Novum Digital Asset Alpha – Daily Analysis 3 July 2020 (8-Minute Read)

TGIF and congratulations to making it to the end of the week! 
 

America is heading into the long 4th of July weekend which should give investors a brief respite from the roller coaster they’ve had to ride this entire week. 

In brief (TL:DR)

  • U.S. stocks closed up for the week, with the S&P 500 (+0.45%), tech-heavy Nasdaq Composite (+0.52%) and blue-chip Dow Jones Industrial Average (+0.36%) all entering the 4th of July weekend in the green. 
  • Asian stocks were up in the pre-lunch trading session and crackdowns against pro-democracy activists in Hong Kong weren’t able to dampen sentiment.  
  • The world’s largest economy regained 4.8 million jobs last month, with unemployment ticking down to 11.1% from 13.3% in May, providing more evidence that the U.S. economy is recovering.
  • U.S. 10-year Treasury Bills rose, as yields fell to 0.670% from 0.682% a day earlier, with investor sentiment still remained cautiously optimistic on soaring coronavirus infections in America (yields typically fall when prices rise). 
  • The dollar fell slightly against a basket of major currencies.  
  • Crude oil rose into bullish territory, with WTI Crude Oil (Nymex) (-0.52%) trading at US$40.44 from US$39.73 a day earlier, as investors factored in a more robust economic recovery in the U.S. 
  • Gold (Comex) (-0.12%) rose to US$1,787.90 from US$1,777.90 a day earlier as lawmakers urged for further stimulus from central bankers. 
  • Bitcoin (-0.84%)  slipped in overnight trading and sits at US$9,155 (GMT 0200) as exchange deposits grew and miners continued to sell Bitcoin to fund operations. 

In today’s issue…

  1. Bond Yields Are Set To Rise, Should Investors Bite? 
  2. Low Interest Rates Forever – How Will That Affect Your Assets?
  3. Millennials Could Save Bitcoin – But They Could Just As Easily Crash It 

Market Overview

Asian stocks were all up at the open with Tokyo’s Nikkei 225 (+0.43%), Seoul’s KOSPI (+0.60%), Sydney’s ASX 200 (+0.59%) and Hong Kong’s Hang Seng Index (+0.69%) all responding to Wall Street’s clarion call. 
 
And even the crackdown on pro-democracy protesters in Hong Kong was not enough to rile sentiment, as investors focused on improving job data out of the U.S. and growing signs of an economic recovery in America, despite surging coronavirus cases.  
 
Meanwhile, unprecedented levels of fiscal and monetary stimulus have slashed borrowing costs and kept the financial system liquid in a time of stress, which has fueled the continued rally in stocks. 
 
But risks still abound. 
 
With coronavirus cases surging across the south and southwest of America, Texas has now mandated the use of face coverings when in public.
 
And there is still the continued risk of increasing trade tensions between China and the U.S., with White House Economic Adviser Larry Kudlow commenting on Fox Business Network that that “we are very unhappy with China” and “there are going to be export restrictions.” 

1. Bond Yields Are Set To Rise – Should Investors Bite?

  • Washington is planning on issuing record levels of debt to fund a yawning fiscal deficit that could exceed US$4.7 trillion this year
  • Bond yields are set to rise as the U.S. Federal Reserve slows asset purchases 
An unprecedented pandemic calls for unprecedented policy measures and the U.S. Treasury department is on track to issue a record amount of debt to fund these measures, with an increasing portion of that debt being long-term. 
 
At a time when the Fed is throttling back asset purchases from a high of US$75 billion a day at the height of the pandemic in March, to about US$80 billion a month since early June, this will create a demand shortfall for U.S. Treasuries. 
 
That demand gap however may cause yields to rise, but not soar – because investors will continue to demand safe assets against a backdrop of shrinking economic activity and growing deflationary risks. 
 
U.S. Treasury yields have hovered at record lows since the coronavirus outbreak ripped through global markets since March, at a time when the dollar and gold have soared – upsetting the traditional equilibrium between these assets. 
 
Typically a rising dollar is met with a falling price of gold, and rising U.S. Treasury yields, but the coronavirus pandemic has upended these relationships as investors sought safety in the dollar, gold and Treasuries. 
 
Given that inflation expectations have fallen dramatically in the months since the outbreak of the coronavirus pandemic, and with one market measure derived from inflation-protected U.S. government securities putting the 10-year break-even rate at just over 1%, investors are currently paying a premium for holding on to U.S. government debt. 
 
And given that inflation is currently nowhere near the Fed target of 2%, few investors see the central bank as tightening monetary policy by raising interest rates, or scrapping asset purchases, any time soon. 
 
For these reasons, investors are (for now at least) better off rotating into risk assets because unless inflation expectations rise rapidly or the market prices tighter Fed policy, bonds may be safe, but investors will be paying a significant premium for that safety. 

2. Low Interest Rates Forever – How Will That Affect Your Assets

  • Low funding costs will hide myriad risks and inflate asset prices 
  • Interest rates tied to outcomes sets the stage for asset price inflation 
The minutes of the U.S. Federal Reserve meeting in June to set rates was telling – if another Great Depression is in the offing, it won’t be because the Fed refused to act. 
 
Minutes indicated that Fed policymakers generally supported tying rate-setting policies to specific economic outcomes, including a promise to keep interest rates low until inflation met or even exceeded the Fed’s 2% goal. 
 
Overall policymakers favored giving the investing public more explicit forward guidance, both for rates and bond purchases “as more information about the trajectory of the economy becomes available.” 
 
And that could be a huge deal – it’s a bit like being able to peak at the questions before actually sitting for the exam – because investors can now factor in the cost of funding when determining asset purchases as well as look ahead to determine when to start paring down holdings of debt, when the Fed eventually scales back asset purchases. 
 
The Fed minutes also revealed that policymakers anticipate the U.S. will suffer the worst economic downturn since the Second World War and has no intention to let up on providing stimulus for the foreseeable future. 
 
That implicit “guarantee” for markets was clear, 
 
“Members noted that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the (rate-setting) Committee’s maximum-employment and price-stability goals.”
 
And that has led to a bizarre set of circumstances for stocks, with zombie companies like Hertz (+2.04%) considering the issuance of more stock as investors can’t seem to get enough of the bankrupt car rental giant. 
 
Growth stocks, which some analysts are arguing have priced in far more optimism than actual economic data suggests, are surging as well. 
 
Google parent Alphabet (+1.94%) rose almost 2% and Tesla (+7.95%) surged almost 8%, after the electric car maker said on Thursday that its second quarter global deliveries fell less than expected. 
 
Consider that Tesla is now the world’s most valuable automaker and it’s not hard to see that central banks may be inflating asset and credit bubbles. 
 
Tesla’s stock has climbed 5x in the past year, from about US$230 a year ago to US$1,100 on Wednesday and pushed the company’s market cap to US$205 billion. 
 
And the fact that Tesla will make only 500,000 vehicles this year and no profits in the process, doesn’t seem to faze investors who can’t get enough of the electric car maker’s shares. 
 
If Tesla breaks even in June, it will be the first time the firm will have been in the black for four consecutive quarters. 
 
And while Toyota (-0.47%), now the world’s second most valuable automaker by market cap, trades at 16 times earnings, Tesla stock trades at an eye-watering 220 times company profits – way above any other automobile business and close to double the multiples seen by tech giants such as Amazon (+0.40%). 
 
Even Tesla’s CEO Elon Musk concedes that the company’s stock price is “too high.”  
 
At a time when the market cap of established carmakers have slid because of the impact of the coronavirus pandemic, Tesla’s stock has tripled. 
 
To be sure, Tesla’s detachment from the industry-wide sell-off will fuel the narrative that Tesla is a tech company, rather than a traditional industrial carmaker – but even then, Tesla is still valued at earnings multiples well in excess of even the most prized tech companies. 
 
And unlike a tech company, where the marginal cost of selling one more piece of software is negligible, the marginal cost of selling one more Tesla car is significant. 
 
Against this backdrop of low interest rates and Fed asset purchases, investors must be careful not to tread into a minefield. 
 
There are countless companies papering over massive losses with cheap credit and questionable business models that may not survive when government intervention is inevitably withdrawn. 

3. Millennials Could Save Bitcoin – But They Could Just As Easily Crash It

  • Bitcoin’s 2-month range of US$8,500 to US$10,000 will require a push to breakout, and that push could come from Millennial investors 
  • Millennial investors could just as easily pump Bitcoin as they could crash it
In April this year, retail (mostly Millennial) investors were drawn to record low oil prices and using zero-fee apps like Robinhood and SoFi, bought into a highly leveraged and struggling oil ETF that wasn’t even tracking the price of oil. 
 
The United States Oil ETF, crashed when the price of oil went negative (because of a lack of storage facilities) and Millennial investors, panicked, dumped their holdings, just as oil prices started to recover again. 
 
The losses were staggering. 
 
But the episode demonstrated the power of Millennial investors, drawn by the clean and user-friendly interfaces of zero-fee trading apps like Robinhood and SoFi, and made clear their ability to move entire markets. 
 
Like the decentralized nature of Bitcoin, these “decentralized investors” could generate a frenzy for Bitcoin if it climbs past its 2020 high of US$10,400 again. 
 
Drawn by the potential for big and quick profits, Millennial participation in buying Bitcoin, their ability to ignore obvious dangers (as demonstrated with their purchase of the United States Oil ETF, which even professional investors avoid) could well push Bitcoin beyond its current range. 
 
But just as Millennial investors saved and killed a dying and obscure oil ETF, they could just as easily pump and crash Bitcoin and that remains a danger, especially if Bitcoin’s price rises too quickly. 

Trading Bitcoin Today

Bitcoin continues to trade rangebound between US$9,000 and US$9,300. 
 
In overnight trading, Bitcoin made a tentative push towards US$9,300 but was quickly sold down, with some analysts suggesting that it may have been Bitcoin from the US$3 billion PlusToken Ponzi scheme taking advantage of the opportunity to sell down holdings. 
 
Yesterday we suggested that those looking to go long on Bitcoin could consider entering at US$9,235 and taking profit when Bitcoin makes another run for US$9,290, with a stop loss at US$9,210 – that trade was in the money. 
 
The short for Bitcoin we suggested was to wait till Bitcoin tested US$9,280 again and take profit at US$9,200, with a short cover at US$9,300 – another trade that was successful. 
 
Bitcoin was ultimately heavily sold down after it was unable to breach US$9,300 and now trades just below US$9,100 (GMT 0330). 
 
Those looking to go long on Bitcoin today can get in at US$9,090 and sell when Bitcoin makes another push towards US$9,200, with a stop loss at US$9,040. 
 
Shorts for Bitcoin can wait till Bitcoin makes another rush towards US$9,280, short to US$9,040 with a short cover of US$9,350. 

Trading Ethereum Today

Ethereum pared back some gains yesterday but data from blockchain data provider Glassnode suggests that the selling pressure may be lifting slightly. 
 
Over the past 24 hours, the amount of Ethereum withdrawn from cryptocurrency exchanges has exceeded the amount deposited, typically an indicator that investors are looking to hold onto Ethereum in expectation of further price appreciation. 
 
Overnight, Ethereum fell from a high of US$232, falling to as low as US$223 at one point before regaining lost ground to now trade at US$226 (GMT 0400). 
 
Yesterday we suggested that those looking to go long on Ethereum could try to enter at US$230 with profit-taking at US$232 and a stop loss at US$229.50 – that trade was in the money. 
 
The short for Ethereum yesterday was to wait till Ethereum hit US$232.50 and short to US$229.50 with a short cover at US$233 – Ethereum unfortunately never hit the entry price and this trade lapsed. 
 
Looking out over the next 24 hours, Ethereum appears to be moving upwards again. 
 
Longs can get in on Ethereum at US$226 and sell at US$228 with a stop loss at US$225.50. 
 
Shorts for Ethereum can wait till Ethereum hits US$228 again and short to US$225.50 with a short cover at US$228.50. 

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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