Hello there,

A terrific Thursday to you as stocks rise amid bets on slower Fed rate hikes with policymakers sticking to the expected 75-basis-point rate hike.

In brief (TL:DR)

• U.S. stocks rebounded on Wednesday with the Dow Jones Industrial Average (+1.37%), S&P 500 (+2.62%) and the Nasdaq Composite (+4.06%) all up on expectations that the Fed will temper the pace of rate hikes as it heads off for a break.

• Asian stocks rose on Thursday as the prospect of a slower pace of U.S. Federal Reserve monetary tightening filtered across global markets.

• Benchmark U.S. 10-year Treasury yields declined one basis point to 2.77% (yields fall when bond prices rise).

• The dollar fell.

• Oil advanced with September 2022 contracts for WTI Crude Oil (Nymex) (+1.26%) at US$98.49.

• Gold was higher with December 2022 contracts for Gold (Comex) (+0.90%) at US$1,753.10.

• Bitcoin (+9.81%) surged to US$23,146 alongside other risk assets, with some altcoins, in particular GameFi ratcheting serious gains of over 30%.

In today's issue...

1. The Fed’s 75-basis-point Hike & What to Make of It

2. A Stronger Dollar Does No One Any Favors

3. Europe’s Regulators Understaffed to Regulate Cryptocurrencies

Market Overview

The Fed raised rates by 75 basis points for a second month, warned that such a move was possible again and reiterated its desire to fight inflation.

U.S. Federal Reserve Chairman Jerome Powell added the pace of hikes will slow at some point and policy will be set meeting-by-meeting, a shift that comes amid signs of an economic slowdown.

The knee-jerk relief in markets on possible crumbs of comfort from the Fed outlook echoes a pattern seen after earlier hikes, but for which rallies have proved less durable.

Those earlier bouts of optimism post-Fed meeting stumbled on recession risks from a global wave of monetary tightening, Europe’s energy woes and China’s property sector and Covid challenges.

Asian markets were mostly higher on Thursday with Sydney’s ASX 200 (+0.88%), Seoul's Kospi Index (+0.73%) and Tokyo's Nikkei 225 (+0.16%) up, while Hong Kong's Hang Seng Index (-0.56%) was down.

1. The Fed's 75-basis-point Hike & What to Make of It

• At a press conference after the Fed’s latest policy meeting, U.S. Federal Reserve Chairman Jerome Powell noted that the central bank would be shifting away from specific guidance and reacting in accordance with the data on the ground.

• Regardless of how sanguine the outlook may be for some investors, it’s important not to be lulled into the same playbook of the recessions of the past two decades.

The U.S. Federal Reserve met market expectations with a 75-basis-point rate hike as policymakers head out for a well-deserved summer break that will at least take policy moves out of the list of factors that could roil already volatile markets until September.

Investors heaved a collective sigh of relief as Fed policymakers roughly stuck to a script of tightening and raising to face off against the fastest pace of inflation in the U.S. in over four decades, but markets cheered the prospect of flexibility to deal with a possible slowdown.

The latest Fed move puts benchmark lending within the range of 2.25% to 2.5%.

More importantly, at a press conference after the Fed’s latest policy meeting, U.S. Federal Reserve Chairman Jerome Powell noted that the central bank would be shifting away from specific guidance and reacting in accordance with the data on the ground.

“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data. The labor market is extremely tight, and inflation is much too high.”

Investors will want to watch the inflation prints for July and August to discern what the Fed is likely to do at the September meeting, especially if price pressures continue to remain elevated and there is pressure to make up for lost time.

But economic data, especially inflation data, is a lagging indicator, and by the time the Fed convenes in September, it’s entirely possible that the actual inflation situation on the ground is markedly different than the one recorded in the previous months, risking policy excess.

Investors are betting that interest rates will peak around 3.3% by the end of this year, between 1% and 0.75% from where they are currently and factoring in a substantial hike in September, before some modest cuts in 2023.

While Powell noted that it wasn’t the intention of the Fed to push the economy into a recession, he noted that the priority at the moment was inflation and the central bank would need to go some way to achieving this goal.

Regardless of how sanguine the outlook may be for some investors, it’s important not to be lulled into the same playbook of the recessions of the past two decades.

In the past, the Fed had pivoted to easing, ready to catch the economy if it faltered, but the macro picture today is vastly different from the past two decades where inflation was low and often well below the Fed’s targets – the room for maneuvering may be a lot smaller.

2. A Stronger Dollar Does No One Any Favors

• As the U.S. Federal Reserve pursues its most aggressive pace of tightening in decades, raising rates at 75-basis-points a pop and sending the dollar to its highest level simultaneously, the rest of the world is reeling at the cost of a stronger greenback.

• Until there’s greater clarity on the outlook, the dollar will likely continue to move from strength to strength until maximum pain, when other central bankers will lobby Washington for some for of relief.

American privilege can be defined as being self sufficient in all of the raw materials necessary for modern life and enjoying the luxury to import anything else needed using one’s own local currency, not so for the rest of the world.

As the U.S. Federal Reserve pursues its most aggressive pace of tightening in decades, raising rates at 75-basis-points a pop and sending the dollar to its highest level simultaneously, the rest of the world is reeling at the cost of a stronger greenback.

From the Brussels to Beijing, Tokyo to Ottawa, central banks globally are adopting a variety of tactics to deal with their rapidly declining currencies, with some doing everything possible to shore up their currencies, and others pursuing a divergent policy path from the Fed.

There are few parallels in modern history where the dollar, the lifeblood of global trade and the preferred reserve currency of the world has risen so much, so fast, leaving a trail of devastation in its wake.

The chaos in Sri Lanka is just one very visible manifestation of the dollar’s strength, with soaring food import costs and dollar-denominated debt default toppling a government and sparking civil unrest, and Sri Lanka may just be the tip of the iceberg.

By some measures, the dollar has already surpassed its all-time-high and it’s up 15% against a basket of currencies since mid-2021.

But with the Fed determined to take down inflation, there’s little to suggest that the dollar will start to retrace back to its previous levels.

The eurozone is bogged down by a war in its own backyard and Russia threatening to send the continent into a deep freeze this winter,

Japan is determined to keep rates at rock-bottom while the Swiss central bank has already raised borrowing costs for the first time in years, just to keep things on an even keel.

China can’t afford to tighten monetary policy now either as it’s reeling from a real estate market that threatens to implode its entire economy and Southeast Asia is still nursing wounds from the pandemic’s hit to tourism dollars and access to hard currency.

Demand for the dollar is also being fueled by investors looking for a safe haven and as markets prove more volatile, demand for the greenback rises.

In a low interest rate environment, U.S. Treasuries were shunned for risk, but now that borrowing costs are on the march again, these securities are in high demand, seen as one of the safest ways to store money.

But it’s not just the rest of the world that smarts from a soaring dollar – America’s largest exporters do as well, as evidenced by the greenback’s strength hammering the profits of some of America’s biggest companies, including IBM and Microsoft.

A broad economic slowdown, clarity on when the Fed will pivot to stop hiking rates, or a significant revival in China’s economic fortunes could hold the dollar back, but it’s not clear when these events will occur.

Until there’s greater clarity on the outlook, the dollar will likely continue to move from strength to strength until maximum pain, when other central bankers will lobby Washington for some for of relief.

3. Europe's Regulators Understaffed to Regulate Cryptocurrencies

• Jurisdictions globally are jostling for primacy to lead the charge on cryptocurrency regulation.

• A key regulator charged with overseeing Europe’s landmark bid to regulate cryptocurrencies is struggling to hire staff with the necessary skills to police the space that Gensler has called the “Wild West.”

The U.S. Securities and Exchange Commission may be helmed by the crypto-savvy Gary Gensler, who previously taught blockchain and cryptocurrencies at the MIT Sloan School of Management has no functional equivalent in Europe and regulators there are struggling to staff oversight and enforcement agencies as the region pushes to police the space.

Given the spate of high-profile failures of some of the biggest firms in cryptocurrency, including lender Celsius Network and hedge fund Three Arrows Capital, jurisdictions globally are jostling for primacy to lead the charge on cryptocurrency regulation.

The U.S. is set to take the lead, but even as the SEC commences enforcement actions against insider trading at Coinbase Global and other cryptocurrency offerings it considers securities, Europe is trying to stake its own jurisdictional and regulatory claims but appears understaffed to deal with the challenge.

A key regulator charged with overseeing Europe’s landmark bid to regulate cryptocurrencies is struggling to hire staff with the necessary skills to police the space that Gensler has called the “Wild West.”

Chairman of the European Banking Authority (EBA), José Manuel Campa has expressed concern that his organization is ill-equipped and understaffed to the task at hand and making matters worse, there is still a lack of jurisdictional clarity until 2025, when Europe’s sweeping new cryptocurrency regulations are due to come into effect.

The EBA, which is headquartered in Paris and not Brussels, was set up in the aftermath of the 2008 Financial Crisis to ensure that banks had enough capital to weather future crises and has been tasked with supervising what has been termed “significant” tokens that are widely used as a means of payment and popular tokens linked to traditional financial assets.

Europe Markets in Cryptoassets Regulation is due to come into force in 2025, and would put the EBA in-charge of policing the space, but with banks, fintechs and consultancies all jostling for talent, the authority is struggling to hire in the fast-moving cryptocurrency sector.

Fortunately, a current bear market has increased the pool of talent available, but even then, the EBA’s salaries, which are aligned with those of the European Commission, are well shy of those available from the private sector.