A wonderful weekend to you!
In brief (TL:DR)
- U.S. stocks went into the weekend strongly as yields stabilized and despite block trades leading to a volatile trading session with the S&P 500 (+1.66%), blue-chip Dow Jones Industrial Average (+1.39%) and tech-centric Nasdaq Composite (+1.24%) all higher.
- Asian stocks went into the weekend on a high note ahead of Wall Street's bullish close.
- The U.S. 10-year Treasury yield held at 1.685% with traders shrugging off the dicey auction of U.S. 7-year Treasury notes.
- The dollar headed continued to firm up as traders bet on the strength of recovery of the U.S. economy.
- Oil rallied with May 2021 contracts for WTI Crude Oil (Nymex) (+4.126%) at US$60.97 as the container vessel blocking up the Suez Canal looks to be stuck for longer than expected and the U.S. now volunteering to help.
- Gold was flat with Jun 2021 contracts for Gold (Comex) (+0.43%) up slightly at US$1,734.70 even as the dollar rose, on concerns that a recovering economy would usher in steeper inflation.
- Bitcoin (+2.70%) recovered heading into the weekend at US$55,167 as sentiment rose and on a resumption of appetite for risk assets and with inflows into exchanges slowing against outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).
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In today's issue...
- Mysterious Block Trade Wipes US$35 Billion Off Stocks
- London Property Just Got More Expensive for Foreigners
- Bankers Think They Can Better Bitcoin
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Market Overview
Stocks recovered strongly to cap off an otherwise volatile week of trading as investors weighed the strength of the U.S. economic recovery against persistently high U.S. Treasury yields.
To be fair, much of the reason why yields were so low over the past year, was because much of the economy remained closed and in times of uncertainty, investors cling to Treasuries.
Now that there are growing signs things are on the mend, Treasuries are simply making their way back to their normal range, but that of course puts pressure on favored pandemic trades including for tech stocks.
In Asia, indices led Wall Street higher into the weekend with Tokyo's Nikkei 225 (+1.56%), Seoul's Kospi Index (+1.09%), Sydney’s ASX 200 (+0.50%) and Hong Kong's Hang Seng Index (+1.57%) all up in the morning trading session.
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1. Mysterious Block Trade Wipes US$35 Billion Off Stocks
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Chinese stocks listed on American exchanges get whacked by mysterious block trades, particularly Chinese tech firms
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Unwinding of positions looks to be either a fund closing down or a general reversal as the U.S. Securities and Exchange Commission increases pressure on the accounting processes for Chinese firms
Friday saw some US$35 billion in market value wiped off of stocks, primarily large Chinese tech companies, but also a handful of U.S. media firms in a mysterious block trade that traders and investors are still trying to get to the bottom of this weekend.
On the last day of a choppy week of trading, massive block trades – large sell orders in this case, may provide some clues as to what institutional investors and hedge funds are thinking.
The unregistered stock sales are believed to have been managed by a group of banks, including Goldman Sachs (-0.96%) and Morgan Stanley (-0.19%), on behalf of undisclosed shareholders.
The massive liquidations triggered price swings for every stock involved in the high-volume transactions, while rattling industry counterparts and some are wondering if the selling was because of a fund liquidation.
Chinese tech giants formed the bulk of the selloffs, including Baidu (+1.97%), Tencent Music Entertainment Group (-1.23%) and U.S. media firms ViacomCBS (-27.31%) and Discovery Communications (-27.45%).
The Chines ADRs (American Depository Receipts) were volatile throughout the day as more block sells were said to have been offered in Iqiyi (-13.20%) and GSX Techedu (-41.56%), dragging other Chinese peers listed on American bourses lower, including Alibaba (+2.04%), before recovering on discovery that it was not a broad industry unwind.
Block trades are not uncommon – with institutional investors and hedge funds using blockhouses, a type of brokerage firm, to execute large trades to help minimize volatility, either by “smurfing” - chopping up a large trade into many smaller trades, or negotiating a block sell directly with a buyer.
Investors are growing wary of Chinese stocks listed on American markets as a whole, after a warning from the U.S. Securities and Exchange Commission revealed that it’s taking steps to force accounting firms to let U.S. regulators review the financial audits of overseas companies.
And that could have led to the block selloff in Chinese shares.
While the sale of U.S. media companies could have been due to a slew of fresh analyst downgrades, as companies like ViacomCBS and Discovery struggle to gain a foothold in the increasingly crowded and competitive streaming market, with less breadth in their product offering.
The mystery grows.
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2. London Property Just Got More Expensive for Foreigners
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The United Kingdom imposes an additional 2% stamp duty on foreign buyers of property in England and Northern Ireland
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Already tepid demand for London properties could see some short term weakness because of stamp duty, even as concerns over the pandemic and Brexit weigh heavily on sentiment
Any visitor to London knows what a global city this truly is.
Whether it’s the cosmopolitan vibe of its high streets or the culture and spirit of what was once the imperial capital for a quarter of the world’s land, London holds a special place both ideologically and financially, in the hearts of billions of people everywhere.
Which is why it’s no surprise that the rich, particularly from former colonies, aspire to own a piece of prime London real estate.
And while London’s real estate scene was closed for business a year ago this week because of the coronavirus pandemic, that only helped to spur pent-up domestic demand, even as international buyers kept away because of travel restrictions.
But come April 1, foreign buyers of London property will have even more reason to stay away as non-United Kingdom residents will have to bear an extra 2% stamp duty charge on any property bought in England (where London is) and Northern Ireland.
The stamp duties could not have come at a worse time, even as doubts over London’s status as a global capital are under pressure from the pandemic and Brexit.
Also not helping foreign buyers is the recent resilience of the pound, which has firmed against the dollar over the past year, as well as a steep decline in rental yields because of Brexit.
Overseas buyers of London property may also think twice about investing because the stamp duty doesn’t just affect them, it affects who they sell to as well – with it being cheaper to sell their properties to other locals than to foreigners because of the stamp duty.
Regardless, London properties are still down some 20% from their peak in 2014, and while the pound is up, it’s still cheaper than the dollar.
And while the increased stamp duty may give some pause for overseas buyers of London property, the complexity of executing a purchase in current conditions could be an even bigger deterrent – involving circuitous travel arrangements, quarantines and the risk of unexpected lockdowns.
Many foreign buyers have stayed away as a result and prices have softened in many key parts of London popular with the well-heeled from abroad.
For bargain hunters, this may be an opportune time to pony up to some prime London real estate, especially if one takes the view that there is a significant body of overseas investors who are unlikely to be deterred by the stamp duty increase.
Investors who are looking for a long term asset that can be passed down for future generations, or for piece of real estate for children who are looking to go to college in the U.K. in the future, prices are likely to affect their decision making only slightly, but will not be the ultimate determinant of if they buy a piece of London property or not.
Speculators on the other hand may be put off – international buyers eyeing luxury London apartments as an investment rather than a home, may turn to other markets with more upside potential.
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3. Bankers Think They Can Better Bitcoin
- More central bankers seriously considering a push into issuing their own digital currency
- Bank of International Settlements casts doubts on Bitcoin's ability to act as a currency, even as it praises its underlying technology layer to support central bank's push to issue their own digital currencies
If you can’t beat’em, join’em and if you can’t join’em then copy’em.
The astounding rally in Bitcoin over the past year and the unprecedented monetary stimulus injected into the economy is forcing central banks to relook the launch of their own digital currencies, even as they are being accused of debasing their own currencies.
In a recent interview with Bloomberg Television, the Bank of International Settlement’s Benoit Coeure suggested that while,
“Bitcoin can be an investment instrument…it has failed the test of being a currency, it has failed the test of being a payment instrument – just because the value is moving around so much.”
But that doesn’t mean that central bankers aren’t keen on leveraging Bitcoin’s core technology, blockchain, with Coeure noting,
“Central banks are focused on an instrument that would provide liquidity, that would provide safety, and that can be used as a commodity in the global payments system.”
“That’s why we want to look into central bank digital currency. Crypto has its place under the sun, but it’s different – it’s not a payment instrument.”
China is in the late stages of issuing its own central bank digital currency, while the European Central Bank is still studying possibilities for its own digital euro.
Meanwhile, the U.S. Federal Reserve is working with the Massachusetts Institute of Technology on studying the practical feasibility of launching its own digital dollar.
In a recent survey by the Bank of International Settlements (“BIS”), as many as 80% of central banks worldwide have either launched their own digital currency, or are actively studying such a move.
And even as Bitcoin’s price continues to be volatile, central banks are looking to make their currency more spendable and increase the volatility of their fiat currencies by digitizing them, whilst unwittingly adding to the argument that Bitcoin can act as a store of value.
At a BIS event on Thursday, European Central Bank President Christine Lagarde said that monetary authorities must keep up with the rapid pace of innovation and that includes digital currencies.
But a move by central banks to issue their own digital currencies creates a fresh set of issues because it raises the question as to where commercial banks sit in the entire equation.
Under current circumstances, central banks sit one step removed from the population as they make loans available to commercial banks, who then layer a premium on those loans to the money that they ultimately lend out.
If the central bank issues its own digital currency, depositors will have a direct relationship with the central bank and cut out the middleman altogether, raising questions as to whether or not the central bank is in the right place to be dishing out loans and managing retail clients.
Nonetheless, the digital currency genie is already out of the bottle and while central banks might run their own digital currencies on their own blockchains, it will be a far cry from Bitcoin, and the ethos of decentralization that Bitcoin maximalists promote.
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