A wonderful Tuesday to you as a rally in global markets extended into a second day.

In brief (TL:DR)

• U.S. stocks were higher on Monday with the Dow Jones Industrial Average (+2.66%), the S&P 500 (+2.59%) and the Nasdaq Composite (+2.27%) all up.

• Asian stocks rallied on Tuesday as investors wagered central banks will have to slow the pace of monetary tightening.

• Benchmark U.S. 10-year Treasury yields declined six basis points to 3.58% (yields fall when bond prices rise).

• The dollar headed for the lowest level since Sept. 22, with a rebounding British pound acting as the biggest drag.

• Oil advanced with November 2022 contracts for WTI Crude Oil (Nymex) (+0.77%) at US$84.27 on expectations the OPEC+ alliance will deliver a substantial supply cut.

• Gold rose with December 2022 contracts for Gold (Comex) (+0.91%) at US$1,717.50.

• Bitcoin (+3.64%) rose to US$19,901.

In today's issue...

1. Inflation Rises to 2.8% in Japan Putting Fresh Stress on Central Bank

2. Could Credit Suisse be a Lehman Brothers Moment?

3. Crypto Lender Celsius Network Sets Dates for Auction of its Assets

Market Overview

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A rally in global markets extended into a second day, lifting US index futures and European stocks, as investors wagered central banks will have to slow the pace of monetary tightening. Investors see weaker-than-estimated US manufacturing data supporting a dovish tilt at the Federal Reserve after 3 percentage points of hikes began to tell on the economy. Money markets signal the Fed will hike rates a further 125 basis points at most by March compared with as much as 165 basis points seen following the third three-quarter point increase last month. In Europe, the equity benchmark jumped by the most in three weeks as travel, technology and retail companies posted some of the biggest gains. Asian markets rose on Tuesday with Tokyo's Nikkei 225 (+2.96%), Sydney’s ASX 200 (+3.75%) and Seoul's Kospi Index (+2.50%) up, while Hong Kong market is closed.

1. Inflation Rises to 2.8% in Japan Putting Fresh Stress on Central Bank

• Inflation in Tokyo accelerated at the fastest pace since 1992, adding to the challenges for the BoJ in communicating its need for inflation-supporting easing.

• Tokyo’s inflation data is a leading indicator for nationwide price trends, and if gains are similar for the country overall, inflation could reach 3% in September.

In the decades following the bursting of its real estate bubble, Japan’s economy languished with anemic growth and low inflation.

So ingrained in Tokyo’s psyche is the need for economic growth that last month, the Bank of Japan (BoJ) maintained ultra-low interest rates and dovish policy guidance, even as it swims against a global tide of central bank policy tightening to combat soaring inflation.

However, Tokyo’s inflation data put price increases in Japan’s capital above the BoJ’s 2% target for a fourth straight month.

Inflation in Tokyo accelerated at the fastest pace since 1992, adding to the challenges for the BoJ in communicating its need for inflation-supporting easing.

According to Japan’s ministry of internal affairs, consumer prices excluding fresh food rose 2.8% in Tokyo in September.

Processed food and durable goods price led the gains, with the former jumping the most in 41 years.

Tokyo’s inflation data is a leading indicator for nationwide price trends, and if gains are similar for the country overall, inflation could reach 3% in September.

Nevertheless, the faster pace of price growth likely won’t prompt the BoJ to tighten its policy when it meets later this month.

And to be fair, while the pace of price increases in Tokyo are picking up, levels are still well below those of the U.S. where inflation is at 8.3%.

Arguing that the current cost-push inflation will wane eventually without robust wage growth, BoJ Governor Haruhiko Kuroda has repeatedly said an interest rate hike won’t take place in the near future.

But with price gains racing toward 3%, he will come under more pressure to explain why he thinks these increases are temporary, especially as gains are spreading beyond energy prices.

Analysts expect the Japanese economy to keep growing in the third quarter, although at a slower place than in the three months ended June, when it regained its pre-pandemic size.

2. Could Credit Suisse be a Lehman Brothers Moment?

• The cost of buying insurance against Credit Suisse defaulting on its debt soared to a record high as the bank failed to calm market concerns around the strength of its balance sheet.

• These moves mean that Credit Suisse’s CDS curve inverted on Monday, a phenomenon that happens when investors rush to buy protection against a default in the very near term.

On Monday, shares of embattled Swiss bank Credit Suisse plummeted 12% to an all-time low after a weekend of fevered speculation about its financial health, before paring losses.

The cost of buying insurance against Credit Suisse defaulting on its debt also soared to a record high as the bank failed to calm market concerns around the strength of its balance sheet.

Traders and investors rushed to sell Credit Suisse’s shares and bonds while buying credit default swaps (CDS), derivatives that act like insurance contracts that pay out if a company reneges on its debts.

Credit Suisse’s five-year CDS soared by more than 100 basis points on Monday. Meanwhile, the the bank’s shorter-term CDS were even more dramatic with one trading desk quoting Credit Suisse’s one-year CDS at 440 basis points higher than last Friday.

These moves mean that Credit Suisse’s CDS curve inverted on Monday, a phenomenon that happens when investors rush to buy protection against a default in the very near term.

Senior Credit Suisse executives spent the weekend calling the bank’s biggest clients, counterparties and investors in an effort to reassure them about the group’s liquidity and capital position.

Many compared the situation to the sharp sell-off in Deutsche Bank’s debt in 2016, when concerns that the German bank would have to skip some coupon payments on its capital bonds drove sharp moves in the CDS market.

Monday’s initially panicked stock-market reaction to Credit Suisse’s rising CDS costs points to a worsening set of options available to the Swiss firm ahead of its emergency strategy review later this month, which is expected to include a large-scale investment banking retreat.

A chief concern amongst investors is the just how many skeletons Credit Suisse has in its closet, with the fallout from the US$10 billion Archegos Capital Management collapse not fully reflected on its balance sheet.

And that’s not including the US$10 billion worth of investor funds that were frozen in the wake of Greensill Capital’s collapse, a British supply chain lender, which Credit Suisse had sold billions of dollars of debt on behalf of.

Although balance sheet wise Credit Suisse “appears” solvent, some estimates of its total liability picture are disconcerting, with as much as US$860 billion in exposure, much of which remains off balance sheet, the exact same strategy that precipitated the 2008 Lehman Brothers crisis.

3. Crypto Lender Celsius Network Sets Dates for Auction of its Assets

• The bankrupt cryptocurrency lender Celsius Network has set dates for the auction of its assets.

• While the so-called “Crypto Winter” has seen many high profile crypto firms collapse, opportunistic investors have also been taking advantage of a dip in prices to score quality assets on the cheap.

Celsius Network has been one of the most high-profile casualties of this year’s crypto-market meltdown that claimed the likes of the TerraUSD stablecoin, hedge fund Three Arrows Capital and lender Voyager Digital.

In June, Celsius froze withdrawals, swaps and transfers on its platform, citing "extreme market conditions" before filing for Chapter 11 bankruptcy protection one month later.

Alex Mashinsky, the embattled founder and former CEO of Celsius Network who resigned as CEO on September 27, himself removed US$10 million from the now-bankrupt crypto lender weeks before Celsius halted customer withdrawals in June.

The bankrupt cryptocurrency lender has set dates for the auction of its assets and will have a final bid deadline of October 17, with an auction, if necessary, on October 20, according to a filing with the U.S/ Bankruptcy Court for the Southern District of New York.

A sale hearing will be held on November 1 and is expected to draw a large number of participants.

In a court filing, Celsius said it had a US$1.2 billion hole in its balance sheet. That document showed that Celsius held US$4.3 billion of assets and US$5.5 billion of liabilities.

While the so-called “Crypto Winter” has seen many high profile crypto firms collapse, opportunistic investors have also been taking advantage of a dip in prices to score quality assets on the cheap.

Whether its ecosystem or users, crypto companies which had until fairly recently attracted eye-watering valuations are now looking increasingly attractive, especially if snapped up for pennies on the dollar.

So far however, most of the buying activity has been limited to well-capitalized firms already in the cryptocurrency industry.