Novum Alpha - Daily Analysis 7 January 2021 (10-Minute Read)
A terrific Thursday to you and I trust you're doing well because the markets are full of good cheer!
In brief (TL:DR)
In today's issue...
American democracy has survived many challenges over the centuries, but perhaps none more graphic and unfortunate than the spectacle witnessed yesterday.
Not since the British burned the U.S. Capitol in 1814 has that beacon of democracy come under such visceral siege and this time not from enemies abroad even, but domestic.
With less than two weeks till the end of the Trump administration, the lame duck President has demonstrated yet again how dangerous he can be to democracy, egging on supporters threatening to disrupt the peaceful transfer of power and continuing to make baseless accusations of electoral fraud.
Investors however, while alarmed at the developments in Washington, shrugged off the unrest and focused on the bigger picture which is Democratic control over the U.S. capital.
Asian markets were sharply higher on the prospect of a weaker dollar with Sydney’s ASX 200 (+1.86%), Tokyo's Nikkei 225 (+1.59%), Hong Kong's Hang Seng Index (+0.09%) and Seoul’s KOSPI (+2.15%) all up.
1. A Blue Wave is Crashing for Tech Stocks
“It doesn’t matter if you win by an inch or a mile, winning’s winning.”
- Dominic Toretto, The Fast and the Furious
If 2016 was the great experiment, then 2020 will go down as the great reset. Democrats who had been apathetic about elections in 2016 handed the White House handily to Donald Trump but came back in 2020 and 2021 to reset the balance of power.
These same Democrats, after suffering the Trump administration for four years and the effects of a devastating pandemic were back in full force to put Joseph R. Biden Jr. into the White House and they showed up again at Georgia’s Senatorial run-offs this year as well.
Last year may have been a watershed moment and Republicans may forever have to contend with a woke Democratic electorate that has been shocked out of inaction.
In an unlikely scenario in what has been an even more unexpected past year, the Democrats may have all the levers of power in Washington for the first time in almost a decade.
With both Georgia’s Senate seats in the hands of the Democrat, the Senate will be tied 50-50 between Republicans and Democrats, and on issues where Democrats may lack the votes to pass certain bills like tax hikes, Vice President Kamala Harris will have the deciding vote to break the deadlock.
If the status quo had prevailed, the investment landscape would have more or less followed similar themes as had already been priced in when Biden won the White House and the Democrats maintained their albeit diminished majority in the House.
But with the Senate in the bag, Democrats will now have the ability to usher in a raft of more left-leaning programs that could see a weaker dollar, asset inflation and deep government debt.
Tax hikes on the very rich and a more aggressive redistribution of income may be back on the cards.
Tech stocks have already taken a beating on concerns that Democrats will seek to break the stranglehold that some of the biggest names in tech have on areas such as social media and e-commerce.
And stocks of energy producers, especially shale and other firms with significant environmental impact have all pulled back sharply.
Yet the Democrats are also likely to put immense pressure on the dollar, especially as it appears that they are keen on a raft of measures that border on the institution of a universal basic income, at least until the pandemic is over.
And with interest rates already so close to zero, Treasury yields are likely to spike, which puts even greater pressure on the U.S. Federal Reserve to keep borrowing costs at an acceptable level for the government.
The investment themes of 2020 therefore can’t be assumed.
While tech may be the “safety stock” in a pandemic, it also is subject to heightened regulatory risks.
Ironically, financial sector stocks which have sorted their houses over the past decade following the 2008 financial crisis, may be in a unique position to profit from Democrats chasing down tech firms.
And that means opportunities for banks and financial institutions, especially in cryptocurrencies and other nascent asset classes.
To everything there is a season.
2. Treasury Yields Breach 1% But Fed Is Not Blinking
For the first time since last March, the benchmark yield on U.S. 10-year Treasuries rose above 1% even as stocks rose to near record highs following projections that the Democrats won both Senate seats in Georgia, tipping the balance of power in Washington to the Democratic Party.
The Democrats now have a razor-thin majority in the Senate, which is split 50-50 on party lines and Democratic Vice President Kamala Harris being able to cast the tie-breaking vote should the Senate be evenly split on issues.
Democratic control over the Senate pavs the way for more fiscal stimulus, though not necessarily excessive stimulus because of the thin margin the Democrats have.
While the U.S. Federal Reserve has kept borrowing costs near zero since the beginning of the pandemic, higher bond yields suggest improved expectations on Wall Street for economic growth.
U.S. Treasury Bills are considered a “safe” security and a rise in their yields suggests that the risk appetite of investors has increased on optimism.
With the Fed currently buying US$120 billion worth of Treasuries and mortgage-backed securities each month to keep a lid on longer-term interest rates, the U.S. central bank has not intimated any intention to accelerate that pace even as Treasury yields breach 1%.
Senate Democratic leader Chuck Schumer has said that one of the first issues the chamber will tackle is passing significantly larger US$2,000 stimulus checks for Americans struggling with the pandemic.
Those stimulus checks are however unlikely to dramatically increase inflationary pressures or cause the central bank to tighten monetary policy any time soon, which could return the “normal” market dynamics where Treasury yields move inversely to stocks.
What is less clear is if Treasury yields will remain at their heightened levels even as the pandemic rages on in the United States.
3. Bitcoin Blasts Through US$36,000 on Democratic Takeover of Senate
Volatility isn’t a feature, it’s a function of cryptocurrencies and nowhere is this more clearly demonstrated than in the world’s favorite digital asset, Bitcoin.
After being flushed by a bout of pandemic pessimism on Monday, just as traders filed back into their offices to start a fresh work year, Bitcoin fell from a high of US$34,000 over the weekend, falling by as much as 17% to a low of US$27,700 at one point, before recovering just as rapidly.
With more twists and turns than a daytime soap opera, Bitcoin has since bounced back, rising as much as 8% at one stage to set a new all-time-high above US$36,499, shooting past the last high set on January 3 this year.
Having already quadrupled in 2020, analysts have been musing whether or not Bitcoin can rise even further or is the bubble just being inflated beyond conception.
While a range of factors have been cited for the most recent Bitcoin rally, trying to find a proximate cause for Bitcoin’s ascent is like trying to read tea leaves – it really depends on what you’re looking to find.
Some analysts are pointing to the Democratic takeover of the Senate, which they believe will herald in more left-leaning policies that put pressure on the dollar and increase the prospect of inflation.
Whereas others are pointing to a JPMorgan Chase (+4.70%) long-term price forecast for Bitcoin of as much as US$146,000.
The thing about Bitcoin is that everyone can be right about their price prediction, just not necessarily all at the same time.
If nothing else, Bitcoin is one of those assets which is driven purely by narrative and while it may be worth many dollars to someone, it could be worth almost nothing to someone else.
Yet as a means of keeping score against a backdrop of the U.S. Federal Reserve which has already stated clearly that it intends to devalue the dollar at a rate of 2% a year, there are few other assets quite like Bitcoin.
Retail investors have already jumped on the Bitcoin bandwagon this year in full swing, even going so far as to cause “connectivity issues” on Coinbase, America’s largest cryptocurrency exchange.
That Bitcoin has staged such sharp reversals, especially after Monday’s rout, is indicative that there are larger forces, such as institutional investors who have not abandoned the nascent asset class.
But if you can't bet on anything else, bet on the volatility of Bitcoin, that's a sure bet.
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Jan 07, 2021