Novum Alpha - Daily Analysis 10 May 2021 (10-Minute Read)

And investors are getting precisely that justification they need as weaker jobs data out of the U.S. into Friday is providing the Democrats the necessary data they need to make the case for continued stimulus.

 
A magnificent Monday to you and a great start to your week! 
 

In brief (TL:DR)

 
  • U.S. stocks were higher headed into the weekend, with the S&P 500 (+0.74%), blue-chip Dow Jones Industrial Average (+0.66%) and tech-centric Nasdaq Composite (+0.88%) all higher on the prospect of poorer U.S. jobs data fueling higher expectations of accommodative monetary policy. 
  • Asian stocks gained Monday after the S&P 500 hit a record on weak jobs data that added to the case for ongoing stimulus.
  • The U.S. 10-year Treasury yield edged up to 1.60% (yields generally rise when bond prices fall), and traders are braced for a busy week of auctions.
  • The dollar held losses after tumbling Friday.
  • Oil rose with June 2021 contracts for WTI Crude Oil (Nymex) (+1.26%) at US$65.72 mostly on the back of a sliding dollar. 
  • Gold was up with June 2021 contracts for Gold (Comex) (+0.08%) at US$1,832.70 as the dollar declined. 
  • Bitcoin (+0.42%) was flat out of the weekend at US$58,833 with inflows into exchanges in Asian trading putting a downwards pressure on price (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 
 

In today's issue...

 
  1. What Happens When the Music Stops? 
  2. Metals Turn White Hot
  3. A U.S. Bitcoin ETF & More Cryptocurrency Regulation Nears Certainty 
 

Market Overview

 
Any justification is a sufficient one provided that markets continue to rally. 
 
And investors are getting precisely that justification they need as weaker jobs data out of the U.S. into Friday is providing the Democrats the necessary data they need to make the case for continued stimulus. 
 
Whether or not that weaker jobs data was a byproduct of disincentivizing work altogether is less clear, but a money machine that feeds off itself is one that has given markets plenty to cheer about. 
 
In Asia, the Monday morning trading session saw a uniform and sharp rise across all indices with Tokyo's Nikkei 225 (+0.96%), Seoul's Kospi Index (+0.80%), Sydney’s ASX 200 (+1.14%) and Hong Kong's Hang Seng Index (+0.58%) all higher as dollars chased yield and on the back of Wall Street's rally. 
 

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1. What Happens When the Music Stops?

 
  • History provides some examples of central bank-inflated bubbles bursting and the monetary policy measures taken thereafter to rescue markets 
  • There could be a multitude of reasons that could cause markets to correct, but predicting when and how is more tricky 
 
To seasoned veterans of the market, our current epoch has a familiar feel to it – déjà vu.
 
Stock valuations are at their richest since Al Gore invented the internet in 1996 (he did not, but any self-respecting conspiracy theorist will attest to it) and U.S. home prices are now back to their pre-financial crisis peak.
 
Some of the riskiest companies in America can borrow money on the cheap and investors are pouring cash into everything from green energy to cryptocurrency.
 
But a sleuth doesn’t have to dig very deep to find the culprit for all the cash sloshing through the system – the U.S. Federal Reserve.
 
Easy monetary policy has regularly fueled financial booms, and central bank policy is easier now than ever before.
 
The Fed has kept interest rates near zero for the past year and signaled that rates won’t change until 2023.
 
Meanwhile the U.S. central bank is buying hundreds of billions of dollars’ worth of mortgage-backed securities and U.S. Treasuries.  
 
But what happens when the music stops?
 
Since stock valuations are only justified if interest rates stay extremely low, what sort of repricing could occur if the Fed has to tighten monetary policy to combat inflation, or bond yields rise by over a percent?
 
A serious correction in asset prices that’s what.
 
History provides some precedent.
 
In the late 90s, the Fed cut rates in response to the Asian Financial Crisis and the near collapse of the hedge fund Long-Term Capital Management, a move that was seen by some as an implicit market backstop, but also helped to inflate the ensuing dotcom bubble.
 
Rates were cut in the aftermath of the dotcom bubble, but that provided the grounds for the inflation of the housing bubble.
 
Rinse and repeat. 
 
And while it’s impossible to predict how, let alone whether this all ends, there are ways that it doesn’t have to.
 
Expensive stocks could eventually earn their way out of being expensive, earning the profits necessary to justify today’s valuations, especially if the U.S. economy continues to recover based on current trends.
 
More extreme pockets of speculation could collapse under their own weight or as profits disappoint or competition emerges.
 
But for assets across the board to fall would likely require some sort of apocalyptic event, such as a recession, financial crisis, inflation, or even global conflict.
 
The point is that we don’t know, but short of a global conflict, we can anticipate what the response in the aftermath of a debilitating crash is likely to be – the same answer that always seems to work – throw more money at the problem. 
 

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2. Metals Turn White Hot

 
  • Industrial metals, especially copper, see unprecedented rallies 
  • Demand for specific metals, especially copper, which is essential to green energy, could prove durable 
 
It doesn’t do anything, it just sits there and stares at you – were once legendary investor Warren Buffett’s chief criticism about investing in precious metals such as gold.
 
But other metals, from copper to iron, do a lot more than just sit there and they’ve been on a tear of late.
 
On Monday, iron ore futures surged by over 10% in Singapore trading, extending a record run amid insatiable Chinese appetite for raw materials and against the backdrop of a wider surge in commodity prices as the global economy recovers.
 
Iron ore is the feedstock for making steel, an important industrial material that’s essential for making everything from cars to bridges, roads to tunnels.
 
Steel prices have surged in China as heavy users like the construction and manufacturing sectors enjoy a busy period, as well as the effects of Beijing’s fiscal stimulus measures.
 
Copper has already doubled in the past year and some analysts are predicting a further doubling is possible if supply falters badly and demand surges.
 
Investors are still piling into metals, staking billions of dollars that the rally won’t end anytime soon.
 
Marking a revival in a sector that has languished for years, many investors are now putting their money where the metals are – with speculative calls (the option to buy at a specific price) in London and New York metal markets hitting historical peaks on the back of copper’s relentless ascent.
 
And copper’s key role in green energy and batteries could see the strength of its demand turn durable.
 
Record amounts have already flooded into metal-focused exchange-traded products, an easier route for retail investors to make bets on metals, and paving the way for more institutional investors and family offices to gain access to the white hot metals markets. 
 

3. A U.S. Bitcoin ETF & More Cryptocurrency Regulation Nears Certainty

 
  • VanEck Associates lodges a fresh application for an Ether ETF, as Canada approves three Ether ETFs 
  • U.S. Securities and Exchange Commission under the leadership of crypto-savvy Gary Gensler shows an increasing appetite for cryptocurrency regulation, the easiest means would be via a Bitcoin ETF 
 
Even as a U.S. Bitcoin ETF waits in the wings, VanEck Associates has upped the ante with a push for an Ether ETF.
 
If approved, the VanEck Ethereum Trust would hold Ether and value its shares daily based off the MVIS CryptoCompare Ethereum benchmark rate, according to a filing with the U.S. Securities and Exchange Commission.
 
The application comes after the SEC delayed its first decision on whether or not to approve VanEck’s Bitcoin ETF to June 13, and as growing pressure mounts on the U.S. to approve at least one cryptocurrency ETF, as neighbor Canada has already approved no less than two Bitcoin ETFs as well as three Ether ETFs.
 
U.S. regulators have yet to approve a single cryptocurrency ETF, but the field is already crowded with companies looking to launch one – no less than 11 companies are already vying to be the first to launch a cryptocurrency ETF.
 
But in growing signs that the U.S. crypto-faithful will get what they want, newly appointed U.S. SEC Chairman Gary Gensler, himself no stranger to cryptocurrencies, has expressed that U.S. investors lack protections when they trade Bitcoin on cryptocurrency exchanges.
 
At a hearing before the House Financial Services Committee last Thursday, Gensler, who was previously teaching blockchain technology at the MIT Sloan School of Management, told members of Congress that while his agency has the authority to regulate cryptocurrencies that are considered securities, trading in Bitcoin represents an oversight gap.
 
Part of the problem is that lawmakers have struggled to find a neat classification for cryptocurrencies, making issues of jurisdiction contentious.
 
Cryptocurrencies like Bitcoin and Ether are often more closely associated with being “non securities,” whereas asset-backed tokens tend to fall more closely within the ambit of the SEC’s jurisdiction.
 
The SEC has signaled that Bitcoin is a commodity under U.S. law and therefore not subject the agency’s toughest rules and according to Gensler,
 
“There’s a lot of authority that the SEC currently has in the securities space and there are a number of cryptocurrencies that fall within that jurisdiction.”
 
“But there are some areas, particularly Bitcoin trading on large exchanges, that the public is not currently really protected.”
 
That could change of course with an SEC-approved Bitcoin ETF and may possibly be what Gensler is hinting at. 
 

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May 10, 2021