Novum Digital Asset Alpha – Daily Analysis 23 June 2020 (10-Minute Read)

Turning in, to a terrific Tuesday, I hope this email finds you with the sun upon your face and the wind set squarely against the sails of your good fortune.

Like a strong tradewind pushing providence across the Pacific, tech companies are providing that shot in the arm that markets have been looking for. 

Led primarily by tech stocks, the S&P 500 (+0.63%) surged ahead to close above 3,100 points – an important psychological level of resistance – to 3,117.86 points. 

Investors are placing increasingly targeted bets.

Whereas last week’s rally in U.S. stocks included a broad spectrum of the economy, more recent rises have been led by companies which investors believe will better weather a patchy economic recovery. 

With surging coronavirus infections sweeping across America, a dreaded “Second Wave” is becoming weighing on investor sentiment, and has sent the price of gold soaring, with Comex Gold (+0.25%) rising to US$1,770.90 and Bitcoin (+2.83%), which is now trading at US$9,640 (GMT 0130) looking squarely at US$9,700.

With coronavirus cases hitting a single-day high on 21 June 2020, according to data from the World Health Organization, and flare-ups across the United States and new scares in Germany and Australia, plenty of risks abound. 

Throw into the mix the threat of increased trade tensions and it’s not hard to see why Asian markets gave up most of their opening gains. 

S&P 500 futures slid in Tokyo trading on rumors from a Trump administration official that the Sino-American trade deal may be “over.”

Asian market response was mixed in the morning trading session with Tokyo’s Nikkei 225 (+0.32%), and Hong Kong’s Hang Seng Index (+0.12%) up, while the export-reliant and more China-sensitive markets of Seoul’s KOSPI (-0.37%) and Sydney’s ASX 200 (-0.82%) were down. 

Oil continued its relentless push upwards, with the North American benchmark WTI Crude Oil (Nymex) (+1.79%) cruising past the resistance at US$40 to close at US$40.46 – it’s highest level in over three months, on the back of optimism that fuel demand is recovering as lockdowns are being lifted globally.  

But overall, markets can expect a mixed bag and greater volatility going into the midweek. 

Risk appetite is being whetted by historic levels of fiscal stimulus programs from central banks around the world, who have proved all too eager to dole out cash, which has steadied equity markets in recent weeks, putting the S&P 500 within its pre-pandemic peak. 

But there are also plenty of risks, the coronavirus pandemic being just one of them – the tempestuous occupant of the White House being the other. 

Just when you thought recovery was on its way again, Trump may throw a grenade in the room with threats of tearing up the hard won Sino-American trade agreement and that could provide short term shocks to all manner of risk assets. 

Tune in to Tuesday and make it a great one! 

Markets May Embellish But Commodities Don’t Lie

Like the kid with chocolate on his face who claims to have not eaten the last bar, demand for industrial commodities are revealing that the world economy is indeed heading towards recovery and that stocks are not getting ahead of themselves. 

But can it be? 

Prices for raw materials from oil to copper are surging as the world economy re-opens for business – a signal to many investors that global growth could indeed be returning faster than expected. 

Stocks of battered commodity producers from energy giant Exxon Mobil (+0.96%) to copper miner Freeport-McMoRan (+2.76%) have been in virtual freefall thanks to the coronavirus pandemic, with many cutting supply and jobs in response to an industry in turmoil. 

But because industrial commodities fluctuate based on real-time changes to supply and demand momentum in the global manufacturing sector, investors watch these prices closely for any signs of changes in activity. 

Right now at least, commodity prices appear to be reflecting recovery. 

Recent data has also shown big increases in retail sales in the U.S. and improving employment last month, with a rise in China’s manufacturing sector as well. 

As the world’s dominant consumer of commodities, the uptick in economic activity in China and elsewhere suggest tentative signals of economic healing from the pandemic, because historically, the recovery phase following economic downturns correspond with big increases in the prices of raw materials.

Add to that fiscal and monetary stimulus and we’ve got a very powerful mix that has sent stocks surging higher, ahead of the broader economy. 

As Americans hit the road again, U.S. crude oil futures have hit their highest level since early March and are now over US$40 a barrel – a substantial recovery when we consider that as recently as late April, oil futures were below zero – because of a lack of available storage. 

Nor has the rise in commodity prices been exclusive to oil, with industrial metals including copper (-1.09%) and tin (-0.15%) up over 15% this quarter alone and agricultural commodities like cotton (-1.82%) (the key component in clothing) heading northwards as well. 

But because many commodity producers cut production in the early days of the coronavirus pandemic, a short term squeeze in the commodity markets is possible and that could be an incredible opportunity for their stocks. 

Spinning Copper to Gold – The Alchemist’s Fantasy Come True

Even if the global economic recovery slows down or there is another wave of coronavirus cases, supply reductions and government spending on infrastructure projects and other programs could prevent another collapse in commodity prices. 

Because infrastructure spending is one of the most direct ways to provide employment to large swathes of the population, governments keen to stimulate their economies may help to boost demand for industrial materials, including copper, from the current low levels. 

Copper has a variety of uses and it also has anti-microbial properties, effective against a wide variety of disease-causing organisms, including the coronavirus. 

Research has shown that while the coronavirus can survive for days on glass, plastic and even stainless steel, it dies within hours on a copper surface and hospitals which have known of the benefits of copper for decades, may not finally be forced to retool their facilities and implement copper on high-touch surfaces. 

Copper is also a key component in building construction, power generation, electronic product manufacturing and the production of industrial machinery and transport vehicles. 

And a renewed demand for the industrial metal has helped shares in copper producer Freeport-McMoRan rebound by over 60% this quarter. 

At US$10.79, Freeport-McMoRan is trading at about half the price of its 5-year high of US$19.94 on 26 June 2015 and at this juncture, it will be a combination of renewed demand for copper, a supply-side squeeze and the rising price of copper that will buoy the miner’s prospects. 

Freeport-McMoRan has already taken steps to slash costs following the precipitous drop in demand for copper, at the height of the coronavirus pandemic. 

The company has announced intentions to slash operating costs by 18%, cut capital expenditures by 30% and reduce exploration costs by 20% – things that we’d want to hear during such trying economic circumstances. 

But more importantly, Freeport-McMoRan has managed to secure funding that ought to help it through the coronavirus pandemic, issuing US$1.3 billion in debt, with maturities of eight years or more and which helped to pay off the debt maturing in 2021 and 2022. 

These long-dated bonds issued by Freeport-McMoRan, at a time when interest rates are at rock bottom and borrowing costs low, put the firm in a far better balance sheet position than before the pandemic, and should help the miner when demand for industrial metals comes back around. 

Freeport-McMoRan also reported that it had over US$5.1 billion in liquidity, comprising both cash and unused amounts on a credit facility, meaning that the company is in decent fiscal shape to deal with the fallout from the the coronavirus pandemic. 

Given that Freeport-McMoRan has recovered some 60% off its March low, it may still have some legs to run, especially since prices of industrial commodities are just starting to warm up, at a time when production is coming under increasing strain from fewer workers and exploration cuts. 

Freeport-McMoRan’s stock price will be closely tied in with copper’s price and a bet on this stock is a bet on economic recovery – especially manufacturing activity in China. 

Potential shocks to the firm’s stock price will come from another Sino-American trade war and if lockdowns are re-imposed. 

Given that there are rumors that the Trump administration is looking to scuttle a trade deal with China, this may present an excellent opportunity to get in on Freeport-McMoRan as the stock price dips in the short term. 

Oil Avoid the Oil Producers For Now

With oil prices now pushing past US$40 for the North America benchmark West Texas Intermediate variety, some investors may be wondering if the battered stocks of oil producers would be a bargain buy at this time. 

Short answer – they wouldn’t. 

Unlike copper, oil is a lot more sticky and tricky. 

Because the Organization of the Petroleum Exporting Countries or OPEC and allies like Russia could easily increase supply if crude oil prices keep rising (in order to get some hard currency into their moribund economies), oil is far less predictable. 

With big oil superstar Exxon Mobil now trading at levels last seen in 2004, it’s understandable that investors are wondering if it won’t be the next big runner. 

But because of the depth and extent with which the coronavirus pandemic has upended the global economy, we wouldn’t be in a rush to pour back into oil companies like ExxonMobil anytime soon. 

And that’s because the coronavirus has changed many consumer behaviors that are likely to be long term. 

With flights grounded and telecommuting (working from home) likely to become a mainstay, travel in general will be dramatically reduced moving forward. 

Without a coronavirus vaccine in sight, and even effective treatments elusive, people aren’t likely to hop on a plane the minute restrictions are lifted. 

Then there’s also been a push towards green energy sources and the electrification of cars, which will dampen demand the long term demand for oil as well. 

And it’s not like during this time of dramatically decreased demand for oil, the rigs can stop pumping or the refineries stop refining – all of that activity has to keep on keeping on, which adds to the supply glut. 

To make matters worse, recent production cuts agreed to by the world’s leading oil producing nations haven’t gone nearly as far as needed to address the demand shortage. 

In April, cuts of 9.7 million barrels per day were a drop in the ocean compared to the fall in demand of nearly 29 million barrels per day and all that excess crude oil has to go somewhere, like the dozens of oil tankers anchored offshore, full of oil and nowhere to go. 

This supply glut could take years to burn through, at a time when Exxon Mobil is also poised to outspend its competitors on capital.

Exxon Mobil has a capital budget of some US$23 billion for 2020, which dwarves Chevron’s (+1.06%) US$14 billion and BP’s (+0.85%) US$12 billion.  

And while conservatively managed, Exxon Mobil needed as much as US$44 billion in debt to make it through the last oil price slump between 2014 to 2017 – it’s unclear how long oil prices will remain low this time, and how much more debt the company will need to borrow to weather the storm.

But thanks to Exxon Mobil’s recent price decline, the company’s dividend yield is now an enviable 7.9%. 

Exxon Mobil has also been increasing its dividend annually for the last 37 years, so it has pressure to keep those payments up, but even for dividend investors, we’d still give the company a miss. 

Given the unpredictability of the long term demand for oil, changing demographics and oil consumption patterns and Exxon Mobil’s exposure to myriad geopolitical and macroeconomic shocks, the firm looks a lot more shaky than it was just a few years ago. 

Bitcoin Surges Higher to US$9,600

Bitcoin continued to have a fantastic run to the start of the week and as we had anticipated, is now trading around US$9,640 having tested the resistance at US$9,740 and pulled back to consolidate at its current level. 

There are indications that Bitcoin may track even higher in July – with evidence from on-chain analysis revealing that so-called “Bitcoin Whales” have started withdrawing large amounts of Bitcoin from digital asset exchange wallet addresses. 

Historically, large withdrawals of Bitcoin from exchange addresses have preceded huge upwards swings in the price of Bitcoin, about four to six weeks thereafter.

And while there is no guarantee of a repeat of those episodes, several technical indicators are suggesting that Bitcoin has rebounded from its price bottom and is looking to trade higher again. 

Right now, exchange reserves are back at their lowest level since December 2018, at a time when Bitcoin was trading at US$3,100 and just before the run-ups of the first quarter of 2019. 

Our Bitcoin trade suggestion for Monday was to enter around US$9,390 and sell at US$9,500 with a stop loss at US$9,325 – a trade that was in the money. 

As we noted yesterday, with a few attempts at US$9,400 already under the belt, the risk-on mood of the market, meant that Bitcoin would enjoy some upside. 

The short trade for Bitcoin on Monday, which was to wait until Bitcoin tested US$9,500 and then short to US$9,400 with a short cover at US$9,550 – was however stopped out with a small loss. 

Looking forward Bitcoin can be expected to go through a period of consolidation at the current level of US$9,640 for awhile at least, with no significant moves either up or down. 

Those looking to go long on Bitcoin can consider entering at US$9,640 and getting out when Bitcoin tests US$9,720 again, with a stop loss at US$9,600. 

Shorts for Bitcoin can wait till another test of the US$9,720 and short all the way down to US$9,600 with a short cover at US$9,740. 

Ethereum’s bullish pennant shows there’s some way to go. (Source: Novum Alpha internal charting tools.)

Ethereum Bounces Off US$230

Ethereum rose in fits and starts yesterday but tracked upwards along with Bitcoin, with investor enthusiasm for Bitcoin spilling across to Ethereum as well. 

Ethreum is due for an upgrade this year to Ethereum 2.0, which has been delayed several times thanks to controversies within the decentralized developer base, but the upgrade will provide plenty of opportunities for the digital asset to scale, with dramatic improvements in security and scalability and an unprecedented ability to cope with the higher demand on the network in the future. 

Our long trade for Ethereum on Monday, entering closer to US$233.50 and taking profit at US$235 with a stop loss at US$233, was profitable. 

Meanwhile, Monday’s short for Ethereum, to wait till it hit US$235 and short to US$230 with a short cover at US$236 was stopped out, with a small loss. 

The short term outlook for Ethereum continues to be bullish and the digital asset currently is consolidating at the US$242 level (0330 GMT), which portends for a push higher. 

Having tested US$246 and retraced, we can expect another shot at goal relatively soon. 

Those looking to go long on Ethereum can consider entering at the current level of around US$242 and selling at US$245 with a stop loss at US$241. 

Shorts for Ethereum can consider waiting till it tests US$245 again and short to US$241 with a short cover at US$246. 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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