Novum Digital Asset Alpha - Daily Analysis 29 July 2020

Welcome to Wednesday! Given that it's the midweek, the markets have shifted gears, just as the work week is shifting gears. With more sudden changes in direction than a ouija board, investors are in for another bout of volatility.

In brief (TL:DR)

 
  • U.S. stocks slid into Tuesday, as earnings reports reflected a far bigger hit from the coronavirus pandemic than anticipated, pushing the S&P 500 (-0.65%), blue-chip Dow Jones Industrial Average (-0.10%) and tech-heavy Nasdaq Composite (-0.49%) downwards. 
  • Asian stocks vacillated for the most part, as investors were undecided of the market's direction, while waiting for the results of the U.S. Federal Reserve's policy meeting. 
  • U.S. 10-year Treasuries ticked up, as yields fell to 0.581% from 0.609% a day earlier (yields typically fall when prices rise) with investors fleeing to safety again amidst ever-present economic uncertainty. 
  • Oil edged down with WTI Crude Oil (Nymex) (-0.02%) at US$41.03 from US$41.56 in the previous session, as the dollar regained lost ground and weak fundamentals for oil demand started to factor into trading. 
  • The dollar steadied, after signs that it had been oversold provided a degree of stability. 
  • Gold's seemingly endless ascent was stalled on a rising dollar with Gold (Comex) (+0.25%) at US$1,968.90 from US$1,963.00 in the previous session. Having come close to testing US$2,000, gold has since pulled back somewhat.  
  • Bitcoin (-1.61%) pulled back from US$11,400 and now trades at US$10,900 with the dollar regaining lost ground and putting pressure on all dollar-denominated assets and Bitcoin's price likely to remain flat in the interim as exchange outflows matched inflows (inflows typically suggest preparation for selling, putting downward pressure on price, while outflows typically suggest preparation for holding, putting upward pressure on price).  
 

In today's issue...

 
  1. China's Newest Stock Market Provides Proof That Not Everything Goes Up
  2. Gold Can't Clear US$2,000 & Why That's A Good Thing
  3. Bitcoin Ducks Below US$11,000, But Could Retail Stimulus Push It Over? 
 

Market Overview

 
Is it sometimes better not to know? There are those who prefer not to know the diagnosis of a health screening if they're sick, or look at the value of their investments in a market downturn.
 
Ignorance can be bliss. 
 
And up till yesterday when a slew of U.S. companies reported their second quarter results, which reflected a far deeper impact of the coronavirus pandemic than analysts had expected, markets were happily chalking up gains in blissful ignorance. 
 
Now that the truth is upon us, Asian stocks drifted rudderless while waiting for the U.S. Federal Reserve to set policy, with Tokyo's Nikkei 225 (-0.79%) and Sydney's ASX 200 (-0.23%) laggards, while Seoul's KOSPI (+0.44%) and Hong Kong's Hang Seng Index (+0.35%) were up in the morning trading session.
 
Politics comes into sharp focus this week as Republicans and Democrats duke it out on the size and duration of a much-needed second round of stimulus. 
 
But perhaps what really dragged the market down yesterday was McDonald's (-2.49%) as the burger chain reported a deeper-than-expected decline in profit as fewer people ate at restaurants and the company spent millions of dollars to help franchisees stay open. 
 
Those efforts may not be enough though as the fast food giant with the golden arches announced up to 200 store closures across the United States. 
 
But stocks of McDonald's may turn out to be a value meal, especially since same-store sales turned positive in July and the average order size grew, as family orders increased.
 
Despite the dismal outlook, McDonald's shares were only down slightly and are now 10% below their record high and trading at a somewhat reasonable 25 times last year's earnings. 
 
Considering that a meal at McDonald's was one of the first things that most New Zealanders looked forward to after their lockdown was lifted, it'd be too early to write off the fast food giant yet. 
 
Which begs the question, would you like a side of fries with your McDonald's stock? 
 

1. China's Newest Stock Market Provides Proof That Not Everything Goes Up

 
  • Beijing-based New Third Board flops on debut, with two-thirds of stocks listed, falling in price
  • Chinese investors may yet become more discerning over a stock's fundamentals and this will have implications on a recent rally in Shanghai and Shenzhen's stock markets 
 
"Discount it and they will buy" could be every retailer's mantra. But the bigger question is what "it" is to begin with. 
 
As Beijing discovered much to its chagrin, the Chinese appetite for shares is not unfettered, especially for perceived "second class" offerings that have none of the glitter that stock markets have become associated with. 
 
The latest addition to China's capital markets got off to a stumbling start this week with 66% of the 32 listed companies on the Beijing's New Third Board falling at the open, just days after traders had raced to snap them up. 
 
Investors used to stock markets that only go up, regardless of fundamentals, were crestfallen and the shock that stocks don't go up simply because they're listed, has dampened market sentiment and confidence. 
 
The New Third Board was meant as a tool to help smaller Chinese firms, squeezed by the coronavirus pandemic, access the capital markets, with looser requirements for profits and revenues than China's main stock exchanges in Shanghai and Shenzhen. 
 
With initial demand for the IPO shares on the New Third Board outstripping supply by over 100 times, investors were hopeful that the market would open with a bang, but that was not to be. 
 
And while allegations over questionable financials and dubious related transactions have plagued many of the bourse's companies, that in and of itself did not dampen initial demand for IPOs. 
 
In a country where buying into an IPO is an almost guaranteed method of making money, investors are understandably quick to cash out at the earliest opportunity. 
 
Chinese government policy forces companies to cut the prices of shares sold during an IPO in order to lure in retail investors, who believe they are getting a bargain, but the New Third Board's poor opening may be because institutional investors offloaded their shares to retail traders en masse, driving down prices. 
 
The damage may already have been done. 
 
At a time when Chinese stocks in Shanghai and Shenzhen are rising endlessly, that the New Third Board's companies have delivered such a poor showing will like tarnish the reputation of the bourse for some time to come and the ability of small firms to access the capital markets. 
 
While Beijing may have hoped that the New Third Board would have provided an opportunity to shore up smaller Chinese businesses, the lackluster showing suggests to investors that these companies are not worth all that much, regardless of the discount. 
 
And while a rising tide lifts all boats, investors in Shanghai and Shenzhen stocks may take the experience of the New Third Board as a warning to scrutinize their purchases more closely. 
 
Fundamentals don't matter until they do. 
 
 

2. Gold Can't Clear US$2,000 & Why That's A Good Thing

 
  • Gold rally towards US$2,000 stalls as dollar recovers lost ground 
  • Fundamentals for the precious metal remain strong and provide investors an opportunity to add to their portfolio before it rises again 
 
It doesn't matter how many years you prepare for an Olympic sprint, because when it comes down to the day of the event, it all comes down to inches. 
 
And yet inches away from US$2,000, gold's remarkable ascent seems to have stalled. 
 
Yesterday the spot price for gold hit an all-time high of US$1,980.57 in Asian trading before falling back to around US$1,955 in the European session. 
 
Tuesday's gold rally lost momentum as the dollar's sell-off eased and traders turned their attention to the upcoming U.S. Federal Reserve meeting that will set policy. 
 
While it is highly unlikely that the Fed will adopt negative interest rates (which will send gold soaring again), it is likely to remain dovish and any expansion of the Fed's balance sheet will have a bullish effect on gold. 
 
Like US$10,000 for Bitcoin, US$2,000 is a major psychological level of resistance for gold, but there are more than a few factors which should contribute to the precious metal at least peeking above that level. 
 
Futures for gold have already cleared US$2,000 and heightened geopolitical risks from simmering tensions between the U.S. and China are all bullish factors for gold. 
 
Falling real yields - driven by Fed policy - have been sapping the dollar's strength, which makes gold, a primarily dollar-priced commodity appreciate. 
 
Yesterday's pullback in gold was not so much a fall in demand for gold, but the view that the dollar has been oversold. 
 
The dollar still remains the center of the financial universe and despite predictions of American decline, there have been countless currencies which have persisted long after the sun set on their empires. 
 
In that vein, the dollar's most recent resurgence is not unexpected and was the main contributor to gold's pause. 
 
But short of aggressive Fed balance sheet expansion, or negative rates, gold is unlikely to clear US$2,000 this week, unless the Fed throws out some surprises. 
 
And that may not altogether be a bad thing.
 
Investors don't buy gold because they're feeling confident about the economy, it's because they're generally concerned over economic uncertainty and inflation. 
 
The pullback provides an opportunity for those looking to hedge in gold, before it clears US$2,000 against a backdrop of political gridlock in Washington and the Fed considering how to provide more support for the economy once the economic outlook becomes clearer. 
 
Just as in the Olympics, inches make the difference between a silver, or a gold.  
 

3. Bitcoin Ducks Below US$11,000, But Could Retail Stimulus Push It Over?

 
  • U.S. stimulus checks saw bump up in demand for Bitcoin, second round of stimulus checks could see another run-up in Bitcoin's dollar price 
 
Timothy Sandler a seasoned blackjack player, has one rule strict rule when it came to gambling - once you've made back your initial capital, you can take more risks with your bets, because technically everything over your starting amount is "house money." 
 
But Sandler is hardly alone in this money management philosophy. 
 
When the U.S. government started doling out stimulus checks to millions of households, the idea that it was "house money" led many to use their stimulus checks to bet big on Bitcoin instead of saving it or buying safer assets. 
 
When the first stimulus checks started coming in, cryptocurrency exchanges Coinbase and Binance both reported a spike in US$1,200 deposits on their platforms - the exact amount of the stimulus checks. 
 
According to Coinbase, soon after U.S. government stimulus checks were first issued, there was an almost 400% increase in US$1,200 deposits and buy orders for Bitcoin on the exchange.  
 
Yet that bet on Bitcoin with "house money" has turned out to be one of the best investments in recent times for stimulus check punters. 
 
And if history is any guide, the next round of stimulus checks for US$1,200 will likely see no small proportion flowing into Bitcoin as well. 
 
Americans who had used their stimulus checks to buy Bitcoin at the time the first checks were issued would have gotten Bitcoin at around US$7,000.
 
With Bitcoin around US$11,000 today, those same US$1,200 deposits would now be worth around US$1,800, for a return of about 50%. 
 
According to U.S. government officials, the second round of stimulus checks will be due out sometime in August and Bitcoin bulls can look forward to a surge in demand for Bitcoin soon thereafter and a push past US$11,000.  

 

What can Digital Assets do for you?

 
While markets are expected to continue to be volatile, Novum Digital Asset Alpha's quantitative digital asset trading strategy has done consistently well and proved resilient.
 
Our flagship Novum Digital Asset Alpha returned over 20% to clients in May alone, with an annualized return target of 350% well on track. 
 
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Jul 29, 2020