A wonderful Monday to you as Fed’s campaign to quell inflation threatens to stymie growth.

In brief (TL:DR)

• U.S. stocks closed lower on Friday with the Dow Jones Industrial Average (-2.11%), the S&P 500 (-2.80%) and the Nasdaq Composite (-3.80%) all up.

• Asian stocks tumbled Monday amid intensifying concern over rising global interest rates and as Chinese investors returned from a week-long holiday to tighter restrictions on American technology.

• Benchmark U.S. 10-year Treasury yields increased 6 basis points to 3.88% on Friday (yields rise when bond prices fall).

• The dollar fluctuated versus its Group-of-10 counterparts while China set its reference rate for the yuan stronger than expected for a 28th day.

• Oil eased with November 2022 contracts for WTI Crude Oil (Nymex) (-0.47%) at US$92.20 as risks to energy demand stemming from tighter monetary policy halted a rally triggered by OPEC+’s decision to cut supply.

• Gold extended a decline with December 2022 contracts for Gold (Comex) (-0.94%) at US$1,693.20 after plunging below the $1,700 an ounce mark last week.

• Bitcoin (-0.18%) was little changed at US$19,396.

In today's issue...

1. Could it be time to double down on emerging market bets?

2. Oil’s Rally Stalls on Fed Rate Hike Concerns

3. Hackers Feast on Crypto Weak Link and Even Binance Isn’t Spared

Market Overview

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Investors continued to digest comments from Fed Bank of New York President John Williams, who said last week that rates need to rise to around 4.5% over time, but the pace and ultimate peak of the tightening campaign will hinge on how the economy performs. Officials have been resolutely hawkish in their message that they won’t be deterred from raising rates by volatility in financial markets. All eyes will now be on this week’s US inflation data after a hotter-than-expected reading in August tempered hopes of a nascent slowdown. A rebound in Covid cases in China amplified the downbeat tone. Commodities declined as traders weighed mounting risks to the world economy. Asian markets fell on Monday with Hong Kong's Hang Seng Index (-3.13%) and Sydney’s ASX 200 (-1.40%) down, while Japan and Korea are closed for holidays.

1. Could it be time to double down on emerging market bets?

• Emerging-market investors have been waiting for the moment when two trends converged – inflation and policy tightening.

• The expectation for at least a halt to tightening next year continues to find support with policymakers reaffirming their fight against inflation and the U.S. labor market staying strong.

While inflation may be a relatively new thing for the rich world, emerging markets have been having to deal with price pressures for some time now and may finally be ahead of the curve compared with their rich world counterparts.

And expectations for a peak in borrowing costs next year are encouraging investors to dip their toes back into emerging-market assets in anticipation on their recovery ahead of the rest of the global economy.

Emerging-market investors have been waiting for the moment when two trends converged – inflation and policy tightening.

Emerging markets from India to Brazil are reporting declines in consumer-price growth, early victories in a war that’s gone on for two years while monetary tightening from the U.S. to U.K. and Europe, are now moderating.

Investors may find the developing world more attractive when monetary tightening does wind down because equity and bond valuations are cheaper than in rich nations, real yields higher and beaten-down currencies brim with carry.

After posting declines in eight of the nine months this year, benchmark gauges of emerging-market bonds, in both dollars and local currencies, are finally rallying in October.

An equity benchmark tracking emerging markets is also recovering from the worst monthly slump since March 2020, while an emerging market currency index is bouncing off the longest streak of losses since 2019.

Some of these gains are being partly fueled by bad economic data and assumptions that will push central banks including the U.S. Federal Reserve to make a dovish pivot.

The expectation for at least a halt to tightening next year continues to find support with policymakers reaffirming their fight against inflation and the U.S. labor market staying strong.

Runaway inflation, the main concern of poorer nations for the past two year, is abating with India reporting four successive months of declines in its consumer price index, while Brazil and South Africa have also joined the peak-inflation club taking some pressure off the biggest emerging market economies to raise rates.

The euphoria could however be premature, and more conservative investors may want to discern a noticeable pause in rate hikes before doubling down on emerging markets.

2. Oil’s Rally Stalls on Fed Rate Hike Concerns

• Risks to energy demand stemming from tighter monetary policy halted oil’s rally triggered by OPEC+’s decision to cut supply.

• West Texas Intermediate dropped below US$91 a barrel, with China’s markets reopening following a week-long nationwide break.

Oil’s nascent rebound has since taken a breather on concerns of a fresh round of U.S. Federal Reserve rate hikes.

Last week, the benchmark U.S. WTI Crude Oil soared 17% after the Organization of Petroleum Exporting Countries and allies including Russia agreed on a 2 million barrel-a-day output cut.

However, risks to energy demand stemming from tighter monetary policy halted oil’s rally triggered by OPEC+’s decision to cut supply.

Traders are concerned that major central banks including the U.S. Federal Reserve will push interest rates deeper into restrictive territory to quell inflation, tanking demand.

West Texas Intermediate dropped below US$91 a barrel, with China’s markets reopening following a week-long nationwide break.

The move by OPEC+ to reduce collective output drew a rebuke from the Washington after U.S. President Biden traveled to Riyadh in July to improve relations in a bid for greater flows of oil.

Oil along with other commodities and risk assets including equities remain pressured by slowdown concerns, with crude giving up all of the gains triggered by Russia’s invasion of Ukraine.

And a slowing global economy triggered by higher borrowing costs, as well as China’s continued zero-Covid policies, could put a damper on demand expectations.

3. Hackers Feast on Crypto Weak Link and Even Binance Isn’t Spared

• A total of 2 million Binance Coin, equivalent to nearly US$570 million, were effectively minted and taken by the hacker.

• According to a statement from Binance, about US$100 million of the stolen funds were not recovered, while the rest were frozen with the exchange adding that no user funds were lost.

On Thursday, a hacker made off with about US$100 million cryptocurrency via a bridge used by the world’s biggest cryptocurrency exchange by volume, Binance.

Cross-chain bridges allow tokens to move between different blockchains and are a means by which cryptocurrencies achieve interoperability across different chains.

A total of 2 million Binance Coin, equivalent to nearly US$570 million, were effectively minted and taken by the hacker.

According to a statement from Binance, about US$100 million of the stolen funds were not recovered, while the rest were frozen with the exchange adding that no user funds were lost.

According to Chainalysis, it’s estimated that US$2 billion worth of tokens have been looted from 13 separate attacks, the majority of which was stolen this year.

Bridges continue to be a major weak point that is exploited by hackers, but an unavoidable route of passage as major blockchains remain largely segregated from each other.

In August, one such bridge called Nomad, which uses a method for verifying transactions that it says is safer than those used by other cross-chain platforms was hit by a US$200 million hack.

Largely decentralized, bridges generally run on open source code, with no single entity or individual answerable for their integrity.

One of the major challenges around building secure bridges is their complexity, which gives hackers many potential entry points and there are few qualified experts who can build and secure them.

The open source nature of bridges acts as a double-edged sword making them more naturally vulnerable to hacks than traditional financial networks, but also allowing more individuals to collaborate to help improve the code.

Another issue with bridges is that most operate with a small set of custodians or entities such as validators that are responsible for securing the network making then vulnerable as they sacrifice decentralization for the sake of operating at scale.