Novum Alpha - Daily Analysis 26 March 2021 (10-Minute Read)
It may take more than a day for concerns over quiet U.S. Treasury auctions to sink into the markets. But that won't necessarily sound the death knell for risk assets and equities - and that's because if yields were able to stay relatively stable despite the lack of appetite amongst investors for Treasuries, that means that the Fed can still intervene if and when it needs to.
A fantastic Friday to you and the markets are none the worst for the wear despite a dicey U.S. Treasury auction.
In brief (TL:DR)
In today's issue...
It may take more than a day for concerns over quiet U.S. Treasury auctions to sink into the markets.
But that won't necessarily sound the death knell for risk assets and equities - and that's because if yields were able to stay relatively stable despite the lack of appetite amongst investors for Treasuries, that means that the Fed can still intervene if and when it needs to.
In Asia, shares were mostly up feeding off Wall Street which managed to shrug off the quiet auction in U.S. 7-year Treasury notes and with Tokyo's Nikkei 225 (+1.00%), Seoul's Kospi Index (+0.43%), Sydney’s ASX 200 (+0.29%) and Hong Kong's Hang Seng Index (+0.97%) all up in the morning trading session.
1. This is What Stimulus Withdrawal Looks Like
Curious to see how a junkie behaves in rehab?
Just take a look at Chinese equities as Beijing unwinds the massive amounts of stimulus that it had earlier injected into its economy.
The CSI 300 Index has shed some 15% since climbing to a 13-year high last month as concern over tighter monetary policy replaced optimism about the economic recovery.
Now the Chinese gauge is trailing MSCI’s global benchmark by the most since 2016 this month, and the most popular mutual funds are getting crushed.
Whereas fund managers could bet on a handful of stocks for a certain return, they’re haemorrhaging now as flows leave Chinese equities.
Central banks around the world are dealing with the aftermath of last year’s multiple interest-rate cuts and trillions of dollars in stimulus.
Some, like the U.S. Federal Reserve and the European Central Bank, have said they’ll stick to their loose policies for now.
Others are being forced to act by inflation risks, such as Brazil and Turkey, where a change of central bank governor roiled markets and Ankara appears to be backtracking on its rate increases.
Investors in February began pricing in higher U.S. growth and consumer prices, bringing forward their opinion of how soon the Fed would be forced to raise interest rates, sending U.S. Treasury yields spiking while bringing down equities.
While this would lead to technical corrections in overpriced markets like the Nasdaq, none of the world’s stock benchmarks are falling faster than China’s, where Beijing has long been the visible hand of the market.
Analysts at Credit Suisse (+0.69%) cut their recommendation for Chinese stocks to the equivalent of “sell” this week, suggesting that the country’s markets are likely to “suffer a bigger payback” than others from the gains seen during the pandemic, the second downgrade of Chinese equities in five weeks.
Beijing is still suffering from post-traumatic stress disorder from the hard lessons learned with too much liquidity, both at home and abroad, reviving a campaign to cut leverage that had been shelved earlier, amid a trade war with the U.S.
Investors who had become used to easy credit terms and margin trading, are now having to contend with tightening at the worst possible time, with Beijing sending the message to both state-owned enterprises and local and regional governments that there is no backstop.
Many state-owned firms are already on shaky ground and any further pullback in liquidity could be enough to push them over the edge.
If liquidity was still aplenty in the markets that would be one thing, as that extra yuan could paper over weaker firms, but it’s almost as if the oxygen has been sucked out of the room.
2. Five Years Good, Seven Years Bad
They say that when you break a mirror, you can expect seven years of bad luck and it appears that “7” isn’t a lucky number for the U.S. Treasury Department.
U.S. equities were cautiously optimistic when the 5-year U.S. Treasury note auction saw decent take up, with yields only slightly higher at 0.85% compared to the target set before the auction at 0.847% - yields rise when the demand and therefore prices of Treasuries falls.
All eyes were on the crucial 7-year U.S. note auction on Thursday, a good indicator as to how longer-term U.S. government borrowing will cost, but markets were miffed when the “weak” auction saw a renewed sell-off in longer-dated Treasuries.
U.S. equities managed to eke out a small gain despite the tepid auction, reversing earlier declines, but the benchmark 10-year U.S. Treasury note continued to come under pressure, after Washington struggled to find buyers for the 7-year note.
The 7-year Treasury has yet to shake off its bout of bad luck, after lackluster demand at the auction in February set off a bout of chaotic trading, and investors are becoming increasingly concerned about the market’s ability to absorb enormous amounts of new debt at a time when sentiment has already soured on Treasuries.
It doesn’t help either that the Fed is standing back and standing by as it articulates that markets will find their own equilibrium when it comes to Treasuries.
Yields on all U.S. government debt continue to trend higher as the backdrop of a brighter economic outlook and higher inflation weigh on investors.
3. Retail Traders Cool on Cryptocurrency
Bitcoin’s relentless rally started to stutter this week as the benchmark cryptocurrency fell to as low as US$50,000 before recovering to around US$52,000 on bargain hunting.
Now on its fifth consecutive day of losses, the longest since last December, there is growing speculation that the latest round of fiscal stimulus checks will be spent in the real economy and not on digital goods.
Unlike the previous round of stimulus checks, when the coronavirus pandemic still kept everyone mostly confined to their homes, lifting movement restrictions and a reopening of the U.S. economy has some analysts now speculating that the bulk of spending will be on physical goods and services.
Bullish call option activity (the right to buy a security at a predetermined price) has slipped and interest in pandemic trades such as ARK Innovative ETF (-0.31%) and GameStop (+52.69%) has waned.
A general rotation into value stocks, including airlines, cruise operators and financials may also be accelerating the downward trend for Bitcoin.
Yet if nothing else, the most recent decline is relatively mild by Bitcoin’s standards at least – in the past decade, Bitcoin has experienced four crashes of over 80% and 16 crashes over 30%, and intraday swings of 20% are common for the nascent asset class.
But recent day closes below certain key levels of price support may spook some momentum traders.
Regardless, Bitcoin still remains some 700% higher over the past year, and spiked briefly midweek as Elon Musk, CEO of Tesla (+1.61%) tweeted that the electric vehicle maker would now be accepting Bitcoin for payment.
But where retail investors are losing interest in the speculative trade in Bitcoin, institutional investors are just getting started.
Earlier this week, Goldman Sachs (+0.58%) revealed a structured product that included a mandate for allocation into Bitcoin derivative products, but not the underlying asset itself.
And Fidelity Investments, the US$4.9 trillion asset manager has filed for an ETF this week as well with the U.S. Securities and Exchange Commission.
Longer term, if Bitcoin is to settle into an established asset class, lower levels of volatility would be helpful to its role in a portfolio and perhaps the rise of institutional investment just as retail investor retreat might be welcome.
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Mar 26, 2021