Hello there,

A terrific Thursday to you as traders hope slower U.S. inflation eases pressure for U.S. Federal Reserve rate hikes.

In brief (TL:DR)

• U.S. stocks closed higher on Wednesday with the Dow Jones Industrial Average (+1.63%), the S&P 500 (+2.13%) and the Nasdaq Composite (+2.89%) all up on optimism that the Fed may be easy on rates given the lessened inflationary pressures.

• Asian stocks extended a rally Thursday following softer-than-expected U.S. inflation data.

• Benchmark U.S. 10-year Treasury yields were little changed at 2.78% (yields rise when bond prices fall).

• The dollar edged up, paring a retreat from a day earlier that was the biggest since the onset of the pandemic.

• Oil held most of a jump above $91 a barrel with September 2022 contracts for WTI Crude Oil (Nymex) (-0.18%) at US$91.76.

• Gold fell with December 2022 contracts for Gold (Comex) (-0.65%) at US$1,802.00.

• Bitcoin (+7.09%) rose to US$24,567 in a sign of the brighter sentiment in markets.

In today's issue...

1. U.S. Stocks Surge on Milder Headline Inflation

2. Gold Everywhere But No One Seems to Want It

3. Ether Surges Ahead of The Merge Software Upgrade

Market Overview

U.S. headline inflation was 8.5% in July, down from the 9.1% June print that was the largest in four decades. Price pressures are still intense and Fed officials were quick to stress more rate hikes are coming.

They also signaled investors should rethink expectations of cuts next year to shore up economic growth.

China’s bourses advanced even as investors digested a warning from its central bank about inflation threats and a pledge to avoid massive stimulus.

Asian markets rose on Thursday with Sydney’s ASX 200 (+1.12%), Seoul's Kospi Index (+1.73%) and Hong Kong's Hang Seng Index (+2.90%) all up while Japan market was closed.

1. U.S. Stocks Surge on Milder Headline Inflation

• U.S. Consumer Price Index saw inflation sink to 8.5% in July, down from a high of 9.1% in June.

• Investors are betting that the Fed’s September meeting won’t include a third consecutive 75-basis-point hike, with the odds of rates being increased by that amount falling to less than half, but the euphoria may be somewhat overdone.

With an inflation print that defeated most expectations, U.S. equities surged higher on hopes that the U.S. Federal Reserve will less aggressive in its upcoming rate hikes, despite policymakers articulating to the contrary.

U.S. Consumer Price Index saw inflation sink to 8.5% in July, down from a high of 9.1% in June, helped largely by a decline in oil prices that helped to bring down prices at the pump to just slightly over US$4 a gallon, from a high of around US$5.

Market observers caution that policymakers will want to see durable evidence of slowing inflation before they begin to consider a pivot on interest rates, but that did little to slow risk appetite in a market increasingly bereft of good news.

Investors are betting that the Fed’s September meeting won’t include a third consecutive 75-basis-point hike, with the odds of rates being increased by that amount falling to less than half, but the euphoria may be somewhat overdone.

Looking at the bond markets, the yield curve remains steeply inverted, with near-term bonds yielding far more than long-dated securities suggesting that traders are still pricing in higher than even odds of a recession sparked by the Fed.

Given that both bonds and stocks are likely to get dumped should the Fed stick to its path of tightening, investors may be better off looking beyond a traditional 60/40 equity-fixed income portfolio and diversify into real assets such or predictable inflation hedges.

Oil prices are volatile and much of the recent pullback has come from diminished demand prospects in China as well as the Biden administration dipping into the strategic reserve.

Wheat futures and other key agricultural products have come down from their most recent highs, which may also help to ease some of the price pressures on Americans, but inflation remains at uncomfortably elevated levels.

August’s inflation print will be a key determining factor for the Fed’s September meeting response.

If price pressures continue to ebb, as they are likely to with the Biden administration pulling out all the stops to rein in inflation ahead of key midterm elections, which risk the Democrats losing one or both Houses of Congress, then it may provide the necessary justification for policymakers to raise rates by just 0.50% despite all the saber-rattling.

2. Gold Everywhere But No One Seems to Want It

• Despite gold rising almost 4% over the past three weeks, fund managers just aren’t buying bullion.

• In recent weeks, net shorts on gold have exceeded net longs, which has only happened on a handful of occasions previously.

In the Battle of Waterloo, British financier Nathan Rothschild of the Rothschild banking dynasty bet that the war between the British and the French would be a long-drawn-out affair, betting his fortune on the price of gold going upwards.

Unfortunately for Rothschild, the efficacy of the British attack and the late arrival of the Prussian army all but sealed the fate of the French and their leader, Napoleon Bonaparte.

In similar fashion, a weak dollar, turmoil, and lower interest rates are all factors that support the argument for an investment in gold.

But just like Rothschild, investors betting that the prolonged Russian invasion of Ukraine would lead to broader geopolitical instability and a heightened demand for bullion have thus far been disappointed.

Typically, falls in the value of the dollar raise the price of dollar-denominated commodities, including gold and things like war make investors head for safe haven assets, of which gold is by far the oldest, dating back to ancient Mesopotamia.

Yet somehow, despite gold rising almost 4% over the past three weeks, driven by a confluence of lower rate hike expectations and the threat of greater geopolitical tension in the South China Sea, with a possible standoff between the U.S. and China, fund managers just aren’t buying bullion.

In data going back to 2006, money managers have almost always had net long positions in gold futures and options traded in Chicago, with more betting that prices will rise rather than fall – a hedge against uncertain times in an ever-changing landscape.

But in recent weeks, net shorts on gold have exceeded net longs, which has only happened on a handful of occasions previously.

Holdings by gold ETFs have been on the decline and despite a run-up in the wake of Russia’s invasion of Ukraine, those gains have now faded to almost nothing.

Appetite for gold by Asian investors, whether of jewelry or as a store of value has also been on the decline.

With jewelry accounting for about half of overall gold demand and trillions of dollars sitting in post-Covid savings in Asian bank accounts, high inflation could provide the trigger for a resurgence in the precious metal.

But higher interest rates could also be the catalyst for a precipitous fall in gold prices as well.

Gold is sitting at a turning point, and something is about to give, which means strategically-placed bets on the gold, depending on the outlook for the dollar, could either see bullion rebound to US$2,000, or fall even lower.

3. Ether Surges Ahead of the Merge Software Upgrade

• Ether soared by as much as 9% on optimism over what is being touted as the final test of the network before the much-anticipated software upgrade.

• But there’s reason that many traders are buying the rumor and selling the news with a countless number of things that could go wrong.

For the longest time, Ether has always been the bridesmaid, never the bride, but ahead of a major software upgrade for the pioneering smart contract blockchain, the price of Ether has led a rebound in cryptocurrencies, leaving Bitcoin in its wake.

Ether soared by as much as 9% on optimism over what is being touted as the final test of the network before the much-anticipated software upgrade and is up about 67% from its recent bottom in June, outperforming Bitcoin, which has rebounded around 15%.

The Goerli test for Ethereum, named after a train station in Berlin, has been successful, with the test network merging with the Proof-of-Stake test network, a transition that will mimic on a smaller scale a similar move for the main Ethereum blockchain.

Ethereum is attempting to do something no other blockchain, especially not one with so many services built atop of it, has ever attempted, move from the more energy-intensive Proof-of-Work method of securing the blockchain to Proof-of-Stake.

With the Goerli test successfully concluded, the next step will be to conduct the Merge, which is widely expected to take place in September.

But there’s reason that many traders are buying the rumor and selling the news with a countless number of things that could go wrong.

The last time that Ethereum attempted to not recognize the proceeds of the DAO hack in 2016, it led to an ideological split in the development community and the emergence of a hard fork, which became Ethereum Classic, a legacy of that era that lives on today.

Ether miners who have invested millions into securing the Ethereum blockchain could soon see their equipment made redundant.

Given that Ethereum is the most important commercial highway in cryptocurrency, the stakes are extremely high and the chance of any disruption could cost billions and impact billions of users.

With over 3,400 decentralized apps built atop Ethereum, it will be a nail-biting finish.