A wonderful Thursday to you with investors positioning for less aggressive rate hikes as earnings and economic data indicate a slowdown. 

In brief (TL:DR) 

• U.S. stocks closed lower on Wednesday with the Dow Jones Industrial Average (+0.01) stable, while the S&P 500 (-0.74%) and the Nasdaq Composite (-2.04%) were down. 

• Asian stocks were mixed on Thursday. 

• Benchmark U.S. 10-year Treasury yields advanced six basis points to 4.06% (yields rise when bond prices fall). 

• The dollar was steady after two days of steep declines.

• Oil fluctuated with December 2022 contracts for WTI Crude Oil (Nymex) (-0.18%) at US$87.75 after touching the highest level in about two weeks after US Secretary of State Anthony Blinken said a deal with Iran would be unlikely to advance in the short term. 

• Gold was little changed with December 2022 contracts for Gold (Comex) (-0.17%) at US$1,666.40.

• Bitcoin (+0.34) rose to US$20,719, lifting the entire crypto market higher.

In today's issue...

1. Nobody Seems to Want to Buy the UK’s Debt 

2. Chinese Stocks Stage Stunning Rebound in Hong Kong Led by Tech

3. Singapore’s Regulator Proposes Fresh Cryptocurrency Rules to Protect Consumers 

Market Overview

Stocks slipped and US futures wavered as traders digested a flurry of major earnings and prepared for another jumbo European Central Bank rate hike later Thursday.

The ECB is set to look past intensifying recession fears by lifting its main interest rate by 75 basis points to the highest in more than a decade as it battles record euro-zone inflation. 

The yen climbed to around 145.70 per dollar, extending its rally to more than 4% from a three-decade low reached Friday. The offshore yuan gave up some of Wednesday’s gains. 

Asian markets were mostly higher on Thursday with Tokyo's Nikkei 225 (-0.32%) down, while Sydney’s ASX 200 (+0.50%), Seoul's Kospi Index (+1.74%) and Hong Kong's Hang Seng Index (+0.72%) all up.

1. Nobody Seems to Want to Buy the UK’s Debt 

• The UK’s net bond sales are set to be the highest in history for the coming fiscal year a view in line with forecasts by bank strategists, who worry the jump in supply could renew the pressure on gilts seen in recent weeks.

• The record net bond sales will reflect increased government borrowing after redemptions and Bank of England selling is taken into account and could hit the pound once more. 

The United Kingdom may have a new prime minister but it’s still battling with the same problems it’s had from the previous administration as the global demand for gilts has dried up. 

According to the nation’s debt chief, the UK’s net bond sales are set to be the highest in history for the coming fiscal year a view in line with forecasts by bank strategists, who worry the jump in supply could renew the pressure on gilts seen in recent weeks.

The Bank of England has already had to step in to shore up gilt markets after the hammering of the pound and the potential implosion of pension funds forced intervention. 

Although the risk premium on UK bonds has now largely reversed and market confidence has improved as the government has backtracked on plans for borrowing-fueled tax cuts, the environment remains challenging and clearly volatile for gilts. 

After the yield on long-maturity gilts soared nearly 1.4% in a matter of days, the Bank of England was forced to step in to calm markets and it may have to do so again as demand dries up. 

UK pension funds were forced to sell gilts and other assets to meet margin calls when yields soared (yields rise when bond prices fall) which showed that pension funds’ risk-management strategies may have been inadequate. 

Traditionally, pension funds buy gilts on leverage, on the basis of two assumptions, that bond prices will remain relatively stable and interest rates stay low – both assumptions have been undermined by recent events, as the UK has had to battle double-digit inflation. 

The Bank of England has been one of the major central banks that has been quicker to raise interest rates in response to soaring inflation, but the unexpected offshoot of those measures was to hammer pension funds which were not properly setup for the perfect storm. 

The Bank of England’s plans to actively sell gilts even as Westminster is looking to issue more, risks adding to the turbulence. 

The record net bond sales will reflect increased government borrowing after redemptions and Bank of England selling is taken into account and could hit the pound once more. 

2. Chinese Stocks Stage Stunning Rebound in Hong Kong Led by Tech

• The more recent moves of Chinese stocks track a jump in U.S.-listed Chinese stocks overnight, and suggest sentiment has stabilized somewhat after President Xi Jinping’s renewed power grip at the leadership gathering dismayed investors.

• While Xi’s dominance suggests the zero-Covid policy and curbs on private enterprise will likely stay, some investors are starting to focus on cheap valuations and resilient corporate earnings.

Whether it’s Chinese investment funds buying or that the initial aftershock of the Communist Party Congress in China has been overcome, there’s no denying the spectacular rebound in Chinese stocks listed on Hong Kong’s stock exchange. 

After a historic 7.3% plunge on Monday, the Hang Seng China Enterprises Index, a gauge of Chinese equities trading in Hong Kong, gained more than 3% early Thursday, marking its third consecutive day of advance. 

Meanwhile, the CSI 300 Index, a benchmark for mainland shares, also edged higher on Thursday. 

The more recent moves of Chinese stocks track a jump in U.S.-listed Chinese stocks overnight, and suggest sentiment has stabilized somewhat after President Xi Jinping’s renewed power grip at the leadership gathering dismayed investors.

It could also be that the powers that be in China are looking to shore up sentiment as the economy continues to struggle with property crackdowns and zero-Covid policies that have hamstrung growth targets. 

As investors focused on a slew of earnings reports and await further policy guidance following the Communist Party Congress, Chinese stocks extended their recovery, lead primarily by tech stocks with declines in the dollar and U.S. Treasury yields also aiding gains. 

While Xi’s dominance suggests the zero-Covid policy and curbs on private enterprise will likely stay, some investors are starting to focus on cheap valuations and resilient corporate earnings.

But it may be too early to start picking up pennies off the track as the locomotive comes bearing down as earnings, while better than previous quarters, are still likely to be far below their longer term trends for a slew of companies, especially technology. 

By surrounding himself with loyalists, the risk that Xi will deploy his vision for the Chinese economy and his conception of “common prosperity” risks unwinding decades of economic reform, growth and freedom. 

Some of these shifts may seem subtle but will have long-term consequences, including having Communist Party members sitting on the boards of major private and publicly-listed companies, as well as a return of the dominance of state-owned enterprises. 

State-owned enterprises have been historically bloated, inefficient and susceptible to cronyism and nepotism, which undermines their innovative potential and productivity. 

And making matters worse, Beijing’s growing tension with the U.S. over thorny issues including tech exports and Taiwan could see fresh tariffs, economic measures or worse, a full-on invasion. 

A lockdown in one of Wuhan’s central districts is also the latest reminder that the economy’s growth will continue to be hampered by zero-Covid curbs.

3. Singapore’s Regulator Proposes Fresh Cryptocurrency Rules to Protect Consumers 

• On Wednesday, the Monetary Authority of Singapore (MAS) proposed restricting retail investors from borrowing money or using credit cards to buy cryptocurrencies and from lending out their digital tokens in search of yield.

• To be fair, many of the entities which imploded in recent times had only a tenuous connection with Singapore. 

After a series of high-profile crypto implosions linked to the city-state, including the collapses of stablecoin terraUSD in May and the once iconic hedge fund Three Arrows Capital, Singapore’s regulators have ramped up warnings to retail investors and proposed a broader range of cryptocurrency rules to bolster consumer protection. 

On Wednesday, the Monetary Authority of Singapore (MAS) proposed restricting retail investors from borrowing money or using credit cards to buy cryptocurrencies and from lending out their digital tokens in search of yield.

Crypto exchanges are also being required to test would-be crypto buyers to check they understand risks in what it calls a “highly volatile” asset class.

In two consultation papers, it said “MAS strongly discourages speculation in cryptocurrencies by consumers,” and “several misconduct cases have been reported by international media, including where legal proceedings were commenced against entities that did not have sufficiently robust business conduct practices in place.”

To be fair, many of the entities which imploded in recent times had only a tenuous connection with Singapore. 

Three Arrows Capital had already shifted its contracts offshore to the British Virgin Islands and had surrendered its license to operate in Singapore well before its implosion. 

Others like Terraform Labs had their development teams located in Singapore, but the bulk of the alleged failures and malfeasances were committed by foreigners outside of the jurisdiction. 

Nevertheless, MAS has taken on a proactive role to ensure that cryptocurrencies can be interacted with safely within its jurisdiction and is looking to ensure that stablecoins, which are designed to track the value of real assets such as the dollar, must be properly backed with reserve assets pegged to the Singapore dollar or other major currencies.

Being well known for providing a welcoming environment for the cryptocurrency industry, Singapore is often described as a “crypto paradise” and several prominent firms have established themselves there. 

But regulators have sounded the alarm after a series of high-profile crypto implosions this year, without embracing the innovative and transformative benefits of blockchain technology and cryptocurrencies. 

That sentiment was coined in comments made by MAS,  

“Support for a digital asset ecosystem does not mean support for cryptocurrency speculation.” 

Broader proposals include requiring service providers to ensure customer assets are segregated from their own assets and adopting “good industry practices” against unfair trading, including monitoring trading activity and setting out rules governing trading.