Hello there,

A terrific Monday to you as Powell’s signal of higher-for-longer Fed rates hits sentiment.

In brief (TL:DR)

• U.S. stocks dipped on Friday with the Dow Jones Industrial Average (-3.03%), the S&P 500 (-3.37%) and the Nasdaq Composite (-3.94%) all down sharply.

• Asian stocks sunk on Monday, leading by tech firms.

• Benchmark U.S. 10-year Treasury yields advanced seven basis points to 3.11% (yields rise when bond prices fall).

• The dollar pushed toward the record hit last month as investors sought a haven from spiking volatility.

• Oil rose with October 2022 contracts for WTI Crude Oil (Nymex) (+0.87%) at US$93.87.

• Gold edged lower with December 2022 contracts for Gold (Comex) (-0.93%) at US$1,733.50.

• Bitcoin (-1.00%) fell to US$19,845 and broke below the US$20,000 level some view as a marker of a deeper slide in investor sentiment.

In today's issue...

1. People’s Bank of China Attempts to Shore Up Yuan

2. Meme Stocks are a Durable Source of Volatility

3. Bitcoin Drops Below $20,000 as Risk-On Optimism Fades Again

Market Overview

Powell in his address last week at the Fed’s Jackson Hole symposium flagged the likely need for restrictive monetary policy for some time to curb high inflation and cautioned against loosening monetary conditions prematurely.

The mood in global markets overall remains downbeat against the backdrop of a slowing world economy struggling with the highest inflation in a generation, stoked by disruptions from Russia’s war in Ukraine and China’s Covid curbs.

Asian markets fell on Monday with Tokyo's Nikkei 225 (-2.66%), Hong Kong's Hang Seng Index (-0.82%), Seoul's Kospi Index (-2.18%) and Sydney’s ASX 200 (-1.95%) all down.

1. People's Bank of China Attempts to Shore Up Yuan

• The People’s Bank of China (PBoC) had so far been capping the yuan’s losses in the run-up to Jackson Hole by setting stronger-than-expected currency fixings.

• But after the offshore yuan sank to a fresh two-year low, China set its daily reference rate for the yuan at a stronger-than-expected level for a fourth day, in an effort to shore up its embattled currency.

The thing about a stronger dollar, especially against a backdrop of soaring inflation, is that it hurts everyone else except America.

And nowhere is the pain being felt more than China, which for years had been pressured by Washington to allow the yuan to appreciate, only to now be faced with the exact opposite problem.

After U.S. Federal Reserve Chairman Jerome Powell stressed the likely need for restrictive monetary policy for some time to curb high inflation at the Jackson Hole symposium last week, risk assets sold off globally and currencies from the Japanese yen to the Chinese yuan were hammered.

The People’s Bank of China (PBoC) had so far been capping the yuan’s losses in the run-up to Jackson Hole by setting stronger-than-expected currency fixings.

But after the offshore yuan sank to a fresh two-year low, China set its daily reference rate for the yuan at a stronger-than-expected level for a fourth day, in an effort to shore up its embattled currency.

Unlike the United States, China relies heavily on foreign imports of industrial quantities of everything from copper to oil, to feed into its massive economy.

And when the dollar, which commodities are priced in, starts to rise, it hurts Chinese manufacturers, even as the economy starts slowing significantly, thanks to zero-Covid lockdown policies and a worsening real estate crisis.

The PBoC set its fixing at 6.8698 per dollar, 96 pips stronger than the average forecast according to a Bloomberg survey, and all the more surprising considering that traders had expected China’s central bank to keep the yuan soft.

Thursday’s fix was 120 pips stronger than the forecast, the widest gap since February 2020 and a sign that Beijing is maintaining a delicate balance between stoking possible imported inflation and keeping exports competitive against slowing global demand. .

The reference rate, which limits the onshore yuan’s moves by 2% on either side, was set stronger after the offshore yuan slid past 6.9 for the first time since 2020.

China does not maintain a fully convertible currency.

The Chinese economy is projected to grow just 3.5% this year, down from a previous forecast of 3.9%, and well off the Chinese Communist Party’s target of 5.5%, a figure that Beijing has been quick to scrub from public communication.

The yuan is under pressure to fall which has the market closely watching the extent of foreign exchange intervention by Beijing.

2. Meme Stocks are a Durable Source of Volatility

• Wall Street professionals and individual investors believe the meme stock will become a durable feature of the market landscape.

• In the latest MLIV Pulse survey, nearly two-thirds of 522 respondents expect some version of the meme stock mania to stick around and this could simply because of their speculative nature.

While loose monetary policy may have birthed the meme stock frenzy, even the era of central bank hawkishness hasn’t been able to usher in the death of this pandemic-era trade.

To be sure, speculating in meme stocks has brought only pain this year, with a basket of 37 retail-trader favorites tracked by Bloomberg down nearly 40%.

The meme stock movement has added volatility into corners of a market already contending with rising interest rates, recession risks and a steep drop from record highs, but has also led to some surprising rebounds.

This month, Bed Bath & Beyond (+5.94%) and AMC Entertainment (-4.48%), two retail meme favorites, were surging, only to give back the gains just as quickly.

It appears that investors (punters) can’t seem to get enough of the casino-like behavior of some of these meme stocks.

Nevertheless, Wall Street professionals and individual investors believe the meme stock will become a durable feature of the market landscape.

In the latest MLIV Pulse survey, nearly two-thirds of 522 respondents expect some version of the meme stock mania to stick around and this could simply because of their speculative nature.

But the survey also found that while the meme-stock phenomenon is likely to stick around, 69% believe it’s unlikely to see the trading volumes it did during its January 2021 height and are therefore unlikely to be a good bet for the remainder of the year as central banks globally tighten policy.

According to Vanda Research, individual investors have recently pushed US$1.2 billion per day into U.S.-listed securities, well below expectations for a US$1.3 billion to US$1.4 billion influx and against a backdrop of rising costs of living.

The retail trading crowd faces a crucial inflection point as summer draws to a close and meme stocks are a good bellwether for retail appetite for more speculative corners of the market.

3. Bitcoin Drops Below $20,000 as Risk-On Optimism Fades Again

• Bitcoin, the largest cryptocurrency by market cap, traded near US$19,600 – well below June’s closing price, extending its rout to almost 60% for this year.

• Nonetheless, some analysts say that the recent trading pattern presents a buying opportunity.

Bitcoin dipped below the psychologically-important US$20,000 level over the weekend, held down by rumors that some 137,000 Bitcoin recovered from the 2014 hack of Mt. Gox may hit the market as liquidators attempt to recover lost funds and policy hawkishness.

Headed into the weekend, risk appetite was already weak, with U.S. Federal Reserve Chairman Jerome Powell warning investors not to price in a pivot to loosening policy, causing cryptocurrencies to extend losses with Bitcoin dipped below US$20,000 for the first time since mid-July.

At the time of writing, Bitcoin, the largest cryptocurrency by market cap, traded near US$19,600 – well below June’s closing price, extending its rout to almost 60% for this year.

Making matters worse, rumors have been spreading throughout the market that the recovery and possible sale of 137,000 Bitcoin could hit the market as liquidators for Bitcoin exchange Mt. Gox finally seek resolution from its 2014 implosion.

Powell has signaled that the Fed is likely to keep raising interest rates high and leave them elevated for a while to stamp out inflation, pushing back against any idea that the central bank would soon reverse course.

Powell’s speech at the annual Jackson Hole economic symposium sent shockwaves through equities markets and U.S. stocks lost a combined US$1.25 trillion on the day, with the market cap for cryptocurrencies dipping below US$1 trillion.

Nonetheless, some analysts say that the recent trading pattern presents a buying opportunity.

According to CryptoQuant, onchain metrics “signal that the price is at the accumulation zone, which has been historically market bottom formations and value investing”.