminiscent of the 1970s.

In the 1970s, the U.S. Federal Reserve had to resort to raising interest rates as high as 20% in 1981 to rein in inflation, which by 1980, had soared to 14% from 8.8% in 1973.

Headline inflation in the U.S. now sits at 8.3%, the highest in four decades, and investors will be waiting for Consumer Price Index data out on Friday to see if the Fed’s policy tightening measures will have had any effect.

Nevertheless, investors must be prepared that the associated rise in global borrowing costs and exchange rate depreciations, already demonstrated in the precipitous fall of the Japanese yen, could trigger financial crises, as they did back in the early 1980s.

Unemployment also soared to 10% in the U.S. as Paul Volcker’s Federal Reserve was forced to

respond to soaring prices with a series of rate hikes.

It is possible however that inflation may already have peaked and major global central banks would be able to engineer a soft landing, but right now the risks are escalating on a daily basis that there is no soft landing to be had.

2. Chinese Tech Firms Stage a Sparkling Recovery, Should You Bite?

• Chinese tech shares are staging a strong recovery as regulators approve 60 video game licenses, fueling speculation that the crackdown may be finally over.

• Investors should be wary that the sudden U-turn in Chinese policy may be more a matter of politics than economics and should prepare for surprises after Chinese President Xi Jinping finally secures his unprecedented third term in office and potentially as ruler for life.

Investing in emerging markets is a lot like waking into a dark jungle to find rare and priceless herbs, the rewards are substantial, but the journey is dark and it’s very scary.

But there are signs of life in embattled Chinese tech stocks with Beijing approving a string of video games as it signals that the crackdown on the sector may finally be over.

On Wednesday, Beijing approved 60 licenses for video games, in a very visible signal that the crackdown on “undesirable” activities such as excessive video gaming among youth may finally be over.

The news also comes on the heels of authorities announcing that they would soon be concluding their investigation into ride-hailing giant Didi Chuxing (-2.61%), which could pave the way for its app to return to China’s app stores.

Last summer, China’s crackdown on the highly influential tech sector spilled over into the video game industry, when regulators introduced stringent measures to curb what was perceived as addiction to video games.

But with China’s economy struggling from zero-Covid lockdowns and a rapidly slowing economy the result of crackdowns on a variety of sectors including technology, afterschool education and real estate, Beijing is having a change of heart at a politically sensitive time.

China’s President Xi Jinping is set to make a play for an unprecedented third term in office and possibly becoming leader of China for life, akin to Mao Zedong and Deng Xiaoping before him.

Achieving those political goals requires economic stability at the very minimum, something which looks increasingly challenging to deliver amidst a backdrop of rolling lockdowns.

Which is why Beijing may be so eager to roll back many of the very measures which it had just recently been so eager to impose, to pursue “common prosperity,” a major goal of Xi.

But what happens when Xi finally ascends the throne?

Investors rushing into Chinese assets need to understand that politics trumps economics in the Middle Kingdom and what is happening now may be what is politically expedient, but not necessarily durable.

Once Xi is coronated, it remains to be seen whether any of these easing measures will be rolled back or he will consolidate power around himself yet again and continue to pursue his long-term political objectives with aplomb.

Instead of taking a purely long-term view for the Chinese economy, especially sectors like tech, investors may be better off betting on less controversial sectors such as materials, food and beverage and retail and take opportunistic trades on more dicey ones like tech.

3. Market Making Giant Citadel Throws its Hat into the Cryptocurrency Circus

• Market maker Citadel Securities, made famous by the meme stock craze of 2021, announces that it's working with Virtu Financial, Fidelity Investments and Charles Schwab to develop a retail-focused cryptocurrency offering.

• Platform could rival existing unregulated cryptocurrency forums, especially as institutional players have already been burned by the vagaries and idiosyncrasies of the cryptocurrency markets.

While the current bear market in cryptocurrencies may be demoralizing for investors, especially those who got in towards the top of the cycle, there are signs that the sector is here to stay as more institutional players throw their hat in the ring.

The latest major player to throw their hat in the ring is market maker Citadel Securities which announced that it would be forming a consortium with Fidelity Investments and Charles Schwab (-0.67%) to build a cryptocurrency trading platform.

Citadel Securities is a market maker that attracted scrutiny early last year for a widely-accepted practice of payment for order flow from retail brokerages such as Robinhood Markets (-1.15%).

The practice of payment for order flow came to light amidst the meme stock craze early last year and Robinhood Markets stopped accepting orders for popular retail stocks like AMC Entertainment and GameStop.

Now Citadel Securities is looking to develop a cryptocurrency offering with help from Fidelity Investments, one of the world’s largest asset managers, and retail brokerage Charles Schwab.

Citadel Securities will be working with Virtu Financial to build the retail-focused cryptocurrency offering that would likely increase access to the nascent asset class and represent the first major push into the space for the firms which are already dominant in traditional assets like equities and exchange traded funds.

Other market makers like Jump Trading and Jane Street have been active in the cryptocurrency space for some time, through venture investments and trading capabilities.

But the cryptocurrency space is unlike anything that even the most venerable market maker may have ever faced before.

A lack of regulatory oversight over the world’s largest and most active cryptocurrency exchanges has meant that it’s unclear if inside market makers have distinct advantages over other traders, and as such, may be the reason that Citadel Securities and Virtu Financial are looking to launch their own platform.

Even seasoned hands have been burned in the cryptocurrency space, with Jump Crypto, an offshoot of Jump Trading having had to intervene in the Wormhole hack, and it is unclear how much it was exposed to the collapse of Luna and TerraUSD.

But the growing interest, especially among Millennials and Gen Z, for cryptocurrencies, has meant that it is no longer possible for financial institutions to ignore the space.

Currently, most retail investors access cryptocurrencies through brokerage apps like Robinhood Markets, as well as cryptocurrency exchanges like Binance and FTX.