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Novum Alpha - Daily Analysis 4 March 2021 (10-Minute Read)

Bond investors are playing chicken with the Fed, dumping U.S. Treasuries on Wednesday and sending yields spiking again, but without necessarily breaching what are seen as key levels of resistance such as the 1.6% level on the 10-year U.S. Treasury.

 
A terrific Thursday to you as the weekend all but beckons. 
 

In brief (TL:DR)

 
  • U.S. stocks wound down lower on Wednesday with the S&P 500 (-1.31%), blue-chip Dow Jones Industrial Average (-0.39%) and tech-centric Nasdaq Composite (-2.70%) all pulling back as the selloff in bonds continued in earnest.  
  • Asian stocks fell with U.S. futures Thursday after an overnight surge in bond yields once more dragged down shares on Wall Street.  
  • The benchmark U.S. 10-year Treasury yield was steady at 1.49% after rising nine basis points.
  • The dollar strengthened. 
  • Oil slipped back with April 2021 contracts for WTI Crude Oil (Nymex) (-0.10%) at US$61.22 mainly on the back of a rising dollar. 
  • Gold fell with April 2021 contracts for Gold (Comex) (-0.13%) at US$1,713.50 as the greenback gained. 
  • Bitcoin (+4.71%) recovered to US$50,987 as investors cottoned on to the inflation narrative as well as the prospect of a U.S. Bitcoin ETF and with outflows from exchanges continuing to lead inflows (outflows suggest that traders are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

 
  1. Bond Bombs Beckon Bullish Buying
  2. Google's Not Watching You, Not Personally Anyway
  3. Don't Hold Your Breath, Cboe Brings Bitcoin ETF One Step Closer to Reality

Market Overview

 
Bond investors are playing chicken with the Fed, dumping U.S. Treasuries on Wednesday and sending yields spiking again, but without necessarily breaching what are seen as key levels of resistance such as the 1.6% level on the 10-year U.S. Treasury. 
 
To be sure, the Fed is keeping a close watch on benchmark Treasury yields, as they more or less determine the cost of borrowing for the rest of the world and should things get out of hand, there is little doubt that the Fed will intervene. 
 
But perhaps like a child trying to slip past their parent and steal a cookie from the kitchen, bond investors are testing the Fed's resolve, sending yields rising, but not breaching any key levels, for now. 
 
Asian markets slumped on Thursday morning, in line with U.S. stock futures and with the carnage in the bond markets ensuing with Tokyo's Nikkei 225 (-1.55%), Sydney’s ASX 200 (-0.81%), Hong Kong's Hang Seng Index (-1.28%) and Seoul's Kospi Index (-0.89%) all down.
 
 
1. Bond Bombs Beckon Bullish Buying
 
  • U.S. Federal Reserve has made clear that it is watching the selloff in bond markets but has so far done little other than to send out officials to pass comments to reassure markets 
  • Fed may see the correction in stocks as healthy, to prevent bubbles from developing, but has a whole suite of tools that could send equities rising more sharply, should the selloff in bonds become a trend 
 
There are many things the U.S. Federal Reserve can do to intervene in markets – there are the most obvious and direct – adjusting interest rates and buying up assets, and then there’s perhaps the cheapest intervention of all – talking.
 
No doubt the U.S. central bank has kept its eyes on U.S. Treasury yields and was concerned enough to send out not their head honcho, Chairman Jerome Powell to say a few words, but one of the top officials at the Fed, Lael Brainard to place some strategic comments.
 
On Tuesday, Brainard said in a video appearance that the Fed remains far from a place where it can start dialing back its support of the economy.
 
In an effort to stem the selloff in bonds, Brainard said that when the day does arrive that the Fed can raise rates, “changes in the policy rate are likely to be only gradual” and that asset purchases “are expected to continue at least at their current pace until substantial further progress has been made toward our goals.”
 
But sometimes words aren’t enough as U.S. government bond sellers were out in full force yesterday, sending tech stocks sharply lower for a second day straight .
 
Tech firms can sustain giddy valuations because when U.S. Treasury yields are low, the growth prospects that tech stocks provide over and above the risk-free rate of return is substantial and investors are willing to pay those premiums.
 
Not so if U.S. Treasury yields soar – investors become less willing to pay a premium for growth.
 
The 10-year U.S. Treasury yield is important because it also acts as a benchmark for global borrowing costs.
 
Not helping matters is the prospect of inflation.
 
The five-year breakeven rate – a measure of inflation expectations in the medium term – hit 2.5% on Wednesday, the first time since 2008.
 
Inflation makes bonds (with their fixed income) less attractive by eroding the real value of their income payments.
 
But those betting against the Fed, should consider that it hasn’t even begun to bring out the big guns yet – Powell has remained deafeningly silent on the bond carnage – suggesting that either the Fed doesn’t see the turmoil in the bond markets as an immediate problem, or that it’s a problem, but it’s keeping its cards close to its chest.
 
Investors betting against stocks might want to consider that the Fed still has plenty of tricks up its sleeve and importantly, it will take time to develop persistent inflationary pressures and for the U.S. to return to full employment.
 
In other words, it’s not as if when inflation hits the magical Fed target of 2%, the Fed will suddenly pull the plug on its policies. 
 
If nothing else, the Fed will successfully push back against any sharp increases in rates and tightening of financial conditions, by reaffirming its commitment to providing support, until the recovery is complete – in other words, much later than investors are pricing in at the moment.
 
So that tech firm that you’ve been eyeing but saw its price run ahead of you? Now might be a good time to deploy some of that dry powder.
 
The messiness in yields will get sorted eventually, the Fed hasn’t even begun to act. 
 
 
2. Google's Not Watching You, Not Personally Anyway
 
  • Google looks to remove tracking cookies that track an individual's website browsing behavior by next year 
  • Shift in approach towards privacy may make Facebook (-1.39%) a target as both Apple (-2.45%) and Google (-2.57%) have substantial alternative data streams to track users for targeted ads that don't rely on browser cookies 
 
Have you ever had that feeling that you’re being watched? That whenever you head out onto the street that someone’s following you around, taking down notes of where you stop into, what stores you browse?
 
Yet if that sounds creepy in the offline world, in the online world, few seem to care as billions of internet users across the world accept browser cookies without so much as a hint of concern over their privacy.
 
Unlike the chocolate chip variety, browser cookies are like digital breadcrumbs that website owners pass on to companies like Google so that advertisers can use these tools to serve you targeted advertising.
 
Saw a dress on a website that you liked? Chances are you’ll see it again at least another seventeen times – the number of times that marketers have calculated is the minimum before either a brand sticks in your mind, or you’re pushed over the edge to make that purchase.
 
But growing concern over privacy has seen search giant Google decide to stop selling ads based on individuals’ browsing across multiple websites, a change that could hasten upheaval in the digital advertising industry.
 
On Wednesday, Google said that it plans to stop investing in tracking technologies that uniquely identify web users as they move across the internet – a practice which has attracted increasing criticism from privacy advocates and (unwanted) scrutiny from government regulators.
 
According to data from Jounce Media, a digital ad consultancy, Google accounted for over half of last year’s global digital ad spend of US$292 billion, and 40% of the money that flows from advertisers to publishers on the open internet goes through Google’s ad buying tools.
 
Google’s planned changes naturally elicited some concerns from the advertising world, with advertisers concerned that they won’t receive as detailed a picture of their targeted audience.
 
But the change could also present opportunities for Google as well, with new targeting technologies that are anonymized that could help brands still achieve their goal in online marketing without the creepy stigma of being individually tracked.
 
And Google could also stand to benefit from the end of cross-website tracking because it becomes less reliant on data from other companies.
 
In an era where data is currency, Google can leverage the data that it already collects from users of its services such as Google Search and YouTube.
 
Google has said that it will still use data it collects directly from users of its other services, also called “first-party” data when targeting ads to be shown on its own websites.
 
And Google’s proposed policy shift only applies to websites, not mobile ads – meaning a  substantial slice of the digital ad ecosystem wouldn’t be affected.
 
eMarketer, a market-research firm suggests that mobile ad spending accounted for as much as 68% of all digital ad spending in the U.S. in 2020, a figure which also includes advertising on mobile versions of websites and not just mobile apps.
 
Google’s move mirrors a similar one by Apple, which plans to limit tracking of app usage by requiring developers to get opt-in permission from users before collecting an advertising identifier for iPhones.
 
One walled garden however remains defiant, with Facebook CEO Mark Zuckerberg complaining in an earnings call last month that “Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work.”
 
Unlike Google, Facebook relies on Apple’s iOS and Google’s Android mobile operating system to reach its end users – changes in privacy on these platforms could seriously affect Facebook’s ability to both access and leverage user data and by extension, advertising. 
 
 
3. Don't Hold Your Breath, Cboe Brings Bitcoin ETF One Step Closer to Reality
 
  • Good odds for a U.S. Bitcoin ETF as crypto-savvy Gary Gensler looks set to helm the U.S. Securities and Exchange Commission
  • Market structure could see a Bitcoin ETF boosting Bitcoin's upside further
 
While some are suggesting that inflation expectations have helped to buoy Bitcoin sailing it past US$51,000 on a day when tech stocks and other risk assets were dumped, it’s also entirely possible that excitement over a U.S. Bitcoin ETF could be floating prices higher.
 
In a filing with the U.S. Securities and Exchange Commission (“SEC”) earlier this week, Cboe Global Markets (-1.64%), which also previously provided cash-settled Bitcoin futures trading before it abandoned them, is seeking approval to list and trade shares in what could be the first Bitcoin exchange-traded fund in the U.S. – the VanEck Bitcoin Trust.
 
Last December, VanEck Associates applied to start an ETF tracking Bitcoin, and this is at least the third time that Cboe Global Markets has teamed up with VanEck Associates to seek a Bitcoin ETF approval from the SEC. 
 
Pressure is building on the SEC to approve the U.S.’s first Bitcoin ETF, as Canadian regulators cleared the launch of the Purpose Bitcoin ETF last month, the first to gain regulatory approval in North America.
 
In its filing, Cboe noted that the cryptocurrency ecosystem had “progressed significantly” since the earlier filings and cited, among other things, the emergence of regulated custodial services for digital assets.
 
U.S. regulators have thus far been reluctant to approve a Bitcoin ETF, citing concerns over market volatility, industry manipulation and thin liquidity.
 
But with more institutional players and big names from Wall Street coming behind Bitcoin, pressure is mounting on U.S. regulators to do more to embrace the nascent asset class.
 
Assisting the Bitcoin ETF applicants' case is the prospective appointment of crypto-savvy Gary Gensler to helm the SEC.
 
Gensler is no stranger to cryptocurrencies, having written on the topic for the better part of a decade, where he expresses the view that digital assets need to be more heavily regulated in order to create a safe, fair and accessible marketplace for all participants.
 
But in his Senate confirmation hearing, Gensler conceded that achieving those stated goals for cryptocurrencies would be a challenge for his agency – Gensler’s previous gig was teaching on blockchain and cryptocurrencies at MIT’s Sloan School of Management.
 
Bitcoin maximalists are betting that a U.S. Bitcoin ETF will lift Bitcoin’s price higher, a function more of market structure than fundamentals.
 
A Bitcoin ETF would be a passive investment and as more investment products start to be developed around the cryptocurrency theme, there will be pressure to push those incoming money flows into passive Bitcoin products like a Bitcoin ETF.
 
To find out how a Bitcoin ETF could substantially drive Bitcoin’s price higher because of market structure, click here
 

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Mar 04, 2021

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