Hello there, A magnificent Monday to you as Asian stocks kicked off mixed despite a strong showing by Chinese equities enjoying the post Golden Week bump. In brief (TL:DR)

• U.S. stocks finished mostly higher on Friday with the Dow Jones Industrial Average (-0.06%), down a touch but the S&P 500 (+0.52%) and the Nasdaq Composite (+1.58%) all helped by the robust performance in Amazon buoying sentiment.

• Asian shares slid into the first week that Chinese traders were back at their terminals, with the buoyant post-Golden Week performance not enough to lift sentiment in the region.

• Benchmark U.S. 10-year Treasury yields held at 1.906% (yields rise when bond prices fall), as traders have to tackle with the twin concerns of tighter monetary policy and U.S. Federal Reserve balance sheet runoff.

• The dollar was flat in Asian trading as traders wait out inflation data due later in the week.

• Oil slipped with March 2022 contracts for WTI Crude Oil (Nymex) (-0.66%) at US$91.70 as traders took profit from the relentless rally in crude off the table.

• Gold inched higher with April 2022 contracts for Gold (Comex) (+0.12%) at US$1,810.00 with traders looking to inflation data and the greenback on bullion's direction.

• Bitcoin (+2.47%) continued to rally out the weekend to US$42,500 in Asian trading, with each subsequent consolidation strengthening the level of support for the benchmark cryptocurrency.

In today's issue...

1. How worried should investors be about U.S. inflation?

2. Chinese Shares Likely to Start Year of the Tiger with a Meow

3. Bitcoin Blasts Through US$40,000 in Dramatic Rally

Market Overview

U.S. Federal Reserve officials are in an unenviable position this week, with inflation numbers due out and some economists projecting figures upwards of 7% to continue adding to the narrative that prices are continuing to spiral upwards at their greatest pace in four decades.

With the Bank of England raising rates, even the reliably dovish European Central Bank has started to waver, with posturing suggesting that it would be open to tightening conditions.

The Fed is caught in a Catch-22 - tighten to aggressively and risk tanking financial markets and possibly plunging the U.S. into a recession. Tighten too slowly and the inflationary genie will be tough to put back into the bottle.

With the financialization of so much in the global economy, policymakers are not blind to the prospects that each time they talk about rate hikes, they risk tanking markets.

Meanwhile Asian markets opened on Monday lower across the board with Tokyo's Nikkei 225 (-0.86%), Sydney’s ASX 200 (-0.24%), Seoul's Kospi Index (-0.83%) and Hong Kong's Hang Seng Index (-0.74%) all retreating, as a post-holiday bump in Chinese equities was not sufficient to derail ongoing concerns over growth in China and tighter monetary policy in the U.S. and European central banks.

1. How worried should investors be about U.S. inflation?

• Signs that price pressures are starting to ebb for certain core items could provide food for thought for the U.S. Federal Reserve as it prepares to tighten

• Blunt use of monetary policy to tackle inflation may be misguided, especially if supply chain snarls are unclogged and as price pressures naturally start to ease

Given the surprisingly strong job numbers out of the U.S. despite concerns that the Omicron variant would derail the sustained recovery in employment, investors are understandably concerned that the U.S. Federal Reserve would be emboldened to tighten more than expected. But there are signs that even though most economists expect inflation to rise once again in January, the pace of price increases may be moderating. Soothsayers polled by Bloomberg are betting that the Consumer Price Index which will be released this Thursday, will reveal year-on-year growth of 7.3%, a fresh four decade high. Nevertheless, some economists are expecting the pace of that growth to moderate, especially for core goods like apparel and used cars. Core CPI which strips out volatile components of CPI data that includes energy and food, is estimated to rise again, but by 0.5% month-on-month, as opposed to 0.6% in December. Supply chain issues have been a major contributor to core goods inflation, especially for used cars. With a lack of chips, many new cars remain undriveable on lots, waiting for their digital brains to be installed and that has led to consumers needing transportation in a hurry to push up the prices of used cars. As more Americans head back to work, they need cars to get them there and as such, used cars have increased in price from demand. But will a slowing pace of price increases be enough to cause the U.S. Federal Reserve to back down from its hawkish pivot? In all probability, no, but it would at least add some texture to discussions about raising rates too aggressively, especially as inflationary pressures start to subside.

2. Chinese Shares Likely to Start Year of the Tiger with a Meow

• Chinese equities likely to come under continued pressure despite all attempts to buoy markets by Beijing, against a backdrop of falling consumer sentiment and property market woes

• Investors may be getting in too soon if they take long bets on Chinese shares now, as Beijing will likely need to do a lot more in the coming weeks and months to shore up appetite for Chinese equities

Given China’s long Golden Week holiday, where markets will start the Year of the Tiger is a bit like walking through a jungle with a resident tiger – uncertain and dangerous. Odds are that Chinese equities will start the year with a whimper as opposed to a roar, supported primarily by a recent surge in Hong Kong-listed Chinese companies and easing concerns that over the regulatory headwinds for the country’s embattled tech sector. Chinese shares have already fallen into a bear market this year, with US$1.2 trillion of market cap wiped off just before the holidays as worries over a weaker Chinese economy superseded Beijing’s regulatory crackdown on everything from the property to the tech sector. Even the biggest China bulls are struggling to find reasons for optimism as the property sector’s debt woes far outweighed any monetary easing by the People’s Bank of China. Beijing may need to do a lot more to shore up markets, including stronger fiscal spending and further credit loosening, in stark contrast to other major economies which have moved to tighten monetary conditions to combat rising inflationary pressures. How the People’s Bank of China will manage liquidity after the customary pre-holiday boost will also offer some clues as to what investors can expect next. Some of Wall Street’s biggest banks have already taken the bait, with Goldman Sachs snapping up real estate debt from some of China’s biggest property developers and those with stronger balance sheets, for cents on the dollar. Other professional money managers have also started to nibble on shares of some of China’s biggest tech companies as well as in sectors which are presumed to be safe from Beijing’s wrath like food and beverage. Monetary policy divergence between the U.S. Federal Reserve and the People’s Bank of China is another reason touted as why global investors are turning bullish again on Chinese equities – but so far has failed to lead to any meaningful gains. That could change however if Beijing demonstrates a determination to keep the liquidity taps flowing, especially if the U.S. Federal Reserve tightens dramatically. At its core however, the main roadblock for Chinese equities is Beijing’s zero-tolerance coronavirus strategy. Repeated lockdowns for even a single infection have forced factories, businesses, and restaurants to shutter and dented consumer demand. The moribund real estate market which has only ever seen rising prices is also weighing on local investor appetite for shares. Trying to call a bottom for Chinese equities is an exercise in futility, but given how the concerted effort by state media, the securities regulator and mutual funds to rally investor sentiment have proved in vain, it would be safe to assume that prices still have some way to fall.

3. Bitcoin Blasts Through US$40,000 in Dramatic Rally

• Bitcoin appears to be consolidating near its 200-day moving average, similar to U.S. equities

• Investors will need to watch for movements in tech shares, which Bitcoin has appeared to gain a reliable correlation with over the past few months, to figure out where the cryptocurrency could be headed to next

Weekends are a time to unwind, to spend time with friends and family, to kick back and grab a cold beer, or maybe even a bit of Bitcoin. Or at least that’s what investors did as risk appetite was on full display again with investors chomping at the bit and sending Bitcoin up by over 10% to US$41,000 over the weekend. With the benchmark cryptocurrency not having crossed US$40,000 in over two weeks, the move was enough to drag along the rest of the cryptocurrency world with it, with Ether roaring above US$3,000. Cryptocurrencies started to rally almost immediately after the aftermarket hour trading in e-commerce giant Amazon bolstered confidence in tech stocks, which cryptocurrencies have largely tracked over the past few months. Last month, the correlation between Bitcoin and the tech-focused Nasdaq 100 was 0.66, its highest since 2011 – a correlation of 1 means that the two assets move in lockstep. Bitcoin’s ascent has also been attributed to rising optimism over the U.S. economy after the U.S. Labor Department report showed employers extended a hiring spree last month despite concerns that the Omicron variant would hit jobs. Chartists have also observed that Bitcoin appears to be consolidating around its 200-day moving average, similar to U.S. equities. Over the past two days, Bitcoin has moved in virtual lockstep with some of the biggest U.S. tech firms, plunging sharply when Meta Platforms (formerly known as Facebook) plummeted on the back of slowing user growth and poor earnings and rebounding just as quickly on the back of stellar fourth quarter earnings by Amazon. Technical indicators appear to suggest that the worst could be over for Bitcoin, at least in the immediate term, with the cryptocurrency appearing to have sustained a rise over US$41,000. With many traders already pricing in a rate hike by the U.S. Federal Reserve of around 0.50%, even a mild move to inch up rates to just 0.25% could be strongly bullish for Bitcoin.