Hello there,

A fabulous Friday to you as mixed signals stir debate on whether the U.S. Federal Reserve will slow rate hikes.

In brief (TL:DR)

• U.S. stocks closed higher on Thursday with the Dow Jones Industrial Average (+0.06%), the S&P 500 (+0.23%) and the Nasdaq Composite (+0.21%) all up despite growing concerns about Fed rate hikes.

• Asian stocks fell along with U.S. equity futures Friday, reflecting caution about the likely pace of U.S. Federal Reserve interest-rate hikes to fight inflation.

• Benchmark U.S. 10-year Treasury yields rose three basis points to 2.92% (yields rise when bond prices fall).

• The dollar was around a one-month high.

• Oil extended losses with September 2022 contracts for WTI Crude Oil (Nymex) (-0.95%) at US$89.64.

• Gold fell with December 2022 contracts for Gold (Comex) (-0.21%) at US$1,767.50.

• Bitcoin (-8.73%) dipped to US$21,465, falling with Asian stocks and growing concerns that the Fed will not let up on its hawkish rate hikes.

In today's issue...

1. A Wall of Stock Options Could Make or Break Bulls

2. All that Glitters is Not Gold

3. Crypto Miners in Russia Throw in the Towel

Market Overview

Investor sentiment has been boosted over the last few weeks by expectations of slower monetary tightening on signs that high inflation is cooling.

But hurdles remain for the 12% jump in world equities from June lows, not least the risk of entrenched global price pressures alongside economic slowdowns in the US and China.

Asian markets were mixed on Friday with Tokyo's Nikkei 225 (-0.04%)and Seoul's Kospi Index (-0.61%) down, while Sydney’s ASX 200 (+0.02%) and Hong Kong's Hang Seng Index (+0.05%) were little changed.

1. A Wall of Stock Options Could Make or Break Bulls

• Investors are watching with growing concern as an avalanche of US$2 trillion worth of options are due for expiry today, possibly upsetting what has been a relatively quiet August for traders.

• But some analysts are warning that investors have not priced in the risk that options liquidity will evaporate at a time when the market needs it the most.

Investors are watching with growing concern as an avalanche of US$2 trillion worth of options are due for expiry today, possibly upsetting what has been a relatively quiet August for traders.

Some believe that derivatives have helped to reduce market volatility, compelling rules-based trading firms to buy shares to hedge their positions where they otherwise wouldn’t, but at the same time, luring investors into the market, betting on a more dovish U.S. Federal Reserve.

But some analysts are warning that investors have not priced in the risk that options liquidity will evaporate at a time when the market needs it the most.

Inflation and employment data, central banker conclaves and the Fed’s rate-setting meeting in September could see a volatile several weeks for markets, in stark contrast to August.

With US$2 trillion worth of options set to expire, it remains to be seen whether these contracts will get rolled over.

It’s estimated that around US$7 trillion in market cap has been restored since mid-June as what started off as a short squeeze quickly led to a buying spree driven by other investors fearing a durable rally that they may be left out of.

As a result, traders in so-called “long gamma” positions, were forced to buy stocks, so as to remain directionally neutral, which has helped to keep markets stable so far.

Overall bullish contracts have changed hands faster than bearish contracts, which should set the scene for stocks to push higher so that these options contracts will be in the money.

2. All that Glitters is Not Gold

• The minutes from the Fed’s July meeting released Wednesday showed officials agreed on the need to dial back the pace of rate increases at some point, but what that point is, is less clear.

• Against this backdrop of uncertainty with respect to policy, gold headed for the first weekly decline in five weeks and bullion is trading near a two-week low.

Spot gold fell around 2.6% this week amid an ongoing discussion on whether the U.S. Federal Reserve will shift to less aggressive rate hikes, dampening demand for inflation hedges which bullion is typically viewed as.

The minutes from the Fed’s July meeting released Wednesday showed officials agreed on the need to dial back the pace of rate increases at some point, but what that point is, is less clear.

Fed minutes revealed that policymakers held divergent views, with St. Louis’s James Bullard urging another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone, saying the case for rate rises remains strong but the pace is up for debate.

Lastest data showed that the U.S. labor market is still healthy with jobless claims falling for the first time in three weeks leaving the door open for the Fed to continue hiking aggressively which weighs on non-interest bearing bullion.

Against this backdrop of uncertainty with respect to policy, gold headed for the first weekly decline in five weeks and bullion is trading near a two-week low.

Gold has so far underperformed for this year, despite long-held beliefs that the precious metal is an effective hedge against inflation.

3. Crypto Miners in Russia Throw in the Towel

• SBI Holdings (+0.25%), Japan’s biggest online brokerage, said it will shut crypto-mining operations in Russia, adding to the churn in the region sparked by the threat of U.S. sanctions.

• Russia’s invasion of Ukraine has created uncertainty over the prospects of the mining business, while crypto’s global market rout has rendered it less profitable to mine tokens.

After China’s crypto mining ban last May, miners have flocked to Russia, in part to take advantage of low-cost power from natural gas and hydropower dams that have made it a popular destination besides North America.

However, Russia’s invasion of Ukraine has created uncertainty over the prospects of the mining business, while crypto’s global market rout has rendered it less profitable to mine tokens.

In April, the U.S. Treasury Department imposed sanctions on BitRiver, a Switzerland-based crypto mining company, targeting one of the industry’s largest data-center service providers, over its operations in Russia. Shortly after, America’s Compass Mining sought to liquidate US$30 million in hardware in Siberia to avoid sanctions.

Prior to the Russian invasion of Ukraine, the former was a favored destination for cryptocurrency miners, lured by the promise of cheap electricity and a relatively permissive attitude by Moscow, with respect to the industry.

Most recently, SBI Holdings (+0.25%), Japan’s biggest online brokerage that has been quicker than most Japanese financial firms in expanding into digital currencies, said it will shut crypto-mining operations in Russia, adding to the churn in the region sparked by the threat of U.S. sanctions.

Washington has long pointed to cryptocurrencies being used by Russia as a means to circumvent sanctions, and Moscow reports that as many as 1 in 5 Russians already owns cryptocurrencies.

SBI Holdings suspended crypto-mining in Siberia soon after the war began contributing to the company’s crypto asset business reporting a pretax loss of US$72 million in the three months ended June 30. SBI Holdings have yet to decide when it will complete the withdrawal of mining operations from Siberia, but as the war in Ukraine drags on, the pressure to pull out will increase.

In an April report, the International Monetary Fund warned that crypto mining may offer Russia a way around sweeping economic sanctions imposed by the U.S. and its allies, by allowing Moscow to leverage its energy resources to power mining, while generating revenue directly from transaction fees.