Hello there,

A terrific Wednesday to you as a global wave of monetary tightening to quell inflation that’s stoking concerns about a worldwide economic slowdown.

In brief (TL:DR)

• U.S. stocks fell on Tuesday with the Dow Jones Industrial Average (-0.71%), S&P 500 (-1.15%) and the Nasdaq Composite (-1.87%) all down.

• Asian stocks retreated amid falls in Hong Kong and China, tracking a closer lower for US stocks Tuesday before earnings lifted spirits after the bell.

• Benchmark U.S. 10-year Treasury yields fell one basis point to 2.80% (yields fall when bond prices rise) as traders brace for a widely telegraphed 75 basis-point Fed hike later Wednesday.

• The dollar dipped.

• Oil was stable with September 2022 contracts for WTI Crude Oil (Nymex) (+0.02%) at US$95.00.

• Gold was lower with December 2022 contracts for Gold (Comex) (-0.15%) at US$1,733.10.

• Bitcoin (+1.81%) rose to US$21,386, while investors eye the strength of the US$21,000 level of support.

In today's issue...

1. A Tightening Fed Increases Risks for Asian Economies

2. Big Boom for Big Oil

3. Regulators Are Coming for Cryptocurrencies Even as Prices Slump

Market Overview

Still, the mood remains edgy ahead of a much-anticipated Federal Reserve interest-rate increase -- part of a global wave of monetary tightening to quell inflation that’s stoking concerns about a worldwide economic slowdown.

The projected Fed move to tackle price pressures would cement a combined 150 basis points increase over June and July -- the steepest rise in rates since the 1980s, when then chairman Paul Volcker wrestled with sky-high inflation.

Asian markets were mostly higher on Wednesday with Sydney’s ASX 200 (+0.23%), Seoul's Kospi Index (+0.11%) and Tokyo's Nikkei 225 (+0.22%) up, while Hong Kong's Hang Seng Index (-1.13%) was down.

1. A Tightening Fed Increases Risks for Asian Economies

• Recent tightening by the central bank of the Philippines and Singapore demonstrates the urgency with which Asian policymakers need to act in the face of a soaring dollar and rapidly tightening U.S. monetary policy.

• Unless Indian, Thai and Indonesian central banks act decisively, their incremental rate hikes will do little to curb outflows or the continued decline of their currencies.

The widely anticipated 75-basis-points rate hike by the U.S. Federal Reserve this week will place pressure on Asian peers to boost monetary tightening, risking more fund outflows and weaker currencies from Asian trading partners.

Comparing the policy rates of Asia Pacific central bank and their five-year averages, the region is more vulnerable than ever before as spreads widen against U.S. Treasury yields, with the danger increasing for emerging markets like Thailand, one of the epicenters for the 1997 Asian Financial Crisis.

Recent tightening by the central bank of the Philippines and Singapore demonstrates the urgency with which Asian policymakers need to act in the face of a soaring dollar and rapidly tightening U.S. monetary policy.

The result of higher yields in the U.S. and a narrowing of yields versus emerging markets such as Thailand, Indonesia and Malaysia, has seen swift bond outflows from these markets, with American assets and the dollar becoming the beneficiary of these withdrawals.

Pressure is growing on Asian policymakers to normalize benchmark rates with inflation in South Korea soaring to its highest level in 23 years and Thailand seeing prices increase at their fastest pace in 14 years.

But many Asian central bankers are caught in a classic Catch-22 because these economies rely heavily on foreign imports of food and fuel denominated in dollars and raising rates would hurt their domestic economies as well as make exports more expensive.

Unless Indian, Thai and Indonesian central banks act decisively, their incremental rate hikes will do little to curb outflows or the continued decline of their currencies.

Meanwhile Japan and China have stuck to their existing monetary policies, with the Bank of Japan doggedly committed to negative rates and yield-curve control, regardless of the cost to its citizens and the yen while the People’s Bank of China can ill afford to take its foot off the gas pedal as a real estate crisis threatens to engulf the Chinese economy.

2. Big Boom for Big Oil

• For the first time in over two decades, oil companies are poised for a record-breaking combined US$50 billion in profit in the second quarter, outpacing even the most resilient tech companies.

• Oil majors are wary that Washington’s accommodative stance towards extraction could very quickly turnaround once conditions improve.

The shift to wean the world off fossil fuels and decades of underinvestment in extraction has become the biggest turnaround story for some of the world’s biggest oil companies.

For the first time in over two decades, oil companies are poised for a record-breaking combined US$50 billion in profit in the second quarter, outpacing even the most resilient tech companies.

Soaring earnings at some of the most well-known oil giants are reflective of the high energy prices that have provided the fuel for inflation, piled pressure on consumers and raised the risk of recession, with some lawmakers calling for windfall taxes.

Nevertheless, the soaring profits at Exxon Mobil, Shell, Chevron, TotalEnergies and BP are likely to already have peaked, as a possible recession threatens to derail demand.

The supermajors are expected to make even more money than they did in 2008, when global oil prices hit almost US$150 a barrel because it’s not just crude that has soared, but natural gas as well as refining margins.

Ancillary sectors such as oil and gas services companies, including the likes of Halliburton, are natural beneficiaries from the boom in energy prices as well.

Many major markets have found themselves critically short on refining capacity, a result of shutdowns, investments stalled by the pandemic, and sanctions on Russia.

China has also limited petroleum exports, in an effort to bolster domestic supply, even as demand has waned thanks to repeated zero-Covid lockdowns.

It’s unlikely that these gains will be durable because the demand side of the equation is rapidly deteriorating, with soaring gasoline prices already undermining consumption.

The supermajors are well aware of the risks of overinvesting during a time of plenty and instead of doubling down on extraction and production capacity, are likely to engage in stock buybacks or paying down debt as interest rates increase, the first time the industry has been able to do so in years.

U.S. President Joe Biden has pleaded with U.S. oil majors to boost domestic production, but so far, those pleas have fallen on deaf ears.

Oil majors are wary that Washington’s accommodative stance towards extraction could very quickly turnaround once conditions improve.

And in an industry where investment in extractive capacity can take years to turn a profit, it’s unlikely that an oil major’s leadership will choose to squander gains from record returns on expansion, especially when the outlook is unclear.

3. Regulators Are Coming for Cryptocurrencies Even as Prices Slump

• Cryptocurrencies were the first to rebound over the past several weeks as investors grew more sanguine on the prospect of supersized Fed rate hikes.

• A strengthening dollar has also been blamed for the recent decline in cryptocurrency prices, which tend to move inversely to dollar strength, as risk appetite wanes.

Bitcoin dipped to a more than one-week low, brought lower by anxiety over an impending U.S. Federal Reserve interest rate hike coupled with increased regulatory action in the sector.

Bitcoin fell by as much as 6.5% yesterday to trade just below US$21,000 before recovering above that level in Asian trading today.

Other cryptocurrencies fared much worse, notching double-digit percentage dips as sentiment soured on risk assets in general.

Thin trading meant that even small bouts of selling led cryptocurrency prices lower, with growing skepticism over a recent rally’s durability.

Cryptocurrencies were the first to rebound over the past several weeks as investors grew more sanguine on the prospect of supersized Fed rate hikes.

But as the Fed’s policy meeting neared, and the reality of a 0.75% increase in borrowing costs, investors fled from risk assets, including cryptocurrencies.

Exacerbating the rout, the collapse of some of the biggest firms in the cryptocurrency sector, including Celsius Network and Three Arrows Capital, have rattled nerves at a time of thin liquidity.

Bitcoin is now down over 55% this year alone and more than 70% off its all-time-high.

Coinbase Global (+3.03%) is now facing a U.S. Securities and Exchange Commission probe into whether the exchange allowed Americans to trade cryptocurrencies that ought to have been registered as securities.

Several Coinbase Global executives have also been charged with insider trading and longtime supporter Cathie Wood’s Ark Investment Management has seen its ETFs dump slightly over 1.41 million shares of the exchange at a steep loss.

A strengthening dollar has also been blamed for the recent decline in cryptocurrency prices, which tend to move inversely to dollar strength, as risk appetite wanes.