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Novum Alpha - Daily Analysis 8 March 2021 (10-Minute Read)

On the one hand there's fiscal stimulus and on the other hand there's U.S. Treasury yields. Investors in Asia are still wavering about the expected rally in stocks on the back of U.S. fiscal stimulus for a couple of reasons - inflation and higher borrowing costs could make emerging market debt burdens more onerous, which tends to affect Asia more than Europe or the U.S.

Welcome to the start of a brand new work week and I hope you had a wonderful weekend! 

In brief (TL:DR)

  • U.S. stocks reversed course on Friday with the S&P 500 (+1.95%), blue-chip Dow Jones Industrial Average (+1.85%) and tech-centric Nasdaq Composite (+1.55%) all clawing back losses suffered earlier in the week as investors bought into the dip.    
  • Asian stocks initially climbed at the open on Monday with optimism over President Joe Biden’s $1.9 trillion Covid-19 relief plan and the global recovery, but have since wavered in a choppy morning trading session. 
  • The benchmark U.S. 10-year Treasury yield rose 3 basis points to 1.60%, a level touched Friday as U.S. jobs data beat estimates, fueling concerns about inflation risk. 
  • The dollar strengthened continued to gain against major trading partners. 
  • Oil rose sharply with April 2021 contracts for WTI Crude Oil (Nymex) (+2.07%) at US$67.46 as positive jobs data out of the U.S. fueled sentiment pricing in an economic recovery. 
  • Gold rose with April 2021 contracts for Gold (Comex) (+0.58%) at US$1,708.40 mainly on the back of a rising dollar.  
  • Bitcoin (+4.59%) rose to US$51,475 as investors rotated back into risk and on thinner volumes. Inflows to exchanges continued to lead outflows albeit at a slower pace (inflows suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Biden on Brink of Signing Biggest Check of his Presidency 
  2. Buy The Dip
  3. Bitcoin Bounces Back

Market Overview

On the one hand there's fiscal stimulus and on the other hand there's U.S. Treasury yields. 
Investors in Asia are still wavering about the expected rally in stocks on the back of U.S. fiscal stimulus for a couple of reasons - inflation and higher borrowing costs could make emerging market debt burdens more onerous, which tends to affect Asia more than Europe or the U.S. 
And the other reason of course is that the U.S. Federal Reserve hasn't made any mention of amping up its asset purchases to relieve the interest rate burden of the U.S. government, which leads investors divided over where U.S. Treasury yields are headed to next. 
The conflicting narratives are leading Asian stocks into a mostly mixed morning trading session, with Tokyo's Nikkei 225 (+0.93%), Sydney’s ASX 200 (+1.64%) and Seoul's Kospi Index (+0.35%) all up, while Hong Kong's Hang Seng Index (-0.47%) was lower. 
1. Biden on Brink of Signing Biggest Check of his Presidency
  • Biden's US$1.9 trillion fiscal stimulus package looks set to be passed into law
  • Prospect of fresh U.S. fiscal stimulus has already buoyed risk markets and sent Asian markets higher
Here, have a stimulus check, if fact, no brotherman here, have two.
Two checks mean a little to me, but it means a big deal to you.
Be strong, trade in the markets, know that if you do, beautiful riches await,
that’s the poem I wrote for the first time
I saw a man with no clothes, just money, and fame.
Mr. Market, that’s his name.
Everyone knew his name yet he’s a no one,
never thought twice about going all in on the market,
until I really got free money with just to rock it.
Now that I know him, to give him money isn’t vanity,
he gives me some numbers, I buy some more stock,  
and to think all the time you spend in big colleges
the answers are sitting with the Reddit flock.
Mr. Market….
(Rapped to the tune of “Mr. Wendall” by Arrested Development, off the album “3 Years, 5 Months and 2 Days in the Life Of...”) 
On the brink of securing final approval from Congress, the Biden administration is set to pass a staggering US$1.9 trillion stimulus bill, betting that massive fiscal intervention aimed at lower and middle class American families will juice America’s recovery without overheating the economy.
Over the weekend, the U.S. Senate voted on party lines to approve Biden’s fiscal stimulus package on the narrowest of margins, and given that most markets were closed, the only speculative asset that could head northwards was Bitcoin.
Barring any surprises in the House of Representatives, where the Democrats hold a slim majority, Biden’s stimulus package looks set to be passed into law.
Representing one of the biggest U.S. government interventions in the economy after the Second World War, Biden’s fiscal stimulus is just shy of the record US$2.2 trillion pandemic stimulus passed in March last year under the Trump administration, and makes the US$787 billion recovery plan during the 2008 financial crisis look like a rounding error.
Around the world, the U.S. fiscal stimulus package should give a fresh jolt to the global recovery amid optimism that increasing vaccinations throughout the year will help to reopen many economies.
But the recent spike in U.S. Treasury yields (how much it costs the U.S. government to borrow) and the tepid response at the most recent U.S. bond auctions, suggests that risks remain that an unintended jump in inflation could unsettle markets and prove particularly damaging for emerging markets, many of which have their debt denominated in dollars.
Regardless, many of the US$1,400 stimulus checks that the Biden administration is dispatching to means-tested Americans might trickle into the markets.
The pandemic has already led lower and middle income Americans to tighten their belts, and given the American penchant to take on risk, might see many Americans who were left out of the GameStop (+4.07%) and AMC Entertainment (+0.25%) trades, head back into the market to find fresh ones.
2. Buy The Dip
  • Retail investors poured into stocks as markets tanked last week as U.S. Treasury yields spiked  
  • Retail investors have continued to increase flows into stocks even as prices started to pullback, using the opportunity to load up on positions of sectors that have fallen out of favor with professional investors 
From Reddit to Twitter (+0.30%), and apps like Clubhouse, a social, conversational podcast app, almost anyone can profess to be a “stock guru” these days, or at the very least sound like one.
And the lexicon from the cryptocurrency markets (that most speculative of sectors) has trickled into the language of the traditionally more laced-up financial markets, with terms like “buy the dip” and “hodl” (a cryptocurrency slang that means to “hold” the cryptocurrency for further price appreciation), more commonly seen on cryptocurrency forums making their way into discussions on stocks. 
Which is why despite Apple (+1.07%) slumping some 15% since late January and Tesla (-3.78%) losing over US$250 billion in market cap in just three weeks, retail investors are still hungry for more stocks (or “stonks” in internet message board parlance).
To borrow a Reddit phrase, retail investors have “diamond hands” meaning they can “hodl” till their stocks “moon” (a term of art borrowed from cryptocurrencies meaning that the stock price will keep rising to “the moon”).
Since markets peaked a few weeks ago, retail traders have plowed cash into U.S. stocks at a pace 40% higher than they did in 2020, which was already a record year, “buying the dip.”
Instead of searching out “value” gems as followers of Warren Buffett are wont to do, these retail investors (speculators) have opted to shop for stocks in parts of the market that have suffered the most, doubling down on highly leveraged tech funds, (ARK Innovation ETF (-1.15%) anyone?) and bullish call options.
And retail traders are now the elephant in the room, becoming far too big to ignore and making up an estimated one quarter of U.S. trading volume on any given day.
Yet despite that some of the favored speculative bets, from electric vehicle companies and Special Purpose Acquisition Companies have buckled because of rising U.S. Treasury yields, retail investors continue to buy into these sectors, hence the term “diamond hands.”
Retail traders, many using their stimulus checks (not to worry if you burned through the last one, Uncle Joe is sending you another, and US$1,400 at that!) have consistently held strong, buying virtually every dip during what’s been the best start to a bull market in almost 90 years!
Professional investors have been left scratching their heads wondering what it’ll take for retail investors to call it a day, especially after 2020 proved that retail investors were right (and in a big way) more often than they were wrong.
The guess is that it won’t be anytime soon – there should still be at least one more rally since the Biden administration looks almost certain to get its US$1.9 trillion stimulus bill passed and you can bet your GameStop buck that some of that money will almost certainly make its way into the markets.
As stocks fell over the last three weeks, data from VandaTrack, an arm of Vanda Research that monitors retail flows in the U.S. market, revealed that retail investors snapped up an average of US$6.6 billion in U.S. stocks, up from the average US$4.7 billion in net weekly  purchases in 2020.
Retail investors are “buying the dip” so to speak and have doubled down on stocks that have been hit the hardest, including Apple, electric vehicle maker NIO Inc. (-2.98%) and ETFs tied to the Nasdaq 100 (a sort of America’s Top 100 tech stocks).
And with an army of retail investors standing by with dry powder and stimulus checks at the ready, dips have grown increasingly shallower.
According to data from Bloomberg, the S&P 500 has gone without a 5% pullback since early November, the longest streak in a year. 
3. Bitcoin Bounces Back
  • Bitcoin rebounds on Biden's fiscal stimulus package prospects fueling concerns over inflation and a general rotation into risk assets 
  • Goldman Sachs (-0.58%) survey of clients reveals that the demand for cryptocurrencies from its well-heeled clients remains robust and should help to provide a floor for Bitcoin's price 
Bitcoin rebounded sharply over the weekend on the back of the Biden administration getting its US$1.9 trillion stimulus package approved at the Senate level, where it now heads to the House of Representatives before it can finally be passed.
Last week’s selloff in risk assets, including Bitcoin and cryptocurrencies was largely attributed to the spike in U.S. Treasury yields.
And while yields remain high, positive employment data is fueling bets on a more robust American economic recovery and heightened sensitivity to increased inflation.
Business software firm MicroStrategy (-3.94%) took the opportunity to “buy the dip” snapping up an additional 205 Bitcoins for an average price of US$48,888, according to a regulatory filing, which brings the company’s total Bitcoin stash to around 91,064, worth almost US$4.7 billion based on today’s price.
Crucially, Bitcoin cleared the US$50,000 level of resistance over the weekend and with the Biden stimulus package looking set to fuel risk sentiment this week, is likely to send the benchmark cryptocurrency higher.  
Speaking with Bloomberg Television in an interview last week, long time cryptocurrency proponent and CEO of Galaxy Digital Holdings Michael Novogratz reiterated his bullish call for Bitcoin to be worth around US$100,000 by the end of the year.  
Novogratz noted that digital currencies have become an “institutional asset class” and that banks are “frantically” trying to get in on the action.
Supporting that view, banking giant Goldman Sachs announced last week that it was restarting its cryptocurrency trading desk, amid growing demand from its clients for access to the nascent sector.
Last week Goldman Sachs posted the results of a client survey which found that some 61% of its respondents expected their digital asset holdings to increase over the next 1 to 2 years and with over 40% of respondents already having exposure to cryptocurrencies.
Notably, almost 60% of Goldman Sachs clients who were surveyed revealed that the most important factor driving Bitcoin’s price action was “institutional investing or offering of additional products.”
The Goldman Sachs survey also revealed that amongst its (well-heeled) clients, over a fifth predicted (much like Novogratz), that Bitcoin would be worth over US$100,000 in a year and over half expected the cryptocurrency to continue trading within the US$40,00 to US$100,000 range.
But Goldman Sachs clients also noted something that the industry could look forward to this year – greater regulation.
Citing the lack of clear and comprehensive regulations as being one of the major hurdles to investing in cryptocurrencies as investors lack access to well-regulated, investable assets, that could change this year as crypto-savvy Gary Gensler looks set to helm the U.S. Securities and Exchange Commission.
Greater regulation from the U.S. could pave the way for the long-awaited U.S. Bitcoin ETF as well as more derivatives and other regulated cryptocurrency products within a more certain regulatory structure that institutional and professional investors have come to demand.
Retail investors continue to play a key role in the growth and development of Bitcoin for now and with the prospect of more stimulus checks heading towards American households, Bitcoin and its ilk should see another rally in the immediate term.   

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Mar 08, 2021

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