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Novum Alpha - Daily Analysis 16 March 2021 (10-Minute Read)

There's so much fiscal stimulus flooding the U.S. economy that it feels like Oprah's Favorite Things - "You get a stimulus check, you get a stimulus check and you know what? You get a stimulus check too!"

Top of the Tuesday to you as markets get under way fed by a steady diet of fiscal stimulus. 

In brief (TL:DR)

  • U.S. stocks entered the stimulus week up with the S&P 500 (+0.10%), and blue-chip Dow Jones Industrial Average (+0.53%) up slightly while the tech-centric Nasdaq Composite (+1.05%) led the pack after sharp selldowns previously. 
  • Asian stocks rose Tuesday as optimism over economic recovery drove U.S. shares to fresh highs. 
  • The U.S. 10-year Treasury yields dipped about two basis points to 1.59%, bringing much needed respite to stocks battered by Treasury yields in recent days. 
  • The dollar fluctuated with no clear direction. 
  • Oil fell with April 2021 contracts for WTI Crude Oil (Nymex) (-0.93%) at US$64.78 as the dollar fluctuated. 
  • Gold was little changed with April 2021 contracts for Gold (Comex) (+0.10%) at US$1,730.90. 
  • Bitcoin (-8.97%) fell to US$54,340 after a weekend rally above US$61,000 as inflows into exchanges continued to lead outflows and under sustained selling pressure (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).

In today's issue...

  1. Biden's Fiscal Stimulus is Reshaping Stockmarket Winners
  2. The Premature Bet on Rising Interest Rates 
  3. The Weekend Whipsaw for Bitcoin is Back 

Market Overview

There's so much fiscal stimulus flooding the U.S. economy that it feels like Oprah's Favorite Things - "You get a stimulus check, you get a stimulus check and you know what? You get a stimulus check too!"
Investor sentiment was bullish as a combination of loose monetary policy, fiscal stimulus and economic recovery have pushed stocks higher.
If inflation is a concern, investors have shrugged off those concerns and in Asia, investors were woken to buoyant markets in the morning session with Tokyo's Nikkei 225 (+0.65%), Hong Kong's Hang Seng Index (+0.49%), Seoul's Kospi Index (+0.41%) and Sydney’s ASX 200 (+1.00%) all posting gains. 
1. Biden's Fiscal Stimulus is Reshaping Stockmarket Winners
  • Fiscal stimulus is stoking a reflation trade into banks and energy sector stocks, while pandemic themed winners such as tech are correcting 
  • Rotational trade may be premature as the pandemic is far from being beaten, with pricing more aspirational than reflective of actual conditions 
The pandemic trade was a pretty simple one – just bet on tech and Treasuries,
But as effective vaccines against the coronavirus were developed, that tech and Treasury trade has been complicated by a spike in U.S. Treasury yields, at a time when investors are growing more concerned over inflation.
And now that U.S. President Joe Biden’s US$1.9 trillion stimulus package is being rolled out, tech stocks are falling out of favor at a time when the sectors which languished during the pandemic are starting to rise to the fore.
Stocks of banks and energy companies, which had been battered during the pandemic, are now shaking up indices from Frankfurt to New York.
Economically sensitive stocks such as banks have seen a surge in investment flows with MSCI’s index of developed economy lenders surging by 30% in the last quarter of 2020 and a further 20% this year alone.
Expectations that the U.S. will return to a strong semblance of normalcy by July this year, has fueled a reflation trade that has seen investors bet on banks as interest rates have soared.
Industrials, commodities and consumer goods are also looking good as investors price in a sharp upswing in pent-up U.S. demand.  
And followers of legendary value investor Warren Buffett will take comfort that things are finally turning their way, with MSCI’s global value index, which tracks companies that trade at low levels compared with measures of their fair value, rising some 8.7% since the start of the year, and hitting an all-time high last Thursday.
The stars of the pandemic are also falling back to earth, including electric vehicle maker Tesla, home exercise bike Peloton, e-commerce giant Amazon and graphics chipmaker Nvidia.
But it may yet be too soon to write off these pandemic heroes just yet.
For starters, the experience in Italy demonstrates the virality of new coronavirus variants, as that country heads back into lockdown.
And even as vaccinations get underway in earnest in the United States, a large swathe of the population continues to resist the vaccine, even as more states are loosening pandemic restrictions.
Even though coronavirus case numbers in the U.S. are falling, they continue to be high, and if complacency were to set in, the U.S. may witness a dreaded second wave of infections, with as many as 30% of new infections now being attributed to the virulent strain of the coronavirus first discovered in the United Kingdom.
And many of the business practices that were forced by the pandemic may continue to prove to be durable, including remote work practices and video conferencing.
As such, the demand for chips, for a variety of data applications and the Internet of Things is likely to remain high even after the pandemic subsides (it’s not likely to ever go away completely).
To be sure, there’s more than an outside chance that value plays will outperform growth in the ensuing period, but investors may be pricing in too much optimism over a return to normalcy – the prospects are good, but the proof is in the pandemic numbers, which so far, remain historically high. 
2. The Premature Bet on Rising Interest Rates
  • Recent Treasury yield spike may have more to do with unwinding of trades and increasing algorithmic trading in government bond markets than fundamentals
  • U.S. Federal Reserve has repeatedly articulated its dovish stance at least until 2023 and investors may be pricing in historical tapers of asset purchases without little evidence that will occur anytime soon 
Interest rate traders would have had a few sleepless weeks in recent times as U.S. Treasury yields surged unexpectedly on expectations of economic recovery and inflation.
But bets on a further sustained rise in rates may be taking things too fast too far, with some evidence to suggest that the recent spike in U.S. Treasury yields may have more to do with the unwinding of trades, than any genuine expectation of a sharp return of inflation.
The recent rise in U.S. Treasury yields flies in the face of current inflation data, articulated Fed dovishness on rates, and actual economic numbers on growth.
And while traders are comparing our current time to the so-called “Taper Tantrum” of 2013, when then U.S. Federal Reserve Chairman Ben Bernanke suggested that the Fed would taper asset purchases “in the next few meetings,” the current Fed has repeatedly made plain that it won’t even begin to consider such measures anytime soon.
In fact, the current Fed has said that it is committed to “maximum” employment (whatever that means) and is even willing to accept inflation levels above 2% in pursuit of broader social goals.
And U.S. Federal Reserve Chairman Jerome Powell has expressly committed not to cut any asset purchases for 2021 or to raise rates at least until 2023.
So why all the bang and the clatter?
Because investors are expecting history to repeat itself as it did in 2013, without realizing that the times and the circumstances were vastly different back then.
The U.S. was not in the midst of a global pandemic and shutdown.
Never before have entire sections of the U.S. economy been laid to waste by an invisible enemy nor has this much stimulus ever been deployed in peace time.
In other words, the recent spike in U.S. Treasury yields may have had more to do with an increase in algorithmic trading and self-perpetuating feedback loops that led to more selling of Treasuries than to do with any genuine fundamentals.
This current Fed has made its plan clear and articulated it plainly for investors to take dressing from.
Not only that, the Fed has been disciplined in its approach as well, which is why the selloff in tech stocks and the rotational play into banks and other economically-sensitive sectors may be somewhat premature.
The world is not out of the pandemic woods yet, but somehow investors are already pricing in the party. 
3. The Weekend Whipsaw for Bitcoin is Back
  • Thinner trading volumes for Bitcoin over the weekend saw a surge to new all-time-high only to come crashing down on Monday against sharp profit-taking
  • Some data to suggest that a sharp selloff in older vintages of Bitcoin (some addresses dating as far back as 2013 and which had never been moved previously) responsible for the flash crash to as low as US$54,000 at one stage
It’s widely known that when trading volumes over the weekend are at their lowest, Bitcoin’s price swings tend to be the most violent.
As more institutional interest pours into the Bitcoin markets, traders who typically keep regular office hours leave the weekends pretty much like a wild west where retail traders hold court.
Thinner volumes mean that relatively smaller amounts can cause massive price swings and this past weekend was no different as traders (primarily retail) chased Bitcoin up to set a new record above US$61,000.
And as often happens, that new record was promptly undermined moving into Monday as Asian traders sold down Bitcoin.
It also didn’t help that over the weekend a large cache of Bitcoin was quietly spirited into cryptocurrency exchange addresses in preparation for a large sale.
Bitcoin fell by almost 10% yesterday as traders abandoned pandemic themes in both tech stocks and cryptocurrencies and bank and energy stocks saw a resurgence.
That correction on Monday dragged down the stocks of companies closely linked with Bitcoin, including the likes of MicroStrategy and Riot Blockchain.
Tesla suffered doubly being both a pandemic growth stock and with its investment in Bitcoin.
Debate is raging over whether Bitcoin’s seemingly relentless ascent is sustainable – the benchmark cryptocurrency has soared some 1,000% in the past year alone, fed on a heady recipe of stimulus, loose monetary policy, institutional interest and a staple diet of speculation.
The most recent correction can however probably be tied not so much to the macro narrative, but the stirring of some older Bitcoin wallet addresses that are alleged to have cashed out, with projections suggesting that as many as 18,000 Bitcoins being sold off in rapid succession on Monday.
Longer term however, Bitcoin is still very much a battle of the narrative, and it’s perhaps only timely that vintage investors in the cryptocurrency are looking to lock-in some of their dollar gains.
The irony though is palpable.
For what is supposed to be a dollar replacement, Bitcoin maximalists still seem very much tied to its dollar appreciation. 

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Mar 16, 2021

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