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Novum Alpha - Daily Analysis 15 January 2021 (10-Minute Read)

Bitcoin (+3.86%) added to gains and rallied to US$38,900 as traders bought the dip and outflows from exchanges led inflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices).


In brief (TL:DR)

  • U.S. stocks turned south on Thursday awaiting clarity over Biden's proposed stimulus plan with the S&P 500 (-0.38%), tech-centric Nasdaq Composite (-0.12%) and blue-chip Dow Jones Industrial Average (-0.22%), all down slightly on uncertainty. 
  • Asian stocks opened a mixed bag on Friday, as Asian investors weighed up the implication of Biden's proposed US$1.9 trillion pandemic relief package against implications to Asian currencies, assets and the dollar. 
  • The U.S. 10-year Treasury yield lurched higher to 1.12% from 1.08% as the U.S. Federal Reserve made clear it was not tapering off its bond-buying and would provide plenty of guidance beforehand of any such taper (yields rise when bond prices fall). 
  • The dollar slipped on Biden's stimulus package proposal. 
  • Oil edged up with February 2021 contracts for WTI Crude Oil (Nymex) (+0.35%) at US$53.76 from US$52.87 as the dollar slid. 
  • Gold continued its slide with February 2021 contracts for Gold (Comex) (-0.25%) at US$1,846.80 from US$1,850.40 previously as investors chased risk assets and fears over inflation are still premature. 
  • Bitcoin (+3.86%) added to gains and rallied to US$38,900 as traders bought the dip and outflows from exchanges led inflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. A Biden Stimulus Package - All of the Fiscal Flavor, None of the Taxes
  2. Bet on the Fed Buying Those Bonds
  3. Betting on Bitcoin Bottoming Out? Bet Again 

Market Overview

Market watchers have shifted their attention away from the almost political sideshow that has become the second impeachment of U.S. President Donald Trump to focus on U.S. President-elect Joe Biden's proposed US$1.9 trillion stimulus package. 
Whilst certainly not in the "trillions of dollars" - the goods news is that a more muted US$1.9 trillion package has better odds of being passed, especially without any proposed tax increases and funded almost entirely through greater borrowings. 
In Asia, investors are taking note of the impact that U.S. fiscal stimulus will have on their home markets, with Tokyo's Nikkei 225 (-0.13%) and Seoul’s KOSPI (-0.52%) down on a weaker dollar hurting their exports to the U.S., while Sydney’s ASX 200 (+1.65%) was up sharply on fiscal and infrastructure stimulus likely to push demand for commodities up and Hong Kong's Hang Seng Index was yet to open at the time of writing. 
1. A Biden Stimulus Package - All of the Fiscal Flavor, None of the Taxes
  • Markets will appreciate fresh trillion-dollar stimulus from the Biden administration, whilst avoiding most of the increased taxes that Biden had pitched on the campaign trail 
  • Risk assets likely to be buoyed as some of that fiscal stimulus trickles down from personal wallets into trading accounts for stocks and cryptocurrencies 
With the Democrats set to take over both the House, the Senate and the White House, expectations are growing that Biden’s proposed pandemic stimulus package should buoy markets to new highs.
Referring to the US$900 billion relief plan Congress passed three weeks ago merely as a “down payment” markets surged higher in anticipation of more government largesse.
With the U.S. Labor Department data revealing that job creation had stalled in December and the U.S. had lost 9 million jobs in 2020, the worse since records first started being kept in 1939, Biden has suggested that any new stimulus will in the “trillions of dollars.”
Biden and his colleagues in the Democratic party have repeatedly endorsed US$2,000 direct payments to most Americans and adding US$1,400 to the earlier US$600 stimulus checks is likely to be in the fresh stimulus.
That’s likely to pass by a slim majority in the Senate and Vice President Kamala Harris may need to be called on to pass the deciding vote.
Fatter stimulus checks should see stocks and the most speculative risk assets bubble over, with some of that stimulus tricking down to bet on firms like Tesla (-1.10%), recent IPOs like Airbnb (+6.18%) and cryptocurrencies.
Retailers like Target (+0.59%) and Walmart (-0.33%) should also see a boost from stimulus checks.
On the campaign trail, Biden had pushed for greater taxes on incomes over US$400,000 and capital gains taxes, but has said that that won’t be a priority when pushing through this latest stimulus plan, as it can be funded through borrowing.
Biden’s concerns over deficit spending are likely to have diminished somewhat, drowned out by the growing chorus of left-leaning economists that surround him, including his pick for Treasury Secretary Janet Yellen.
Yellen has argued that a prolonged period of historically low interest rates has reduced the dangers of deficit spending and Biden has echoed such sentiments saying last week,
“With interest rates as low as they are…every major economist thinks we should be investing in deficit spending in order to generate economic growth.”
That echo-chamber of left-leaning economists will serve as fuel for the markets and continue to see asset inflation in a variety of asset classes.
Whether or not that path is sustainable is another story as U.S. Treasury yields have been steadily increasing, given optimism over vaccines and increased risk appetite from stimulus packages. 
2. Bet on the Fed Buying Those Bonds
  • U.S. Federal Reserve Chairman Jerome Powell has made clear that the market will get plenty of advance notice before the Fed tapers bond purchases
  • Inflation will need to surpass 2% targets and become sustainable and provides some guidance at least as to any Fed tapering goalposts 
There’s nothing that investors hate more than uncertainty, and nobody knows this better than U.S. Federal Reserve Chairman Jerome Powell.
Which is why Powell sought to stamp out rumors of a premature reduction in the U.S. central bank’s massive bond-buying campaign, saying that “now is not the time” to have that conversation.
But the bigger question then is, when is a good time?
As markets continue to set new records, anytime is a good time, but not right now it seems.
At an online discussion on Thursday, Powell emphasized,
“We know we need to be very careful in communicating about asset purchases.”
“Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis, is be careful not to exit too early.”
U.S. Treasury yields have been slowly creeping up, having rebounded from their lowest levels since July last year, the benchmark 10-year U.S. Treasury Bill has remained stubbornly over 1% in recent weeks.
In the aftermath of the 2008 financial crisis, markets were roiled and yields spiked when investors were surprised by the news that the Fed was thinking of paring back its bond-buying.
But the Fed has since learned from that lesson and Powell has made clear,
“We’ll let the world know. We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases.”
That may be tricky to achieve because even the Fed announcing that it is beginning to think, about "beginning to think about" paring back bond purchases, may be sufficient to upset markets.
For now though, investors can pretty much expect more of the same, with Powell noting that the time to raise rates was “no time soon.”
After over a decade of inflation shooting far below the Fed’s 2% target, last September the Fed pushed out guidance that it was appropriate to keep rates near zero at least until inflation had risen to its 2% target and was on track to moderately exceed that level.
Investors can sleep easier knowing that the Fed will be there to tuck them into continued low rates and providing a blanket of bond buying until they start thinking about yanking it. 
3. Betting on Bitcoin Bottoming Out? Bet Again
  • Traders may have been caught by surprise when trying to call a Bitcoin bottom this week as Bitcoin bounced back up and recouped most of its losses 
  • Investors should focus on the volatility of Bitcoin in percentages and avoid being drawn into the drama of the absolute values that Bitcoin trades at 
When Bitcoin crashed to as low as US$33,000 earlier this week, after having scaled to a new all-time-high past US$41,000 as recently as last week, Bitcoin naysayers were smug that the Bitcoin bubble had finally burst.
But before you could say, “Hold my Bitcoin,” the bellwether cryptocurrency recovered most of the eye popping losses proving naysayers were yet again too quick to forecast the end of the most recent rally in what is arguably the world’s most controversial nascent asset class.
Spiking to as high as US$40,000 yesterday, Bitcoin’s relentless ascent has since temped down to around US$38,900.
But for those seasoned in the dark arts of Bitcoin trading, the level of volatility isn’t just unsurprising, it’s par for the course.
None of the volatility is surprising, the only reason it seems surprising is because the absolute numbers are a lot larger and the media gives it a lot more attention.
A combination of institutional interest and retailers pouring back into Bitcoin is pushing absolute prices higher, but in terms of volatility, nothing much has changed – the greater the number of participants in the Bitcoin trade, the more volatile investors can expect things to get.
For now, the narrative seems to indicate a process of price discovery that favors a strong rally – calling the bottom is a trickier affair.
Having already risen by more than 300% since last year, fiscal stimulus, loose monetary policy and outside fears over inflation and the debasement of fiat currencies, are just some of the macro factors fueling Bitcoin’s ascent.
And greater institutional investment, coupled with high profile investors such as billionaire hedge fund investors Paul Tudor Jones and Stanley Druckenmiller endorsing Bitcoin, have added to the positives fueling Bitcoin’s rally.
Add to the mix, PayPal (-1.16%) rolling out spending avenues for cryptocurrency holders this year and it’s not difficult to see why the heady cocktail of factors are fueling the rapid rise of Bitcoin.
Cryptocurrency products have seen an unprecedented surge in popularity in recent weeks as investors rushed to get a piece of the action.
And Grayscale, whose Grayscale Bitcoin Trust (“GBTC”) is popular among institutional investors has reported total inflows of more than US$3 billion across its products in the fourth quarter of last year, with GBTC seeing average weekly investments of around US$217 million during that period.
Given that stocks can rally some 20% in a single day, a 26% rally in Bitcoin would bring it to US$50,000 and that’s why it’s important to remember that the absolute numbers may be large, but the volatility in terms of percentages is just ever so slightly higher than for other risk assets. 


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Jan 15, 2021

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