Hello there,

A terrific Tuesday to you as traders bracing for hawkish Fed-speak at Jackson Hole retreat.

In brief (TL:DR)

• U.S. stocks were lower on Monday with the Dow Jones Industrial Average (-1.91%), the S&P 500 (-2.14%) and the Nasdaq Composite (-2.55%) all down.

• Asian stocks retreated on Tuesday amid worries about Federal Reserve monetary tightening that have also boosted bond yields.

• Benchmark U.S. 10-year Treasury yields were at 3.02% (yields rise when bond prices fall).

• The dollar was steady.

• Oil topped $91 a barrel with October 2022 contracts for WTI Crude Oil (Nymex) (+1.78%) at US$91.95 after Saudi Arabia said OPEC+ may be forced to cut output.

• Gold rose slightly with December 2022 contracts for Gold (Comex) (+0.21%) at US$1,752.10.

• Bitcoin (+1.40%) was at US$21,479.

In today's issue...

1. Bets on Inflation Have been Getting Burned

2. Euro Sinks as Gas Prices Soar

3. Bitcoin May be Starting to Lose Steam

Market Overview

The Fed’s brake on the US economy to ensure high inflation keeps cooling remains the key wider driver in global markets. Traders are bracing for hawkish talk at the central bank’s Jackson Hole symposium later this week.

Doubts are creeping in about bets that the Fed will temper monetary-policy tightening, expectations that had helped to lift investor sentiment.

Asian markets were lower on Tuesday with Tokyo's Nikkei 225 (-1.19%), Seoul's Kospi Index (-1.10%), Sydney’s ASX 200 (-1.21%) and Hong Kong's Hang Seng Index (-0.78%) all down.

1. Bets on Inflation Have been Getting Burned

• With global inflation still at high levels, many central banks expected to keep raising borrowing costs to limit price pressures.

• The Global Inflation-Linked Bond Index has plunged 17% in 2022 – the worst-performing of the 20 key fixed-income benchmarks.

While it’s not that soaring global inflation hasn’t created any winners, just that the most obvious ones aren’t shoe-ins for investments gains.

With global inflation still at high levels, many central banks expected to keep raising borrowing costs to limit price pressures.

One strategy that’s believed to work at a time of roaring inflation has been to bet on bonds that hedge price pressures, but unfortunately that trade has been a disaster.

The Global Inflation-Linked Bond Index has plunged 17% in 2022 – the worst-performing of the 20 key fixed-income benchmarks and linker indices concentrated in longer-maturity debt have absorbed the worst losses as central banks around the world lift interest rates.

In the United Kingdom, inflation is at its highest since the early 1980s, when inflation-linked gilts were first issued.

Similar instruments called Treasury Inflation-Protected Securities (TIPS) were only introduced in the U.S. over a decade later.

Due to institutional demand from pension funds, borrowers often issue these inflation-linked bonds in multi-decade maturities, but longer bonds are especially sensitive to rate increases, making them tricky to hold in a portfolio without suffering bouts of volatility.

For some funds, the pummeling of longer-maturity inflation linked bonds is now creating a buying opportunity.

2. Euro Sinks as Gas Prices Soar

• The euro resumed its slide on Monday to as low as $0.9934 against the dollar, its lowest level since 2002, as a fresh surge in gas prices heightened worries over the region’s economy.

• The slump reflects concerns about the energy crisis and a broad rise in the dollar turbocharged by expectations the U.S. Federal Reserve will raise interest rates much more aggressively than the European Central Bank.

With winter fast approaching, it’s not just the cold that’s threatening Europe, but a plummeting currency as well.

In July, the Europe’s common currency initially breached parity with the greenback, but has since rebounded.

However, the euro resumed its slide on Monday to as low as $0.9934 against the dollar, its lowest level since 2002, as a fresh surge in gas prices heightened worries over the region’s economy.

The slump reflects concerns about the energy crisis and a broad rise in the dollar turbocharged by expectations the U.S. Federal Reserve will raise interest rates much more aggressively than the European Central Bank.

Traders are now pricing in the odds of a 75-basis-point Fed hike in September at 60%, up from just 50% a month ago.

Economists have said that the rise in gas prices in Europe may crimp industrial production in mainland Europe and push the region into recession.

Widespread fears of gas shortages this winter have led users to try to lock in supplies, pushing up prices even as fears of a severe economic slowdown grow.

Another reason for the latest surge in gas prices was an announcement last week by Gazprom, Russia’s state-backed gas monopoly, that it was planning maintenance on the Nord Stream 1 pipeline to Germany early next month.

There are fears that any maintenance could be used as a pretext for a prolonged shutdown of the line, with Moscow having blamed the capacity reduction on western sanctions interrupting its normal maintenance schedule.

Gas prices in Europe were also responding to a surge in the price of liquefied natural gas in Asia, where state-backed utilities are starting purchases ahead of winter in a “beggar-thy-neighbor” policy that could see Europe be in for hard times in the coming months.

3. Bitcoin May be Starting to Lose Steam

• Bitcoin, the world’s largest cryptocurrency by market cap, has now shed close to 10% over the past 4 days.

• The MACD, a technical indicator known as the moving average convergence divergence, also flashed a warning sign by turning negative for the first time in weeks, which for some technical watchers, is a sign Bitcoin may continue to come under pressure.

Bitcoin, the world’s largest cryptocurrency by market cap, has now shed close to 10% over the past 4 days, held back by a bout of risk aversion in global markets on jitters over tightening U.S. Federal Reserve monetary policy.

Ether, the second-largest cryptocurrency by market cap, slipped also, and smaller tokens like Avalanche and Cardano have lost more than 5%.

Because of the Fed’s commitment to raising interest rates further and drain liquidity, faith in the global equity rebound from June’s bear-market lows is starting to show signs of wavering.

Global equities retreated on Monday, keeping the pressure on cryptocurrencies given the correlation between the two asset classes and ending a recent trend where digital assets were starting their tentative decoupling from traditional ones.

The MACD, a technical indicator known as the moving average convergence divergence, also flashed a warning sign by turning negative for the first time in weeks, which for some technical watchers, is a sign Bitcoin may continue to come under pressure.

But perhaps the most obvious headwind for Bitcoin is a resurgent U.S. dollar which has been rising to its highest level in over a month.

A strengthening greenback and the prospect of fresh rate increases will all conspire to make any rebound in cryptocurrencies short-lived.