A terrific Wednesday to you as risk assets tumble as investors reassess Fed’s rate hike path.

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In brief (TL:DR)

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• U.S. stocks slumped on Tuesday with the Dow Jones Industrial Average (-3.94%), the S&P 500 (-4.32%) and the Nasdaq Composite (-5.16%) all down sharply.

• Asian stocks tumbled in the wake of the broad-based selloff on Wall Street.

• Benchmark U.S. 10-year Treasury yields advanced one basis point to 3.42% (yields rise when bond prices fall).

• The dollar held most of its rally on the CPI report.

• Oil edged lower with October 2022 contracts for WTI Crude Oil (Nymex) (-0.54%) at US$86.84.

• Gold fell with December 2022 contracts for Gold (Comex) (-0.32%) at US$1,711.90.

• Bitcoin (-9.10%) fell to US$20,352 along other risk assets, the biggest decline since cryptocurrencies plunged in June.

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In today's issue...

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1. The Market Suffers from Pandemic Fever All Over Again

2. Asia Suffers Fallout of U.S. Inflation Data

3. Cryptocurrencies Succumb to Losses on U.S. CPI Data Even as Ethereum Merge Looms

Market Overview

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The hotter-than-expected US inflation reading that triggered the stock rout has swaps traders certain the Federal Reserve will raise interest rates three-quarters of a percentage point next week, with some wagers appearing for a full-point move.

That leaves investors weighing the prospect of tighter conditions across a swath of markets after jumping back into risk-sensitive assets in recent days on hopes that inflation would cool more.

Asian markets fell on Wednesday with Tokyo's Nikkei 225 (-2.64%), Sydney’s ASX 200 (-2.58%), Seoul's Kospi Index (-1.62%) and Hong Kong's Hang Seng Index (-2.52%) all in the red.

1. The Market Suffers from Pandemic Fever All Over Again

• Wall Street suffered its worst sell-off since the early days of the pandemic as investors predict more aggressive action from the U.S. Federal Reserve.

• It would be a brave investor to double down on equities at the current juncture, especially given that the Fed’s response to the slowing pace of price increases is as yet unclear.

If flooding the markets with liquidity was the elixir that rescued the global economy during the depths of the pandemic-induced crash in asset prices, then the withdrawal of that medicine is proving to be a bitter experience.

After official U.S. Consumer Price Index data increased unexpectedly in August with CPI prices up 0.1% from the previous month, Wall Street suffered its worst sell-off since the early days of the pandemic as investors predict more aggressive action from the U.S. Federal Reserve.

CPI came in at 8.3%, down from 8.5% in July, but higher than the 8.1% economists had predicted.

According to data from CME Group, investors on Tuesday priced in a 1-in-3 chance that the Fed would raise rates by a full percentage point this month rather than a 0.75% increase that remains the consensus expectation.

The benchmark S&P 500 stock index tumbled 4.3%, its worst day since June 2020 with 99% of companies sliding in value.

The Nasdaq Composite fell 5.2% as technology groups seen as most exposed to higher rates bore the brunt of selling.

Nearly 2,000 stocks trading on the New York Stock Exchange fell in value in tandem, a phenomenon normally seen at times of market stress.

Facebook owner Meta (-9.37%) and chipmaker Nvidia (-9.47%) were among the biggest losers, both down 9%, while Amazon (-7.06%) shed 7%.

Apple (-5.87%) and Microsoft (-5.50%) experienced their biggest daily losses since September 2020 with market valuations down US$154 billion and US$109 billion respectively.

Asian stocks also followed Wall Street lower on Wednesday, with Hong Kong’s benchmark Hang Seng index falling 2% and Japan’s Topix index down 1.7%.

The yield on short-dated government debt that tracks interest rate expectations hit its highest level in almost 15 years as investors increased their bets that the Fed will need to act more aggressively to combat rising prices.

Following the report, investors in the futures market bet that the Fed’s benchmark interest rate would stand at 4.17% by year-end, versus expectations of 3.86% before the report.

The prospect of higher rates prompted a jump in the dollar, leaving it up 1.4 per cent against a basket of six peers.

To be fair, it’s as yet unclear whether the panic in the markets is warranted.

After all, the pace of inflation appears to be plateauing, with CPI at 8.3%, down from 8.5% in July and well off the 9.1% in June, but investors remain concerned that the low hanging fruit have all been plucked and the bitter medicine of higher rates can be avoided.

It would be a brave investor to double down on equities at the current juncture, especially given that the Fed’s response to the slowing pace of price increases is as yet unclear.

2. Asia Suffers Fallout of U.S. Inflation Data

• Policy makers in Asia are seeking to stem losses as their currencies teetered on the brink of key levels that may trigger even more selling.

• Years of reform and the bolstering of reserves has helped shore up Asian central bank balance sheets and they are far more prepared to suffer the dollar’s seemingly relentless onslaught, but not indefinitely.

As more aggressive U.S. Federal Reserve tightening to tackle inflation boosts the dollar, policy makers in Asia are seeking to stem losses as their currencies teetered on the brink of key levels that may trigger even more selling.

In Japan and South Korea, officials ratcheted up the rhetoric, while China’s central bank set the daily reference rate on the yuan at the strongest bias on record after higher-than-expected US inflation data fueled dollar gains.

However, a depleting stock of foreign reserves may severely limit the ability of central banks to fight against a soaring dollar.

On Wednesday, traders entered a wave of sell orders on emerging Asian currencies at the market’s open.

The won suffered its biggest drop since June, within minutes of the market’s open while the Thai baht plunged as much as 1.3%.

The Philippine peso, Indonesian rupiah and Malaysian ringgit also declined.

Against this backdrop, authorities in the region quickly sought to limit the losses.

After Japan’s chief currency official Masato Kanda said the government won’t rule out any options in responding to foreign exchange moves, the yen edged up again, albeit momentarily.

In South Korea, the Vice Finance Minister Bang Ki-sun held an internal meeting and asked officials to closely monitor financial markets.

Given the increasing divergence in monetary policies between the Fed and Asia’s central banks, little (if anything) can be done, but fortunately, Asia’s central banks are in far better shape to withstand the whiplash of a rising dollar than they were in 1997.

Years of reform and the bolstering of reserves has helped shore up Asian central bank balance sheets and they are far more prepared to suffer the dollar’s seemingly relentless onslaught, but not indefinitely.

3. Cryptocurrencies Succumb to Losses on U.S. CPI Data Even as Ethereum Merge Looms

• Crypto and stock markets are feeling the pain after the Sept. 13 inflation report printed an unexpectedly hot figure that showed headline inflation rising by 0.1% month-over-month.

• The majority of cryptocurrencies are also nursing single to double-digit losses against a backdrop of bearish sentiment on concerns of further interest rate hikes.

Cryptocurrencies are once again demonstrating their strong correlation with stock markets and reeling from recent U.S. inflation data which showed headline inflation was at 8.3%, down from July’s figures, but above most economist estimates.

Cryptocurrency markets are also braced for a possible test ahead from the upgrade of the Ethereum blockchain, known as “The Merge.”

The upgrade to slash Ethereum’s energy use is due late Wednesday or Thursday and has now been overshadowed by macroeconomic factors of risks of large U.S. Federal Reserve interest-rate hikes.

Bitcoin plunged almost 10% and is currently trading around US$20,300, giving up more than 50% of its recent weekend gains.

Ether, the native token of Ethereum, extended recent underperformance to drop to US$1,600, despite bullishness on the success of The Merge.

The majority of cryptocurrencies are also nursing single to double-digit losses against a backdrop of bearish sentiment on concerns of further interest rate hikes.

Barring an extremely bullish Merge event, risks remain heavily skewed towards the downside.

Many institutional players are cottoning on to the potential behind The Merge, including banks and financial institutions which have been building atop Ethereum in anticipation.

An array of financial services are built atop Ethereum, making it a critical cryptocurrency highway, so any snafus in the software upgrade from proof-of-work to a proof-of-stake paradigm could ripple across digital asset markets and cause untold damage.