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

Just when you thought U.S. Treasury yields couldn't get any higher. Investors dumped stocks as the Fed appeared to take an extremely tolerant stance on inflation, causing U.S. Treasury yields to spike violently and to their highest level in a year.

A fantastic Friday to you even as markets start floundering. 

In brief (TL:DR)

  • U.S. stocks tanked on Thursday as the S&P 500 (-1.48%), blue-chip Dow Jones Industrial Average (-0.46%) and tech-centric Nasdaq Composite (-3.02%) were sharply lower thanks to benchmark U.S. Treasury yields that spiked above 1.7%. 
  • The U.S. 10-year Treasury yields touched the highest levels in more than a year to 1.72% as the Federal Reserve’s tolerant stance on inflation unnerved investors. 
  • The dollar held its gains from the prior day. 
  • Oil slipped with April 2021 contracts for WTI Crude Oil (Nymex) (-0.50%) at US$60.20 despite a weaker dollar as investors questioned the demand side of the equation. 
  • Gold fell with April 2021 contracts for Gold (Comex) (-0.20%) at US$1,733.30 mostly on the back of a stronger dollar. 
  • Bitcoin (-3.34%) fell to US$57,136 after a sharp selloff earlier in the week as inflows into exchanges continued to lead outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).

In today's issue...

  1. Tech Tantrums
  2. Oil's Premature Rally Goes Up in Flames
  3. Cash Can Co-Exist with Cryptocurrency 

Market Overview

Just when you thought U.S. Treasury yields couldn't get any higher. 
Investors dumped stocks as the Fed appeared to take an extremely tolerant stance on inflation, causing U.S. Treasury yields to spike violently and to their highest level in a year. 
In Asia, markets followed Wall Street's lead with Tokyo's Nikkei 225 (-0.78%), Hong Kong's Hang Seng Index (-0.84%), Seoul's Kospi Index (-0.97%) and Sydney’s ASX 200 (-0.22%) were all lower in the morning session. 
1. Tech Tantrums
  • Tech stocks continue to bleed as investors dump longer-dated U.S. Treasuries, pushing up yields and whittling at the premiums commanded by growth stocks 
  • Pullback is welcome as it provides both buying opportunities and a chance to reduce otherwise frothy valuations  
If 2020 was the year for tech stocks (since when did they become a defensive play?), then this year has been the year for tech tantrums.
As the rest of the world floundered because businesses that required face-to-face contact couldn't operate in a pandemic year, technology firms were a life preserver in a sea of red, pushing up indices, and attracting eye-watering valuations.
But signs of an economic recovery and rising U.S. Treasury yields have marked a sharp turnaround for the prospects of tech firms.
This year alone, the Nasdaq 100, has erased any gains made in 2021 twice.
And some analysts are warning that as vaccinations get under way in earnest, tech firms are likely to get hit the hardest, with a reflation trade that should see followers of Warren Buffett’s value mantra laughing all the way to the bank.
To be fair, valuations have gotten ahead of themselves, and the pullback could be considered healthy to set tech firms on a longer term and more sustainable growth trajectory.
Taking some of the froth off could present some opportunities to pick up some tech stars on the cheap.
Companies like Amazon (-3.44%) enjoyed a huge boost to their bottom lines during the pandemic and longer term, consumer habits like online shopping are likely to prove durable.
Video communications have for many ushered in the welcome end of the office commute and certain business practices like “Zoom” (-6.04%) have turned from nouns to verbs, suggesting that these firms aren’t likely to head off into the sunset anytime soon.
But with U.S. Treasury yields at the elevated levels that they’re at, and concerns over inflation weighing heavily, tech firms are likely to come under increasing pressure if not for one thing – retail investors.
Fiscal stimulus checks are making their way across the U.S. and you can bet your last dollar more than a handful of these will make their way to the markets, with many of the themes that drove the pandemic trade likely to resurge.  
2. Oil's Premature Rally Goes Up in Flames
  • Electrification, especially for vehicles casts a pall on oil's long term prospects
  • Uncertain if oil demand will ever return to pre-pandemic levels, even if borders re-open with the rise of alternative fuels 
Investors betting on inflation and a resumption of economic growth had helped to rally the U.S. benchmark WTI past US$65, but now that trade has proved premature – reflecting just how fragile the demand side of the equation is.
To be sure, actual consumption has been tepid.
OPEC+ a grouping of oil-producing nations decided to rein in production earlier this month, with hedge funds piling into their most bullish positions in over a year, aided by an attack on a Saudi Arabian oil complex that propelled Brent crude past US$70 a barrel for the first time in more than a year.
However, when there are concerns over economic growth and a higher dollar, the inflation boost quickly turns into a drag amid deflated demand expectations.
Until recently, commodities were on a tear. 
Crude surged more than 30% through Wednesday from the start of the year.
And corn, soybeans and copper reached multi-year highs and lumber prices skyrocketed.
Bulls took such a command that some traders were gearing up for a new supercycle of prolonged gains.
That enthusiasm has come to a halt this week as slow vaccine rollouts sparked concern over how long it will be before consumption of energy, metals and grains returns to pre-pandemic levels.
That was compounded by gains in the dollar, which make greenback-priced commodities less attractive as a store of value.
To be sure, borders remain very much closed, and a resumption of international travel seems somewhat distant, and traders are starting to recognize that questionable demand tomorrow doesn’t necessarily translate to returns today.  
3. Cash Can Co-Exist with Cryptocurrency
  • U.S. Federal Reserve Chairman Jerome Powell's comments about central bank digital currencies or CBDCs the closest the Fed has ever come to considering the issuance of its own digital dollar 
  • A Fed-issued digital dollar likely to have limited impact on cryptocurrencies as the pre-existing alternatives still have their use 
In the clearest sign yet that the U.S. Federal Reserve is considering the issuance of its own digital currency, Fed Chairman Jerome Powell said that potential central bank digital currencies must co-exist alongside cash.
Speaking via a pre-recorded video conference to a payments conference in Basel, Switzerland on Thursday, Powell said,
“A recent report from the Bank for International Settlements and a group of seven central banks, which includes the Fed, assessed the feasibility of CBDCs in helping central banks deliver their public policy objectives.”
“Relevant to today’s topic, one of the three key principles highlighted in the report is that a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system.”
“The Covid crisis has brought into even sharper focus the need to address the limitations of our current arrangements for cross-border payments.”
“And as this conference amply demonstrates, despite the challenges of this last year, we still have been able to make important progress.”
Some cryptocurrency industry participants are growing concerned that should the Fed issue its own central bank digital currency, it will give Bitcoin and possibly other stablecoins, a run for their money.
But thus far the Fed has shown no appetite for issuing its own digital currency, even though China has already taken great strides in issuing its own CBDC and some are warning that the U.S. risks being left behind as more and more central banks consider their own digital currencies.
The impact of a digital dollar is as yet unclear on the rest of the cryptocurrency scene, especially since there are plenty of dollar-based stablecoin alternatives already in operation.
But any effect of a Fed CBDC is likely to be minimal at best. For starters, most cryptocurrency exchanges will be reluctant to accept a Fed dollar stablecoin, especially given the legally ambiguous status of the most commonly accepted stablecoin for derivatives trading, USDT or Tether. 

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Mar 19, 2021

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