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Novum Alpha - Daily Analysis 5 April 2021 (10-Minute Read)

Spring is in the air! The smell of renewal, rebirth are being peppered with the lingering stench of the coronavirus as new variants threaten to derail the road to reopening.

Welcome back and a Happy Easter as markets reopen following the Easter holiday. 

In brief (TL:DR)

  • U.S. stocks ended last week up with the S&P 500 (+1.18%), tech-centric Nasdaq Composite (+1.76%) and blue-chip Dow Jones Industrial Average (+0.52%) all higher.
  • Asian stocks climbed Monday as investors weighed an unexpectedly strong U.S. jobs report and the sustainability of the latest selloff in bonds.
  • The U.S. 10-year Treasury yield slipped to 1.70%.
  • The dollar was little changed against major currencies. 
  • Oil fell with May 2021 contracts for WTI Crude Oil (Nymex) (-0.37%) at US$61.22 after OPEC+ decided to boost production and Saudi Arabia raised prices for shipments to Asia.
  • Gold rose with Jun 2021 contracts for Gold (Comex) (+0.05%) at US$1,729.20 on the back of a stronger dollar. 
  • Bitcoin (+1.73%) edged higher to US$58,533, on inflation concerns with outflows from exchanges continuing to lead inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of rising prices).

In today's issue...

  1. Ferrari Stock Slips from Pole Position 
  2. Bond Yields Are Rising But What Will The Fed Do?   
  3. Banks Banking on Bitcoin's Lack of Volatility 

Market Overview

Spring is in the air! The smell of renewal, rebirth are being peppered with the lingering stench of the coronavirus as new variants threaten to derail the road to reopening. 
Stocks were almost uniformly higher at the open after the Easter holiday, reflecting optimism over the prospects of the U.S. economy's robust recovery. 
Tokyo's Nikkei 225 (+0.77%) and Hong Kong's Hang Seng Index (+1.97%) were up, while Seoul's Kospi Index (-0.08%) was down marginally and Australia's markets were closed for the Easter holiday.  
1. Ferrari Stock Slips from Pole Position
  • Ferrari (-0.17%) has slipped this year amidst a rotation into value stocks on the prospects of an improving economy 
  • Longer term trend for Ferrari's fortune is less clear, as company has no evident electric vehicle plan, struggles with leadership and lacks a competitive SUV offering against rival Lamborghini 
Anyone familiar with the high-octane stakes of motor racing will know that everything can change in a Formula 1 second.
An unforced driver error, a fumble at the pit lane, or technical malfunction can go anywhere from adding milliseconds to minutes – and in motorsports, every millisecond counts.
For decades, Ferrari was a dominant player at the pinnacle of motor sports – Formula 1.
But dogged with reliability issues and struggling with performance, the prancing horse has struggled of late in that arena and in the stock market as well.
The Italian supercar maker was a top performer in the Stoxx 600 Automobiles & Parts index for each of the last three years, but has had a dismal start to 2021 so far, shedding some 5.6%, a marked contrast to rivals including Volkswagen (+1.07%), which owns competitors Porsche, Lamborghini and Bugatti.
And while Ferrari’s competitors have received a strong boost from rolling out comprehensive plans for electric vehicles, Ferrari seems to be drifting rudderless in a world that is increasingly moving away from burning fossilized dinosaur juice.
But Ferrari’s recent lackluster performance is also emblematic of a rotation out of the luxury sector – one of the few stocks to have done very well in a pandemic year.
During the pandemic, investors moved into what were seen as defensive plays such as luxury brands, including Ferrari, as the fortunes of the well-heeled were not just unaffected by lockdowns, but actually rose by some 10% on average.
And unlike rival Lamborghini, which has been minting a fortune selling its Urus SUV, Ferrari still doesn’t have one beyond concept sketches to answer the challenge of the raging bull.
To be fair, Ferrari was never an electric vehicle company, and expecting it to come up with a comprehensive electric vehicle plan as a relatively small and independent outfit was always going to be challenging.
And Lamborghini enjoys the economies of scale that come from its parent Volkswagen, which developed and tested electric vehicle concepts at the Volkswagen and Audi levels, allowing much of this tech to flow through to the marque with the raging bull.
Ferrari enjoys none of those benefits.
But during the pandemic, Ferrari’s lofty valuation multiple relative to other carmakers, suggested that it was more of a luxury play, rising 28% last year, with performance similar to Hermes International (+1.33%) and luxury house LVMH (+0.63%), even as other automobile makers saw their stock battered.
Investor bought into Ferrari on the belief that ultimately those who can afford a Ferrari can do so regardless of economic conditions.
Yet the rich also have fickle tastes.
Whether it’s NFTs (non-fungible tokens) tied to digital art or luxury doomsday bunkers, the tastes of the 1% are constantly shifting.
Today, rocking up to a glitzy event in Silicon Valley in anything outside of a Tesla (-0.93%) (perhaps a Toyota Prius may be tolerated) would be frowned upon.
And on the east coast, the Lamborghini Urus now occupies driveways where once a Ferrari 488 might have otherwise.
But one thing that Ferrari has is brand cache and plenty of it.
Some profit taking in its stock is not altogether surprising, given its most recent run-up, but longer term, whether the fossil-fuel burning Ferrari can justify its valuation becomes less certain.
Not so long ago, Ferrari’s archrival Lamborghini was in the doghouse, but fast forward several decades and Ferrari no longer occupies the pole position on the track, or the driveway. 
2. Bond Yields Are Rising But What Will The Fed Do?
  • U.S. Federal Reserve meeting minutes from last month due to be released on Wednesday may provide some insight as to what the central bank views on the economy and long term borrowing costs are 
  • Fed unlikely to show any immediate urgency to reign in Treasury yields, even as more officials are penciling in an earlier than expected increase in rates  
U.S. Federal Reserve meeting minutes are to the investor what tea leaves are to the soothsayer – they provide clues to what the powers that be, may have in store.
And with U.S. Treasury yields spiking before the Easter long weekend, investors will be eager to understand whether the Fed will do anything to reign in borrowing costs.
In minutes of its most recent monetary policy meeting to be released this Wednesday, clues will be had over whether the Fed intends to reign in bond yields (by perhaps ratcheting up asset purchases) and what the central bank views are on the economic recovery.
The meeting, which took place in March, was against a backdrop of a much-improved economic outlook and a US$1.9 trillion fiscal stimulus package passed by the Biden administration.
In the weeks since that meeting, there have been some changes to say the least – overall pandemic fatigue has led to many Americans abandoning many of the social distancing and mask-wearing precautions that had helped to slow the advance of the pandemic.
And even as vaccinations proceed in earnest, fresh lockdowns are being forced in parts of the U.S. with epidemiologists warn of a possible “fourth wave” due to coronavirus variants.
Treasury yields had also normalized to a tighter band during the Fed meeting – which suggests that the minutes are likely to reveal the Fed won’t do very much by way of reigning in borrowing costs, mainly because the situation looked to be under control at the time. 
Because U.S. Treasury yields affect a wide variety of debt, from mortgages to auto loans, even if the Fed was looking to modulate their recent rise, it was doing so with the data it had in March, which suggested that doing nothing was probably best.
And while Fed officials have clearly signaled that they won’t raise rates until at least 2023, more have penciled in earlier interest rate increases than at last December’s Fed meeting.
Much will ultimately depend on the path forward for growth and inflation, especially since the Fed is now committed to let inflation run over its longstanding target of 2%, until the economy gets back on its feet and unemployment comes down significantly. 
3. Banks Banking on Bitcoin's Lack of Volatility
  • Bitcoin volatility starting to come down even as volumes increase, suggesting slightly elevated levels of institutional participation 
  • While most larger U.S. banks have avoided cryptocurrencies, others are caving to client pressure to provide the institutional grade services necessary to support cryptocurrency investments 
Bitcoin has a bad reputation for being volatile and as such, unsuited for inclusion as an investment asset.
Until now.
According to JPMorgan Chase (+0.97%), the 3-month realized volatility for Bitcoin has fallen to 86% after rising above 90% in February, when it hit its all-time-high.
6-month volatility for Bitcoin also appears to be stabilizing around 73% and as volatility subsides, JPMorgan Chase suggests, a greater number of institutions could warm to the cryptocurrency space and potentially pave the wave for a Bitcoin ETF to be listed in the U.S.
One of the reasons cited by the U.S. Securities and Exchange Commission for rejecting a Bitcoin ETF thus far, is that the underlying asset is highly volatile and the higher the volatility of an asset, the higher the risk capital consumed by it, which is part of the reason why the biggest U.S. banks have thus far declined to provide direct access to cryptocurrencies.
But what has changed is that as more wealthy investors have delved in the cryptocurrency space, they’ve put pressure on the banks that serve them to come onboard as well.
Some, but not all, Wall Street banks are gradually warming up to the idea.
Goldman Sachs (+0.20%) said earlier this week it’s close to offering Bitcoin investment vehicles for cryptocurrencies to private wealth clients while Morgan Stanley (+0.72%) plans to give rich clients access to three funds that will enable ownership of cryptocurrency.
Bank of New York Mellon (+0.38%) is developing a platform for digital assets as well but none of the biggest banks like Citigroup (+0.54%), Wells Fargo (+1.46%) or Bank of America (+2.07%) are currently providing direct access to Bitcoin or other cryptocurrencies.
Swiss bank Julius Baer (+2.15%) has started offering trading and custodian services for major cryptocurrencies within Switzerland, while Swiss private bank Bordier & Cie has started trading via third party platforms.
In Singapore, DBS Group Holdings (+0.69%) recently started its own cryptocurrency exchange that allows qualified investors from its private bank to invest in major cryptocurrencies while providing custodian services for them.
But even as more institutional investors get involved in Bitcoin, volatility which is inherent in the cryptocurrency, will persist and remain much higher than that of other traditional asset classes.
As an uncontrained asset, untethered to any traditional legal, physical or commonly recognized rights, Bitcoin’s value will continue to remain in the eye of its behodlers (misspelling intentional).
But the surge in interest, beyond the curious, may be the thing that makes the difference.
America’s largest cryptocurrency exchange Coinbase is set to debut on the New York Stock Exchange this month and its reception will provide further evidence of the institutionalization of an otherwise decentralized nascent asset class. 

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Apr 05, 2021

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