A wonderful Monday to you as stocks extend rally amid dollar's pause.

In brief (TL:DR)

­

• U.S. stocks closed higher on Friday with the Dow Jones Industrial Average (+1.19%), the S&P 500 (+1.53%) and the Nasdaq Composite (+2.11%) all up.

• Asian stocks climbed Monday as investors weighed the prospect of Europe following the Federal Reserve with more outsized interest-rate hikes.

• Benchmark U.S. 10-year Treasury yields gained two basis points to 3.33% (yields rise when bond prices fall).

• The dollar retreated.

• Oil dropped with October 2022 contracts for WTI Crude Oil (Nymex) (-1.14%) at US$85.80.

• Gold edged lower with December 2022 contracts for Gold (Comex) (-0.25%) at US$1,724.20.

• Bitcoin (+2.39%) surged to US$22,153 as bulls succeed in wiping out weeks of losses.

In today's issue...

­

1. Hot Housing Markets Face Chill of Winter

2. Bets on Energy Stocks Skyrocket as Shortages Loom

3. MicroStrategy Doubling Down on Bitcoin Bet

­

Market Overview

­

Investor focus is on August US inflation data due Tuesday, with headline CPI expected to cool to an 8% a year pace while the core measure that excludes food and energy is seen accelerating.

Traders almost fully expect another jumbo-sized Fed hike next week, following two 75-basis-point increases.

The rebound in risk assets and the retreat in the dollar at the end of last week contrast with the hawkish remarks from Fed officials. That stance, and recession worries, has driven equities down to nearly oversold levels.

Asian markets rose on Monday with Tokyo's Nikkei 225 (+1.16%) and Sydney’s ASX 200 (+1.02%) up, while Hong Kong and Korean market were closed.

1. Hot Housing Markets Face Chill of Winter

• Realtors in some of the world’s hottest real estate markets were minted as loose monetary conditions saw a surge of buying from Sydney to Seattle, Stockholm to Singapore.

• Higher interest rates hit the housing market and the real economy through a cascade effect.

Not so long ago, in a suburb not so far away from Sydney, the flow of buyers snapping up high-end real estate sight unseen was relentless.

Realtors in some of the world’s hottest real estate markets were minted as loose monetary conditions saw a surge of buying from Sydney to Seattle, Stockholm to Singapore.

But with interest rates rising, real estate prices are fast cooling, threatening to worsen a global economic slowdown as property is a leading source of household wealth.

To be sure, the slowdown is nothing compared to the sharp crash of the 2008 Financial Crisis, but already frothy markets in Australia and Canada are facing double-digit percentage declines on house prices, and some believe that the pain is just getting started.

Higher interest rates hit the housing market and the real economy through a cascade effect.

Households with mortgages tighten their belts (the rising cost of living doesn’t help either) while the increase in funding costs discourages would-be buyers from entering the property market, dragging down prices and future development.

The sudden shift comes as low interest rates fueled a boom in housing as the pandemic spurred demand for larger homes with home offices or studies and extra room to remain locked down.

Now many homebuyers who paid record prices for their property face loans that are due to reset to higher rates, just as soaring inflation and a potential recession hit home.

But not all housing markets are built equal and how exposed homebuyers are depends on location.

In the U.S., the majority of buyers rely on fixed-rate home loans that go for as long as 30 years, with variable rate mortgages making up just 7% of loans in the past five years.

By contrast, most other developed countries offer fixed-rate housing loans at the offset, before these too, become floating and the correlation between housing price correction and variable-rate loan density is strong.

According to a May report by Fitch Ratings, Australia, Spain, the United Kingdom and Canada had the highest concentration of variable-rate mortgages and are also the housing markets which are showing the greatest signs of weakness.

­

2. Bets on Energy Stocks Skyrocket as Shortages Loom

• In an MLIV Pulse survey recently, two-thirds of respondents, which includes portfolio managers and retail investors, plan to increase exposure to the sector over the next six months.

• An index of energy companies in the S&P 500 has rallied by more than 40% so far this year as profits surged along with oil and gas prices.

With Russia constricting deliveries of natural gas through its Nord Stream pipeline, energy markets have come under further strain, having already tripled in Europe this year alone.

Against this backdrop, energy stocks and bonds are poised to get a fresh boost from investors positioning to benefit from the surge in electricity prices and fuel shortages expected later this year.

In an MLIV Pulse survey recently, two-thirds of respondents, which includes portfolio managers and retail investors, plan to increase exposure to the sector over the next six months.

It’s expected that Russia will choke off flows of natural gas to Europe, leading to shortages of key fuels this winter and energy stocks are one of the rare bright spots in the world’s equity markets, which are otherwise stuck in a sea of red.

An index of energy companies in the S&P 500 has rallied by more than 40% so far this year as profits surged along with oil and gas prices.

Investors want to remain invested in energy stocks because of massive supply constraints and the need of a hedge against the growing risk of escalation in Ukraine, despite the country making significant gains against Russia in recent days.

Inflation has reached record levels in the eurozone at the same time that a recession appears likely in the coming quarters as the rising cost of living saps demand, undermining the pandemic rebound.

In the oil market, there are already signs of demand destruction taking place, with crude prices retreating about 25% over the past three months.

Nevertheless, some investors remain convinced that the “picks and shovels” trade, betting on energy companies which have suffered years of underinvestment in extraction, will prevail even as demand dips.

3. MicroStrategy Doubling Down on Bitcoin Bet

• MicroStrategy said the firm has entered an agreement with investment bank Cowen & Co. to sell up to US$500 million of its Class A common stock, with the possibility of using that amount to buy more Bitcoin.

• MicroStrategy added that it intends to retain all future earnings, if any, to purchase additional Bitcoin and for the development of the software business.

Publicly traded software company MicroStategy (+11.71%) may ostensibly be in the business of enterprise software, but its name is synonymous with Bitcoin, and is already the single largest corporate holder of the cryptocurrency, with over 129,000 Bitcoin in its coffers.

In a prospectus filed with the U.S. Securities and Exchange Commission on Friday, MicroStrategy said the firm has entered an agreement with investment bank Cowen & Co. to sell up to US$500 million of its Class A common stock, with the possibility of using that amount to buy more Bitcoin.

The announcement comes just a month after its CEO Michael Saylor stepped down and one week after the Washington D.C. Attorney General sued the company and Saylor for alleged tax fraud.

MicroStrategy added that it intends to retain all future earnings, if any, to purchase additional Bitcoin and for the development of the software business.

The enterprise software company has accrued a sizable Bitcoin treasury of 129,699 BTC, today worth over US$2.7 billion, which the company says it plans to hold for the long term.

In the share prospectus, MicroStategy added that it has no plans to engage in trading or enter into derivative contracts with its Bitcoin holding, but may sell Bitcoin as needed to generate cash for "treasury management and other general corporate purposes."

Bitcoin has rebounded in as many days, having sunk to a low of US$18,500 last week to come back strongly to US$22,200 as at the time of writing.

Investors remain cautious in their appetite for cryptocurrency, despite growing institutional interest, including BlackRock’s recent tie-up with exchange Coinbase.

Sentiment remains mildly bullish given the upcoming software upgrade of Ethereum, which has been years in the offing, and which would see the world’s second most valuable blockchain by market cap switch to the far more energy efficient Proof-of-Stake method to secure transactions.

­