A wonderful Tuesday to you as investors awaited the Federal Reserve’s policy meeting. 

In brief (TL:DR) 

• U.S. stocks closed lower on Monday with the Dow Jones Industrial Average (-0.39), the S&P 500 (-0.75%) and the Nasdaq Composite (-1.03%) all down.

• Asian stocks rebounded Tuesday as Chinese stocks roared back. 

• Benchmark U.S. 10-year Treasury yields declined three basis points to 4.02% (yields rise when bond prices fall). 

• The dollar edged lower. 

• Oil advanced with December 2022 contracts for WTI Crude Oil (Nymex) (+1.06%) at US$87.45 after losing around 3% over the previous two sessions. 

• Gold rose with December 2022 contracts for Gold (Comex) (+0.55%) at US$1,649.70.

• Bitcoin (+0.51) was stable at US$20,587. 

In today's issue...

1. Could the U.S. Federal Reserve be Poised to Pivot?  

2. Asia’s Factories Fall Silent as Global Demand Slows 

3. Hong Kong Picks Up the Torch from Singapore by Considering Retail Investors for Crypto

Market Overview

The dollar and Treasury yields fell as investors awaited the Federal Reserve’s policy meeting. Stocks and US equity futures rallied.

Chinese stocks pared gains after the Foreign Ministry said it was unaware of any plans to ease restrictions. 

European luxury shares and US-listed Chinese stocks jumped in premarket trading, tracking an earlier rally in Chinese markets on speculation that the country’s policymakers are looking at gradually unwinding its stringent Covid policy. 

Asian markets rose on Tuesday with Tokyo's Nikkei 225 (+0.33%), Sydney’s ASX 200 (+1.65%), Seoul's Kospi Index (+1.81%) and Hong Kong's Hang Seng Index (+5.23%) all up.

1. Could the U.S. Federal Reserve be Poised to Pivot?

• Based on current data, there’s every reason to believe that the U.S. Federal Reserve will remain resolute in its resolve to combat inflation, even as other central banks start to show signs of wavering. 

• But persistent inflation and robust employment data may temper expectations of the Fed slowing down its rate hikes, especially as Powell has made clear that prices continue to remain far too high. 

You turn if you want to, the Fed’s not for turning. Or at least that’s what the current data would suggest as other central banks start to ease off the tightening given moribund economies and a slew of other challenges, not least of which have been declining currencies. 

Based on current data, there’s every reason to believe that the U.S. Federal Reserve will remain resolute in its resolve to combat inflation, even as other central banks start to show signs of wavering. 

But one data point is nearing a key inflection that could encourage U.S. policymakers to think twice about persisting in their hawkish pivot – the Fed’s preferred yield curve that is close to indicating a recession. 

U.S. Federal Reserve Chairman Jerome Powell has hinted that he’s willing to risk a recession in order to bring price pressures back in step, but a yield curve that him and his colleagues at the Fed use to measure economic conditions is on the cusp of inverting. 

The yield curve on where 3-month rates are now versus where they are expected to be in 18-moonths’ time is on the precipice of an inversion, with the spread between the two falling to just 0.2% this week, from as high as 2.7% in April. 

An inverted yield curve is a key warning signal for many investors that a recession is on the cards and many other closely-watched spreads in the Treasury markets have already flipped to zero below zero, an almost certain indicator of a recession. 

The prospect of a recession is causing some investors to bet that while the Fed is likely to stick to another 75-basis-point hike in November, it may be forced to move to smaller rates from December onwards, a shift in guidance that could provide a momentary boost for risk assets. 

But persistent inflation and robust employment data may temper expectations of the Fed slowing down its rate hikes, especially as Powell has made clear that prices continue to remain far too high. 

Because yield curves price in market expectations, they are not necessarily reflective of the conditions on the ground, which are revealed by employment data. 

Corporate earnings have been compressed and margins squeezed due to rising material and labor costs, but consumption remains firm and for now, there’s no reason why the Fed would reduce the size of its next most immediate hike, but Powell may pave the way for greater flexibility in the subsequent meetings. 

That doesn’t necessarily mean that markets are out of the woods just yet. 

Even 50-basis-point hikes will be sufficient to ensure that borrowing costs increase, affecting a slew of industries and consumption.

2. Asia’s Factories Fall Silent as Global Demand Slows

• Asia’s factories fell silent in October as global demand for manufactured goods made in the region continues to weaken, especially as the sale in electronics and computers slumps.

• According to a statement by Caixin and S&P Global, supply, domestic and overseas demand, and employment in the manufacturing sector all contracted in October. 

Soaring inflation and interest rates are crimping consumer spending in the U.S. and Europe, bringing to an end a red hot trading boom for Asia that had been super charged by the pandemic.

Asia’s factories fell silent in October as global demand for manufactured goods made in the region continues to weaken, especially as the sale in electronics and computers slumps.

Taiwan registered its weakest PMI reading in over a decade with the the S&P Global manufacturing purchasing managers’ index dropping to 41.5 in October from 42.2 in September to mark its weakest reading since January 2009, soon after the Global Financial Crisis. 

Meanwhile, Japan’s manufacturing gauge slipped to 50.7 from 50.8 and South Korea’s PMI rose to 48.2 from 47.3, but was still in its fourth consecutive month of overall contraction.

In Southeast Asia, Thailand’s PMI fell to 51.6 from 55.7 as selling prices rose at their fastest rate on record and global demand for goods deteriorated. 

Indonesia, Malaysia and Vietnam also reported more sluggish manufacturing expansion in October.

According to a statement by Caixin and S&P Global, supply, domestic and overseas demand, and employment in the manufacturing sector all contracted in October. 

Weak domestic and international demand were the main drag on headline figures and will add to challenges for Asia’s manufacturers, at a time when dollar-denominated debt loads are hanging like millstone around the region’s factories.

The world’s biggest factory, China, is said to have a rapidly deteriorating situation in its manufacturing sector, having to contend with both a slowdown in external demand, and Covid outbreaks resulting in lockdowns.

3. Hong Kong Picks Up the Torch from Singapore by Considering Retail Investors for Crypto

• Hong Kong is taking steps towards legalizing retail trading of crypto assets. 

• Hong Kong’s financial authorities said on Monday that the Chinese territory’s regulators are also exploring the listing of crypto exchange traded funds as the city’s rivalry with Singapore intensifies. 

Last year, Beijing declared all activities related to digital tokens illegal. 

But in a reversal that contrasts Beijing’s crackdown on crypto transactions in mainland China, Hong Kong is taking steps towards legalizing retail trading of crypto assets. 

Current rules in Hong Kong limit cryptocurrency trades to institutional investors with a portfolio of at least US$1 million, but these rules could soon change at a time when Singapore is increasing restrictions on retail investors trading in the nascent asset class. 

When Hong Kong rolls out new rules for retail investors trading in crypto, it could clench back the title of “Asia’s Crypto Capital” from Singapore, as a spate of high-profile collapses of crypto firms associated with the latter forces authorities there to take a more conservative approach. 

Hong Kong’s financial authorities said on Monday that the Chinese territory’s regulators are also exploring the listing of crypto exchange traded funds as the city’s rivalry with Singapore intensifies. 

The Hong Kong Securities and Futures Commission has been said to be actively looking to set up a regime to authorise ETFs which would provide exposure to digital assets with appropriate investor protection guardrails.

Given Hong Kong’s already deep and liquid capital markets, a cryptocurrency ETF would put it heads and shoulders above Singapore. 

Hong Kong will soon be conducting a public consultation on how retail investors may be given a degree of access to digital assets under the new licensing regime.

Crypto assets are by design permissionless and as such, retail investors are going to access these assets regardless of regulators, but Hong Kong’s commonsense approach could potentially provide far more investor protection instead of just limiting access. 

A crypto ETF, with the requisite institutional controls and protections would at the very minimum provide a structured and familiar regime within which retail investors could gain exposure to the nascent asset class, instead of accessing unregulated exchanges offshore. 

Hong Kong’s financial chief Paul Chan said at the government’s FinTech Week held recently, that the city was “open and inclusive” with regards to digital assets, adding, 

“We want to make our policy stance clear to global markets to demonstrate our determination to explore financial innovation together with the global virtual assets community.”