A great Friday to you as global stocks are on course for their first weekly advance in four.

In brief (TL:DR)

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• U.S. stocks were higher on Thursday with the Dow Jones Industrial Average (+0.61%), the S&P 500 (+0.66%) and the Nasdaq Composite (+0.60%) all up.

• Asian stocks advanced Friday as investors assessed whether monetary tightening to tackle inflation in the US and Europe is getting closer to being priced in.

• Benchmark U.S. 10-year Treasury yields declined one basis point to 3.30% (yields fall when bond prices rise).

• The dollar retreated.

• Oil rose with October 2022 contracts for WTI Crude Oil (Nymex) (+1.48%) at US$84.78.

• Gold climbed with December 2022 contracts for Gold (Comex) (+1.06%) at US$1,738.40.

• Bitcoin (+8.04%) surged to US$20,719, gaining the most in a month as dollar drop boosts crypto.

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In today's issue...

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1. ECB Raises Rates by 75 basis points and Why You Shouldn’t Care

2. Gold Soars on Expectations of Super-Sized Fed Rate Hike

3. U.S. SEC Continues to Rattle Saber Against Crypto Lawbreakers

Market Overview

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Global stocks are on course for their first weekly advance in four, a small measure of respite from the bear-market omens circling markets due to monetary tightening, energy woes and China’s growth slowdown.

European natural gas prices eased as the region’s energy ministers gathered for a summit to draw up plans to fix an unprecedented crisis that threatens to undermine the broader economy.

Asian markets rose on Friday with Tokyo's Nikkei 225 (+0.53%), Sydney’s ASX 200 (+0.66%) and Hong Kong's Hang Seng Index (+2.69%) up, while Korean market was closed.

­1. ECB Raises Rates by 75 basis points and Why You Shouldn't Care

• The ECB raised rates by 75 basis points despite fears soaring energy prices will push the eurozone into recession.

• Surprisingly, eurozone economic data has remained resilient so far with growth rising by an unexpectedly strong 0.8% in the second quarter.

The European Central Bank (ECB) has lagged behind most major central banks in its response to high inflation with a 50 basis point hike, the first such move for more than a decade.

The latest rate rise to tackle record inflation was 75 basis points despite fears soaring energy prices will push the eurozone into recession a decision backed by all 25 members of the governing council and matches the ECB’s previous biggest increase in borrowing costs.

The ECB’s benchmark deposit rate has now lifted from zero to 0.75% the highest level since 2011.

According to the ECB’s president Christine Lagarde, there would be “several” rate rises in the coming months to bring inflation down from its latest “far too high” record of 9.1% back towards the bank’s target of 2 per cent.

The interest rate rise comes despite mounting fears that the currency area’s economy will shrink in the coming months because of surging energy prices with Russia’s throttling of critical European gas supplies hammering businesses and households throughout the region.

Surprisingly, eurozone economic data has remained resilient so far with growth rising by an unexpectedly strong 0.8% in the second quarter.

In July, the unemployment rate hit a record low of 6.6%, bolstering calls by hawkish ECB policymakers for more “forceful” action on rates.

But the real revelation wasn’t the rate hike, nor the ECB’s determination to fight inflation, instead it was the nod to excess liquidity in the European banking sector that is here to stay.

Between 2020-2021, European banks borrowed more than 2 trillion euros from the ECB via TLTRO operations under borrowing conditions extremely advantageous with interest rates as low as -1% for the period.

There are around 2 more years to go before these TLTRO loans mature but banks could in principle opt to repay early, reducing the ECB balance sheet, but the ECB just gave the banks the perfect incentive not to repay these loans.

Low funding costs were locked in between 2020 and 2021 at -1% for basically all banks, and going forward they will be equivalent to the average ECB depo rate between June 2020 and June 2022 and the maturity of the TLTRO loan.

Looking at market-implied forwards, that means roughly 0.25% to 0.50% borrowing costs ahead from the bank’s perspective.

On the investment side, banks will be making good money if they merely park the excess reserves they borrowed back at the ECB, according to the same market-implied forwards they will be making on average 1.25% to 1.50% because of the recent rate hikes.

With such warped incentives, it’s very likely European banks won’t be repaying these TLTRO loans and importantly, no mention of quantitative tightening was discussed at all by the ECB.

This means the ECB balance sheet won’t shrink, and euro excess liquidity won’t be coming down anytime soon.

And because European governments are making guarantees to shore up the private sector and households during the energy crisis, governments will be absorbing losses through their balance sheets, which means printing more euros via deficits.

While more real-economy euros being created and persistently high financial-economy euro balances could be net positive for the private sector through less defaults and a smaller decline in earnings, the euro is poised to act as a long-term release valve and the currency could be in for an emerging-market style shock.

2. Gold Soars on Expectations of Super-Sized Fed Rate Hike

• Gold was on track for its first weekly rise in four, contrary to expectations.

• Bullion has risen from earlier in the week when it was trading around $1,700 an ounce, which technical analysts see as a “danger zone” below which gold could lose investor support.

As expectations firmed for a super-sized interest rate hike when the U.S. Federal Reserve meets later this month, gold was on track for its first weekly rise in four, contrary to expectations.

On Thursday, U.S. Federal Reserve Chairman Jerome Powell said that the central bank needed to “act now” and “forthrightly” to bring inflation under control, increasing the prospect of a 75-basis-point hike when it meets between 21 and 22 September.

The rise in gold is all the more surprising as rate hikes typically make it less attractive to hold the non-interest-bearing precious metal, and hikes are normally attended by a sharp increase in Treasury yields, which also raises the opportunity cost of holding gold.

Bullion has risen from earlier in the week when it was trading around $1,700 an ounce, which technical analysts see as a “danger zone” below which gold could lose investor support.

The sell-off of policy-sensitive two-year Treasuries continued to push yields up to 3.51%, close to their highest level since 2007, but those yields seemed to do little to break gold’s rebound.

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3. U.S. SEC Continues to Rattle Saber Against Crypto Lawbreakers

• On Thursday, the Chairman Gary Gensler went back on the offensive against those in the crypto industry by repeating his demands that crypto exchanges, brokers and attorneys in the digital-asset industry comply with securities regulations.

• On the other hand, crypto enthusiasts say forcing digital-asset firms to comply with traditional registration and oversight requirements could effectively kill businesses.

Cryptocurrency traders have been put on notice that the U.S. Securities and Exchange Commission considers a range of widely traded digital assets to be securities, a position that could impose regulatory requirements that observers say could be crippling to the industry.

On Thursday, the Chairman Gary Gensler went back on the offensive against those in the crypto industry by repeating his demands that crypto exchanges, brokers and attorneys in the digital-asset industry comply with securities regulations.

Gensler’s latest salvo is only his latest push to crack down on an asset class that he says often operates in legal gray areas.

In remarks prepared for Thursday’s Practising Law Institute’s SEC Speaks event in Washington, Gensler noted that “the public deserves the same protections from your clients that they get with other issuers of securities.”

Gensler added that any legislation should be done in a way that maintains the SEC’s oversight of “crypto security tokens” and those assets make up the bulk of digital assets that are currently traded.

On the other hand, crypto enthusiasts say forcing digital-asset firms to comply with traditional registration and oversight requirements could effectively kill businesses.

Furthermore, some argue the “decentralized” nature of digital-asset trading also makes it difficult to obtain the types of information the SEC typically requires.