Novum Alpha - Daily Analysis 26 February 2021 (8-Minute Read)
Bitcoin (-8.02%) traded below US$50,000 again at US$46,488, falling sharply amidst a broad selloff in risk assets and inflows into exchanges surged ahead of outflows (inflows suggest that traders are looking to sell Bitcoin in anticipation of lower prices).
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A fantastic Friday to you, but not so much for the markets I'm afraid.
In brief (TL:DR)
In today's issue...
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Market Overview“I maintain that an absolute prince who knows how to govern can extend his credit further and find needed funds at a lower interest rate than a prince who is limited in his authority.”
“In credit, supreme power must reside in only one person.”
- John Law, Scottish Economist and convicted murderer
In the bond markets at least, it appears that the absolute prince that has been the U.S. government is indeed limited in its authority as bond traders have been sending U.S. Treasury yields soaring.
The rout in bonds has spilled over into the stock markets and other risk assets at a time when the most recent auction for U.S. debt was met with lukewarm response.
In Asia, markets were uniformly lower with Tokyo's Nikkei 225 (-2.23%), Sydney’s ASX 200 (-2.08%), Seoul's Kospi Index (-2.79%) and Hong Kong's Hang Seng Index (-3.32%) taking their cue from Wall Street.
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1. Facing Off a Common Bond
Bond traders are in a standoff with central banks, betting that they’ll be forced to soak up the government bonds that they are now dumping onto markets and that standoff took center stage today, the last day of the Lunar New Year.
After U.S. Treasury yields surged to a one-year high, policymakers have had to enter a slew of debt purchases to calm panicking markets.
The Australian central bank soaked up some US$2.4 billion worth of unscheduled purchases while South Korea announced buying plans for the next few months as rising U.S. Treasury yields infects Asian bond markets.
The timing could not be worse as the Biden administration looks to push through a US$1.9 trillion fiscal stimulus package.
Central banks are keen to make sure that borrowing costs for the governments they serve remain low, and to put a cap on the reflation trade that is rippling through all markets, putting pressure on everything from tech stocks to Bitcoin, and hurting government debt issuances.
Australia has taken the lead in acting as a breakwater for rising yields in Asia, a role typically served by the Bank of Japan, with the Reserve Bank of Australia’s offer to buy US$2.4 billion worth of debt erasing gains in Australia’s three-year bond yield, and with U.S. Treasury yields coming off their highs as Asian investors piled in.
But the faceoff between bond traders and central banks is likely to persist, as evidenced by the Bank of Korea’s commitment to purchase over US$6.2 billion worth of government debt in the first half of this year.
The U.S. is already seeing difficulty in raising money, with a record low demand for U.S. debt at Thursday’s debt auction and Indonesia has said that it will pare sales of government bonds.
Rising bond yields has hurt stocks in Asia, with the MSCI Asia Pacific Index sliding by as much as 2.5%, the most since last June, and with tech shares amongst the worst performers.
The elephant in the room right now is the U.S. Federal Reserve.
Whilst Fed Chairman Jerome Powell has committed to maintaining the pace of asset purchases, unless the Fed acts soon to ratchet up those purchases, markets could continue falling.
Selling begets selling and given the rapid rise of Treasury yields, each bout of selling triggers stop-losses and lures in short sellers.
Even if the Fed doesn't intervene, it could at least come out and say something.
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2. What Are Investors Watching Out for as Treasury Yields Spike?
Part of the reason that the spike in U.S. Treasury yields took so many investors by surprise is the speed at which that spike occurred.
Until fairly recently, bond traders conducted the bulk of their business using the phone (for talking not texting) or Bloomberg’s message board (think of it like DMs for bonds).
But that shift to digitalization occurred in earnest after the 2008 financial crisis forced banks to take some of the bond inventory off their books because of more stringent capital requirements.
And one of the first bond markets to digitalize was that of government bonds.
With great digitalization comes great disruption and as algorithmic bond trading increased for government bonds, U.S. Treasury yields which are typically slow moving at best, spiked almost instantaneously past 1.6% for the benchmark 10-year U.S. Treasury Note for the first time in a year.
And while many see bond yields continuing to push higher as the global economy opens and growth recovers, others suggest that yields may have topped off because a disorderly selloff in bonds or equities could trigger at the very minimum, a verbal intervention from the U.S. Federal Reserve to stop the rout.
Benchmark U.S. 10-year Treasuries hit a high above 1.6% momentarily before pulling back, while tech shares, the darlings of the pandemic, were routed.
Fueling the selloff was a poorly received U.S. Treasury auction as traders yanked forward bets on how soon the Fed would be forced to tighten monetary policy.
Some analysts are suggesting that at the very minimum, Fed officials may come out to say something and as it is, it looks like the U.S. 5-year Treasury yield is inordinately high, especially given that the Fed has been transparent about rate hikes being held back to 2023 at the earliest.
That having been said, yields on the 10-year U.S. Treasury Note are harder to judge, given that the Fed taper of asset purchases could happen at any time within that window.
Nonetheless, the pullback in tech stocks and other risk-based assets could provide welcome buying opportunities.
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3. A Cryptocurrency Exchange Gets Listed on a Stock Exchange
In an ironic twist, America’s largest cryptocurrency exchange Coinbase, looks set to be listed on a stock exchange.
And while Coinbase deals in cryptocurrencies, it sure makes a lot of fiat ones, three hundred million give or take, according to a regulatory filing.
The size of Coinbase’s business was revealed in regulatory filings, showing that the cryptocurrency exchange generated some US$1.3 billion in revenue last year, up a staggering US$534 million from the year before, and allowing Coinbase to turn a profit of US$322 million.
Coinbase’s listing, the first for a large cryptocurrency exchange, is likely to rank as one of this year’s biggest new tech listings and would mark a milestone for backers of the nascent digital asset sector.
Coinbase looks set to list in late March and unlike a traditional IPO, the firm will file a direct listing, meaning that it will not raise additional capital when it goes public.
In a letter attached to the company’s filing, Coinbase CEO Brian Armstrong warned,
“We may earn a profit when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at break even, smoothed out over time, for the time being.”
Armstrong evidences the maturity and wisdom that comes from years of operating in the digital asset space – where one good year may be enough to cover several lean ones, but where prospects are as uncertain and as volatile as the assets that are traded.
Almost all of Coinbase’s revenue came from transaction fees last year, and as cryptocurrencies become more mainstream, volumes (regardless of price) are likely to grow.
Privately, Coinbase is expected to command a valuation of US$100 billion, up from US$8 billion less than three years ago.
Just as Nasdaq became the premier site to list tech firms, it’s entirely possible that Coinbase could become the digital asset equivalent.
And Coinbase is hardly a one-trick pony touting services designed for large institutional investors and through a series of strategic acquisitions, now provides software products for cryptocurrency developers.
According to the regulatory filing, Coinbase claims that almost two-thirds of its trading volume in the fourth quarter consisted of institutional activity – a jump of over 70% from the previous quarter.
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Feb 26, 2021