Novum Alpha - Daily Analysis 23 March 2021 (10-Minute Read)

Steady Treasury yields have calmed markets somewhat as investors watch closely the upcoming Treasury auctions to gauge whether demand has recovered to stable levels for safe securities. Investors waded back into the markets, but carefully.

 
Terrific Tuesday to you as markets show signs of greenshoots. 
 

In brief (TL:DR)

 
  • U.S. stocks reversed Friday's losses as the S&P 500 (+0.70%), blue-chip Dow Jones Industrial Average (+0.32%) and tech-centric Nasdaq Composite (+1.23%) were higher, recovering some ground as U.S. Treasury yields held steady. 
  • Asian stocks followed U.S. peers higher as bond yields maintained Monday’s decline ahead of a series of closely watched Treasury auctions.
  • The U.S. 10-year Treasury yield fell about one basis points to 1.68%, stirring hopes of improved demand in the lead-up to a heavy round of sales.
  • The dollar was steady.
  • Oil rose with April 2021 contracts for WTI Crude Oil (Nymex) (+0.21%) at US$61.55 but demand side risks remain as stockpiles look set to be higher. 
  • Gold pulled back slightly with April 2021 contracts for Gold (Comex) (-0.21%) at US$1,736.80 as risk appetite for commodities in general waned. 
  • Bitcoin (-3.10%) fell to US$54,880 at the open in a bout of choppy trading as expected and with outflows from exchanges leading inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of rising prices).

 

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In today's issue...

 
  1. RoBidenhood is Robbing from the Rich to Give to the Poor
  2. Follow the Trail of the Crude
  3. Could the Fed's Digital Dollar Fuel the Demise of Wall Street?

Market Overview

 
Steady Treasury yields have calmed markets somewhat as investors watch closely the upcoming Treasury auctions to gauge whether demand has recovered to stable levels for safe securities. 
 
Investors waded back into the markets, but carefully. 
 
Shares in Asia, were mostly up in Tuesday's morning session with Tokyo's Nikkei 225 (+0.53%), Hong Kong's Hang Seng Index (+0.19%) and Sydney’s ASX 200 (+0.22%) up slightly, while Seoul's Kospi Index (-0.24%) was down marginally amid uncertainty over U.S. Treasury yields that other markets took in their stride. 
 
 
1. RoBidenhood is Robbing from the Rich to Give to the Poor
 
  • Biden's push to raise income taxes on the wealthy as well as capital gains taxes could affect stock market behavior and lead investors to hold for longer
  • Infrastructure spending may benefit certain segments of the stock market more than others and higher capital gains taxes may temper speculative fever 
 
It’s hard to say how good U.S. President Joe Biden is with a bow and arrow, but he sure has his quiver set on the rich of America.
 
Emboldened by his success in passing his signature US$1.9 trillion stimulus package, Biden is now attempting to make good on his campaign pledge to raise taxes on the rich (read anyone with over US$400,000 per annum in income) by showing how well they did during the pandemic.
 
It’s easy for ordinary Americans to get behind Biden’s plan, especially in a year that has hurt most Americans financially, the revolt against the rich may only be just beginning.
 
Part of the tax hikes will go towards paying some of Biden’s longer-term agendas, including infrastructure, climate change and assistance with home healthcare and childcare.
 
But that may not have the effect that some investors may be pricing into the markets.
 
A large part of capital gains in the U.S. are realized through the sale of shares and real estate.
 
Till the point that shares are sold, gains remain on paper only, which is why company executives have entire strategies laid out for them by their tax advisers as to when to sell their shares.
 
But the middle class and the bulk of Americans who received fiscal stimulus checks are likely to be spared any tax hikes. 
 
Biden’s proposed hikes to capital gains taxes have the potential to dramatically change the dynamics in the stock market.
 
Because retail investors could be penalized more heavily on some of the massive gains they make by speculating on stocks like GameStop (-2.55%), it’s possible that they may then hold on to equities for the longer term, which would necessitate a closer examination of either a company’s books or its prospects.
 
And day traders in companies like Tesla (+2.31%) and Apple (+2.83%) may end up having so-called “diamond hands,” holding on to the stocks in their portfolios for longer to manage the higher capital gains taxes at opportune exit windows. 
 
But unlike the fiscal stimulus package, Biden’s proposed tax hikes will face a more arduous journey through the Senate, with Senate Minority Leader, Republican Mitch McConnell saying last week that there wouldn’t be bipartisan support for higher taxes.
 
True, but then there wasn’t bipartisan support for the US$1.9 trillion fiscal stimulus package either, with Democrats potentially using what’s known as the “reconciliation process” which allows them to pass bills through the Senate with a simple majority.
 
If so, then investors will need to brace themselves for a potential shift in equities, and consider examining value stocks more closely.
 
Many of these firms, including airlines, hotels and cruise operators, were battered by the coronavirus pandemic and saw their stocks suffer as a result.
 
As vaccinations get underway in earnest in the U.S. and investors who have to contend with stiffer capital gains taxes consider their longer term tax planning, value stocks may come back to the fore.
 
Alternatively, investors, particularly retail investors who aren’t as much affected by rising income taxes, may decide that they’ll need sufficiently large returns to counter increased capital gains taxes, and take to more fervent speculative stocks in the market.
 
Either way, changes are afoot, if Biden can bring his tax bill across the line. 
 
 
2. Follow the Trail of the Crude
 
  • Crude oil consumption reflects a patchy pandemic recovery  
  • Oil may have a price floor, but borders, vaccinations and demand will need to ramp up before supply side constrictions can do anything meaningful 
 
Many of us may desire to own a Tesla (or such other electric vehicle), but odds are the depreciating lump on our driveway burns dead dinosaurs.
 
Unfortunately, the world isn’t burning up many of those fossils now.
 
With the economic recovery from the pandemic patchy, oil is edging lower and fuel consumption is facing setbacks after some countries in Europe either extended or restarted lockdowns, while in the U.S., New York City’s mayor urged a pause to the reopening.
 
And as international travel has ground to an almost standstill, demand for oil in Southeast Asia, which relies heavily on tourism, has hit a plateau.
 
Thailand’s famous beaches and markets are deserted, and at the ritzy Marina Bay Sands Casino in Singapore, the odd local gamblers have their pick of tables that would usually be teeming with Chinese tourists.
 
A slow rollout of vaccines and a resurgence in cases in the region of almost 700 million people, is pushing back the timeline to opening borders.
 
There are still movement restrictions in parts of Indonesia and Malaysia and the aviation hub of Singapore hasn’t had much success in establishing travel bubbles, while Myanmar, has descended into domestic unrest.
 
Exacerbating downward pressure on oil demand, crude stockpiles in the U.S. are creeping up, expanding by some 1.2 million barrels last week, according to a Bloomberg survey.
 
But traders betting on the demise of oil may want to temper those views, especially as the longer-term outlook on coronavirus vaccinations is positive and with the U.S. unleashing significant stimulus that could still boost demand.
 
OPEC+ members are also continuing to put a floor under prices through a series of output cuts that should help to stabilize any sharp drop. 
 
3. Could the Fed's Digital Dollar Fuel the Demise of Wall Street?
 
  • Financial industry executives are growing nervous that the Fed may issue its own digital dollar and potentially upend their role as a rent-seeking trusted intermediary   
  • Rise of cryptocurrencies has put tremendous potential on central banks the world over to get on board with digital currencies
 
China has one and as many as 80% of central banks around the world are looking to get one too – no, it’s not a back scratcher, but a central bank digital currency.
 
And whilst the world’s premier central bank has until fairly recently shown reticence to adopt one, there are growing signs that it may have had a change of heart.
 
As soon as July, officials at the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology, which had been developing prototypes for a digital dollar platform, will be unveiling their research on the potential to digitize the greenback.
 
Whilst most Chinese are comfortable using digital yuan, having used digital payments for years like Alipay and WeChat Pay, a digital dollar would fundamentally change the way Americans use money and some leading financial firms are already starting to lobby to slow down the birth of a digital dollar, and in the event that it is birthed, to not be cut out from the ecosystem.
 
At the top of their list of concerns, financial intermediaries are fearful that they’ll be cut out if Americans develop a direct relationship with the Fed, depriving these institutions of their rent-seeking function.
 
The way most money flows into the system at the moment is that the Fed makes money available to commercial banks, who borrow the money and then lend that money out to ultimate borrowers in the form of mortgages, student loans and the myriad other lending products.
 
But a digital dollar wouldn’t just bust the banks, payment services providers like Visa (+0.53%) and Mastercard (+0.53%) would be affected as well, because their gateways would become less relevant if digital dollars could be debited and deposited without them serving as intermediaries.
 
To be sure, a digital dollar could be years away, nor have policymakers had any thoughts on how it would interact with the legacy monetary system, but the serious consideration that it’s being given is sufficient to make financial industry executives nervous.
 
And while cash isn’t likely to go away, it’s use will almost certainly decline.
 
Using a digital dollar would be as simple as holding up a smartphone screen to be scanned or tapped (which is already the case in China and has been for years) and behind the scenes, the digital dollar would move from one account to another.
 
Money already works that way in the U.S., with the majority of greenbacks just digital entries in bank accounts, but a digital dollar would do away with the need for a go between of a commercial bank or credit card network, dramatically reducing settlement time and fees. 
 

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Mar 23, 2021