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Novum Alpha - Daily Analysis 19 January 2021 (10-Minute Read)

Happy Martin Luther King Jr. Day! American markets were closed yesterday for the holiday but that didn't stop the good holiday cheer from spreading to Asian markets buoyed by robust economic data out of China.

 

In brief (TL:DR)

 
  • U.S. stocks were shut for a holiday Monday and look set to open higher today.
  • Asian stocks mostly rose with U.S. equity futures Tuesday and on the back of strong fourth quarter GDP growth in China.  
  • U.S. 10-year Treasury yields climbed to 1.11% as investors continued to bet on risk assets and renewed fiscal policy (yields rise when bond prices fall). 
  • The dollar slid in Asian trading ahead of Biden's inauguration in anticipation of greater fiscal spending. 
  • Oil slipped with February 2021 contracts for WTI Crude Oil (Nymex) (-0.04%) down at  US$52.34 from US$52.36 but further losses were stemmed by a sliding dollar. 
  • Gold rose with February 2021 contracts for Gold (Comex) (+0.55%) at US$1,840.00 from US$1,829.90 as the dollar slipped. 
  • Bitcoin (+2.32%) rose to US$36,841 on expectations over dollar weakness and as inflows into exchanges slowed against outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 
 

In today's issue...

 
  1. Betting Against The Dollar? Get in Line 
  2. Revival of Chinese Growth Buoys European Stocks
  3. Rival Institutional Bitcoin Vehicle Could Cap Bitcoin's Price Premium 
 

Market Overview

 
Before you know it, it's the third week of January and the United States of America will be set to swear in a brand new president in just hours. 
 
That expectancy of the incoming Biden administration has spilled over into markets buoyed by a belief in more robust fiscal policy proposals from the White House and continued loose monetary policy. 
 
In Asia, investors kicked off Tuesday in fine style with robust GDP growth out of China rallying Tokyo's Nikkei 225 (+1.23%), Seoul’s KOSPI (+2.25%), Sydney’s ASX 200 (+1.23%) and Hong Kong's Hang Seng Index (+1.57%) to open higher in the morning trading session. 
 
 
1. Betting Against The Dollar? Get in Line
 
  • Bets against the dollar reach highest level in almost three years 
  • Medium term weakness for the dollar obscures potential for a sharp dollar rally should economic conditions in the U.S. improve and demand for dollar-assets increase if yields should spike 
 
With Joseph R. Biden Junior literally just hours away now from being sworn in as the 47th President of the United States, speculative bets that profligate fiscal spending will weigh down the dollar have built up to their highest level in almost three years.
 
Even as the greenback has rebounded by almost 1% this year against a basket of other major currencies, hedge funds and other currency traders have amassed over US$10 billion worth of bets against the dollar as of last week, according to data from the U.S. Commodity Futures Trading Commission.
 
Investors betting against the dollar are entering an increasingly crowded trade with fundamentals still pointing to a weaker dollar, at least in the medium term.
 
Shedding nearly 7% last year as near zero interest rates reduced the attraction of dollar assets, many investors continue to believe that looser monetary policy will weigh down the greenback especially against rival economies such as China.
 
For its part China has made it easier to bet against the yuan, on concerns that a rising yuan coupled with a declining dollar could make exports more costly.
 
A lot still depends on what happens next.
 
While speculative bets against the dollar are the odds-on favorite to pay off, fiscal measures by the incoming Biden administration might help spur a revival of U.S. economic activity that has suffered because of a raging pandemic.
 
A more efficient and cohesive coronavirus vaccine rollout plan could also see improved earnings in American companies and bond yields may start to rise again, lifting demand for the dollar and Treasuries.
 
Ultimately a bet for or against the dollar in the longer term has more to do with the strength of the U.S. economy than any medium term fiscal and monetary policy outlooks and in this regard, U.S. Federal Reserve Chairman Jerome Powell has made clear countless times, “don’t bet against the American economy.” 
 
 
2. Revival of Chinese Growth Buoys European Stocks
 
  • China's fourth quarter GDP growth higher than expected and only major economy to grow in a pandemic year 
  • Improved Chinese economic prospects fueling demand for European stocks, but Chinese consumption growth is still muted and pandemic in Europe may ultimately weigh down any greenshoots of recovery in European economic fortunes
 
Yang Jun fiddles with his spanking new iPhone 12 Pro Max. At almost a thousand dollars, Jun’s new gadget is the equivalent of about a month’s salary for the average Chinese worker.
 
For Jun, a creative director at a Chinese ad agency, the phone was a must have, “what if clients saw me with an older iPhone?” he muses.
 
In stores and restaurants across the Middle Kingdom, Chinese are shopping and dining, with face masks the only visible sign that the coronavirus pandemic remains a concern.
 
Whilst the rest of the world was mostly under lockdown, China’s GDP grew by 6.5% in the final quarter of 2020, compared with the previous non-pandemic year, pushing economic growth to 2.3% for the full year.
 
China’s V-shaped economic recovery plan has been no secret – get the pandemic under control and deploy fiscal and monetary stimulus to boost investment, something that the Biden administration will be hoping to achieve as well.
 
Economic growth in China accelerated as the nation’s factories revved up to cater to exploding global demand for medical equipment and work-from-home devices such as laptops, computers and video conferencing equipment.
 
But while much has been made about China stimulating its massive domestic demand towards consumption, workers still tightened their belts and reduced discretionary spending, as was the case everywhere else in the world.
 
And while the Chinese Communist Party has made domestic consumption one of the cornerstones of its economic plan, Chinese consumers, even the very rich, are still spending cautiously.
 
Consumption spending per capita fell 4% in 2020 from a year earlier and after adjusting for inflation, while investment in fixed assets, including real estate and infrastructure only grew by 2.9% according to China’s statistics bureau.
 
But that hasn’t stopped investors from betting that a resurgent and confident Chinese economy will soon be ready to spend lavishly on European goods as European stocks surged higher on the back of Chinese economic data.
 
Stocks of Europe’s biggest luxury brands as well as automobile makers rebounded on the positive economic data from China, but such a rebound may be premature as the coronavirus continues to rage unabated across much of Europe.
 
Nonetheless, China’s ability to eke out economic growth in a pandemic year has been nothing short of miraculous and has allowed it to increase its share of the global economy at the fastest pace on record.
 
Major trading partners with China, of which ten Southeast Asian countries combined rank higher than the United States, means that these economies will also benefit from a resurgent China.
 
Some economists suggest that China’s GDP will grow by as much as 8.2% this year, outpacing the rest of the world, even as coronavirus vaccines are rolled out.  
 
 
3. Rival Institutional Bitcoin Vehicle Could Cap Bitcoin's Price Premium
 
  • Alternatives for institutional and accredited investors to Grayscale Bitcoin Trust could help to reduce fees and cap premiums versus underlying for Bitcoin 
  • Premiums may be reduced but will continue to exist until a Bitcoin ETF is approved by regulators
 
What’s the price of Bitcoin now? Overheard in cafes (where available) and at dinner parties (not available), speculation as to the price of Bitcoin has now spilled over from internet forums to the general population as a 300% rally in the nascent digital asset has now permeated popular culture.
 
But unbeknownst to most casual observers, Bitcoin doesn’t have a “global” price – a lot depends on where you buy it from.
 
And that’s the dilemma when it comes to a decentralized asset, because price is often used by investors to determine value and if we can’t even agree on price, what is there to speak of when it comes to value?
 
Nowhere is this more obvious than the yawning premium that Grayscale Bitcoin Trust has charged institutional and accredited investors for the privilege of participating in Bitcoin through a fully regulated investment vehicle.
 
Unlike other methods of purchasing Bitcoin, like at a hotel coffee lounge with a stranger in a laptop and a Louis Vuitton bag full of money below the table to seal the deal, institutional investors such as pension funds need more traditional and regulated methods to participate in alternative assets.
 
And for the longest time Grayscale Bitcoin Trust had been the only show in town that these institutional investors could attend because of Grayscale's reporting status to the U.S. Securities and Exchange Commission.
 
Instead of buying and selling Bitcoin directly, investors in Grayscale Bitcoin Trust buy shares of the trust, whose shares derive their value from the Bitcoin held by Grayscale on behalf of investors, but that service comes at a premium.
 
Outside of the 2% annual management fee that investors pay to Grayscale for managing the trust, investors also pay as much as 20% more to gain exposure to Bitcoin, than if they had bought the Bitcoin themselves.
 
And that Grayscale “premium” has often been used as a sort of breathing space for investors to divine what the general markets are willing to pay for Bitcoin, outside of the regulated market environment.
 
That “premium” however may soon be set to shrink with Osprey Bitcoin Trust, which is intending to launch in over-the-counter markets with a management fee of only 0.49%.
 
With Fidelity Digital Assets set to provide custodial services for Osprey Bitcoin Trust, renewed institutional interest in Bitcoin has drawn in fee competition and may also erode some of the premium that Grayscale Bitcoin Trust’s shares have been commanding.
 
And while the competition on fees is welcome, as witnessed by how the ETF industry’s fees were slashed as competition for assets brought them to near-zero levels, it could also add to the already high levels of volatility in Bitcoin.
 
Bitcoin’s rally has seen the prices of Grayscale Bitcoin Trust and Bitwise 10 Crypto Index Fund soar well above the value of their underlying holdings.
 
But in the absence of a Bitcoin ETF, which U.S. regulators had repeatedly rejected, these other regulated vehicles remain the easiest ways for institutional investors to get Bitcoin exposure without having to sign up with a cryptocurrency exchange or create their own digital wallets.  
 
That convenience however comes at a high price.
 
Given the notoriously volatile nature of Bitcoin, investors buying into these Bitcoin trusts typically have a lock-up period, and in the case of Osprey Bitcoin Trust, that lock-up is for a year before the shares in the trust can be sold in the secondary market.
 
A year in the cryptocurrency markets, as seasoned Bitcoin traders will attest, is several lifetimes in the traditional financial markets.
 
Nonetheless, greater competition in the Bitcoin trust market should at least help to bring fees down and hopefully bring down the premiums that these trusts attract over their underlying assets, and in the medium term, that could drag prices down.  
 
 

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Jan 19, 2021

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