Novum Alpha - Daily Analysis 25 March 2021 (10-Minute Read)

A mega container ship stuck in the Suez Canal could not be anymore emblematic of what's facing markets at the moment. Will we or won't we recover and what will that recovery look like?

 
A terrific Thursday to you even as tech tanks in the markets - it's a sign that investors believe the economy is recovering!  
 

In brief (TL:DR)

 
  • U.S. stocks marched into wound down on Wednesday with the S&P 500 (-0.55%), blue-chip Dow Jones Industrial Average (-0.01%) and tech-centric Nasdaq Composite (-2.01%) all down as the reflation trade came back in play and demand for Treasuries steadied. 
  • Asian stocks edged higher with U.S. futures Thursday as investors weighed the benefit of economies reopening against concerns about inflation.
  • The U.S. 10-year Treasury yield held around 1.62% and all eyes are on the 7-year U.S. Treasury auction today, for signs of stable demand for bonds. 
  • The dollar steadied around two-week highs.
  • Oil retreated with May 2021 contracts for WTI Crude Oil (Nymex) (-1.88%) at US$60.03 after spiking initially because of the container vessel blocking the Suez Canal, as investors priced in the eventual removal of the blockage. 
  • Gold was little changed with Jun 2021 contracts for Gold (Comex) (+0.02%) at US$1,735.80 as the dollar held its own. 
  • Bitcoin (-2.11%) fell to US$52,992 on the back of a rising dollar and as tech stocks came under pressure, with inflows into exchanges ahead of outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).

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  4. Raoul Pal, Co-Founder, Real Vision

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In today's issue...

 
  1. So You Want to Be a Stock Picker?
  2. Fed Up with Market Intervention
  3. U.S. Bitcoin ETF Gets Closer to the Finish Line

Market Overview

 
A mega container ship stuck in the Suez Canal could not be anymore emblematic of what's facing markets at the moment. 
 
Will we or won't we recover and what will that recovery look like? 
 
Even as vaccinations get under way in earnest, coronavirus cases are continuing to surge in the U.S. and Europe is bracing for fresh or extended lockdowns, even as it lags in innoculating its population.  
 
In Asia, shares were mostly up with U.S. futures on Thursday with Tokyo's Nikkei 225 (+0.39%), Seoul's Kospi Index (+0.06%) and Sydney’s ASX 200 (+0.16%) up, while Hong Kong's Hang Seng Index was (-0.09%) mostly flat. 
 
 
1. So You Want to Be a Stock Picker?
 
  • Economic recovery presents opportunities for stock pickers who have lagged the S&P 500, with actual economic conditions making it more obvious who picked the winners and the losers 
  • Firms with outdated business models and heavy debt overhangs aren't likely to fair well post-pandemic and not all cheap stocks can be picked 
 
The pandemic has not been kind to both value investors and stock pickers.
 
As investors poured into tech stocks as a haven, Redditors and retail investors were outperforming professional stock pickers by orders of magnitude.
 
Yet as the pandemic-era rally in U.S. tech stocks wanes, with a handful of tech giants such as Apple (-2.00%), Amazon (-1.61%), Google (-0.43%) and Facebook (-2.92%) constituting up to a quarter of the S&P 500’s value, the pro stock pickers are hoping that a recovering U.S. economy will change the tide on their fortunes.  
 
Economically-sensitive industrial, energy and financial stocks are on the rise, and companies within each sector are likely to chart very different paths out of the pandemic.
 
Whereas a rising tide floats all boats, making it hard for a stock picker to stand out when the only game in town was tech, an economic recovery makes picking the winners from the losers a more skills-based game.
 
With the majority of active managers underperforming the S&P 500 (which had become even more tech-heavy due to the pandemic) since 2013, data from S&P Dow Jones shows that they’re making a turnaround.
 
Passive strategies have dominated the past decade – at the end of 2010, actively managed U.S. stock funds held some US$4 trillion in net assets, versus US$1.5 trillion for their index-tracking passive counterparts, according to data from Morningstar.
 
By the end of the decade, passive held some US$8 trillion in assets, just a touch behind active managers.
 
And as tech starts to show signs of weakness, the economic recovery will help throw up opportunities – some firms have done a better job of cutting costs, setting them up for a strong rebound in earnings, while others have adopted digitalization better.
 
But cheap does not necessarily translate to good – and some stocks remain cheap for a reason – troubled companies with big debt overhangs and limited prospects aren’t likely to do well even after the pandemic ends.  
 
 
2. Fed Up with Market Intervention
 
  • Steady hand of the U.S. Federal Reserve to not intervene despite spiking U.S. Treasury yields has a calming effect on markets 
  • All eyes on the U.S. 7-year Treasury note auction later today after the last one didn't go so well, any sign of tepid demand may cause yields to spike and shake out markets again  
 
If the recent spike in benchmark U.S. Treasury yields was a game of chicken, then the U.S. Federal Reserve didn’t blink.
 
That calm and steady hand played out well when yields pulled back in the earlier part of this week, on concerns over rising coronavirus cases and fresh lockdowns in Europe.
 
Ultimately, the market will do what it does and the Fed has bigger fish to fry – ensuring a steady hand for economic recovery and pushing towards higher levels of employment.
 
During a testimony before the powerful Senate banking committee on Wednesday, U.S. Federal Reserve Chairman Jerome Powell dismissed concerns that the recent rise in long-term borrowing costs would be unhealthy for the U.S. economic recovery, countering that markets had adjusted in an “orderly” manner to the brightening economic outlook.
 
To be fair, the Fed can’t be expected to respond to every sudden Treasury yield spike like a jittery teenager to a pimple the night before prom.
 
And when the benchmark U.S. 10-year Treasury yield spiked to a 14-month high of 1.75% before pulling back to 1.63%, the Fed’s calm and steady hand (by doing nothing) was probably the best response in hindsight.
 
As economic conditions improve, the demand for “safe” securities like U.S. Treasuries is bound to wane, which will see yields necessarily rise – that’s the normal market in operation.
 
Where things will become disconcerting is when yields rise, and the market starts tanking – in other words investors are gripping on to cash for dear life – but that seems unlikely as the Biden administration is injecting some US$1.9 trillion into the system.
 
And a recent string of decent Treasury auctions has also helped steady the bond market, with the U.S. Treasury Department able to offload some US$61 billion of 5-year notes at a yield of 0.85%, which was just a touch higher than the initial 0.847% yield set prior to the auction – suggesting that investors are starting to buy Treasuries again.
 
Thursday will be crucial as the Treasury will be selling another US$62 billion worth of 7-year notes – last month’s auction didn’t do so well with demand tepid and investors will be looking out to see how this one fares.
 
If the 5-year Treasury note auction was anything to go by, things should turn out fine, otherwise a lack of demand could see bond yields spiking and a fresh dumping of risk assets. 
 
3. U.S. Bitcoin ETF Gets Closer to the Finish Line
 
  • Fidelity Investments files for a Bitcoin ETF on Wednesday
  • New products at Goldman Sachs (-0.94%) which have mandate for exposure to cryptocurrencies re-confirms growing institutional demand 
 
Bullishness over the prospect of a U.S. Bitcoin ETF wasn’t able to buoy Bitcoin prices overnight as risk sentiment soured on improving demand for U.S. Treasuries.
 
Even as the U.S. economy shows signs of recovery, there are ongoing concerns over inflation, as well as fresh lockdowns in Europe and parts of the United States.
 
And although Fidelity Investments, the US$4.9 trillion asset manager, filed paperwork with the United States Securities and Exchange Commission, or SEC, to list a new Bitcoin exchange-traded fund on Wednesday, the move, which under normal market conditions would have buoyed Bitcoin prices, wasn’t enough to shift the needle upwards.  
 
Fidelity’s Bitcoin ETF aims to track the cryptocurrency’s daily performance using the Fidelity Bitcoin Index PR, an index that’s derived from several price feeds.
 
If approved, the Fidelity Bitcoin ETF will allow investors access to the fund through a traditional brokerage account without the “potential barriers to entry or risks involved with holding or transferring bitcoin directly.”
 
Like other proposed Bitcoin ETFs, the Fidelity Trust is intended to provide more institutional pathways to cryptocurrencies and if nothing else, should facilitate better price data.
 
So far, lawmakers at the U.S. Securities and Exchange Commission have struck down every proposal to securitize Bitcoin in an ETF over concerns of extreme volatility and price manipulation.
 
Proponents of the flagship cryptocurrency believe the tide could be changing now that Bitcoin has matured as an asset class and more importantly the SEC also has a new boss in the form of Gary Gensler, a crypto-savvy regulator who taught blockchain at MIT’s Sloan School of Management.
 
In growing signs of institutional demand for cryptocurrency exposure, last week, Goldman Sachs filed for a new ETF that includes the option to add BTC exposure.
 
According to the prospectus, the Autocallable Contingent Coupon ETF-Linked Notes “may have exposure to cryptocurrency, such as bitcoin, indirectly through an investment in a grantor trust.”
 

What can Digital Assets do for you?

 
While markets are expected to continue to be volatile, Novum Alpha's quantitative digital asset trading strategies have done well and proved resilient.
 
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Mar 25, 2021