Novum Digital Asset Alpha – Daily Analysis 24 July 2020 (8-Minute Read)

It’s finally Friday! And I hope that you’re looking forward to the weekend! Because the markets could sure use a break. 

In brief (TL:DR)

  • U.S. stocks were all down, with the S&P 500 (-1.23%), blue-chip Dow Jones Industrial Average (-1.31%) and tech-heavy Nasdaq Composite (-2.29%) all down sharply, with tech stocks in particular taking a beating on fears of over-valuation. 
  • Asian stocks were mostly down after an unexpected rise in American jobless claims rekindled fears that a recovery in the world’s largest economy has stalled. 
  • U.S. 10-year Treasuries continued their rise, as yields slid to 0.582% from 0.595% a day earlier (yields typically fall when prices rise) as investors priced in new rounds of stimulus as well as increased uncertainty over the economic recovery.  
  • Oil edged down slightly with WTI Crude Oil (Nymex) (+0.12%) at US$41.12 from US$42.00 in the previous session, on reports that U.S. domestic stockpiles had increased, particularly in those states worst hit by the coronavirus pandemic. 
  • The dollar slid further as investors continued to doubt the efficacy of the U.S. response to surging corornavirus infections. 
  • Gold continued its ascent with Gold (Comex) (-0.30%) at US$1,884.30 from US$1,868.00 a day earlier, as investors continued to weigh concerns over inflation risks and repeated rounds of fiscal and monetary stimulus.   
  • Bitcoin (+0.52%) continued to rise over the past 24 hours as unemployment rose unexpectedly in the U.S. with Bitcoin trading at US$9,567 at GMT 0230 and Bitcoin outflows from cryptocurrency exchanges leading inflows again, suggesting miners and other Bitcoin stakeholders are expecting further rises (outflows typically suggest holding for price appreciation). 

In today’s issue…

  1. A Lack of Real Yield Is Leading To Unreal Returns
  2. Dollar’s Decline Has Been Gold’s Chance to Make Silver Shine
  3. The Card Company Crystallizing Cryptocurrency’s Coming Out Moment

Market Overview

The simple reality of economics is that companies under pressure are not about to go out and hire a bunch of staffers. 
So it was really only a matter of time before the bad news started rolling in and on Thursday, U.S. stocks took a hammering after the first weekly increase in new unemployment claims since March. 
The Nasdaq Composite which has defied gravity in the midst of a global pandemic has now demonstrated that it too, is not immune to the laws of physics as the index took a battering weighed down by the sudden slump in stocks like Microsoft (-4.35%) and Tesla (-4.98%)
Stocks in Asia were mostly down in the morning trading session, with Tokyo’s Nikkei 225 (-0.58%), Sydney’s ASX 200 (-0.98%) and Hong Kong’s Hang Seng Index (-1.08%) down, while Seoul’s KOSPI (+0.07%), was up only marginally.  
The uptick in jobless claims in the U.S. could not have come at a worse time, just as a resurgence of coronavirus infections have led some states to roll back plans to reopen for business. 
But there may be a silver lining to the chaos. 
Jittery investors and a falling stock market may provide the impetus and political will that Washington needs to resolve outstanding issues and push forward a fifth coronavirus relief package before the end of this month. 
For now at least, an extension of current reliefs look likely as politicians on Capitol Hill iron out differences in the color and complexion of the next round of more substantive coronavirus relief measures. 
Investors continue to pay close attention to corporate earnings as they roll out, but being a lagging indicator, it will be the third quarter of 2020 that will make all the difference. 
In the meantime, tech stocks have come off their lofty valuations and may have some ways more to fall before being worth considering again. 
Investors will no doubt soon realize that technology stocks don’t exist in isolation outside of the economy, but are just as much intertwined with the economy as any other company.

1. A Lack of Real Yield Is Leading To Unreal Returns​

  • The real yield of U.S. Treasuries is at an 8-year low
  • Yield-hungry investors are inflating all manner of risk assets, until central banks normalize policy measures, the only way is up 
For investors scratching their heads over the recent asset rally in what ought to be the worst economic conditions since the Great Depression, it can feel as if everything is a little fake. 
Real yields on U.S. Treasuries have fallen to their lowest since 2012 this week, in a move that reflects investor belief that a weak economy will need very loose monetary policy for a very long time. 
And as central banks around the world cut interest rates and increase stimulus to bolster their economies against the economic ravages of the coronavirus pandemic, yield-starved investors have had little choice outside of putting their money into all manner of assets to compensate. 
The turn towards a variety of risk assets has helped cash-strapped companies stave off messy bankruptcies as well as provided support for financial assets and growth.
Which is why despite an ongoing pandemic, the S&P 500 is now in the green for the year while the tech-laden Nasdaq Composite has hit record highs. 
And so far, inflation has yet to rise, which is why the Fed has embraced the idea of allowing inflation to float above the 2% level in order to bolster economic activity. 
For investors wondering whether now is the time to buy, the unfortunate answer is “yes.” 
Because central banks around the world show no signs of holding back their relentless march towards slashing rates and fiscal support, real yields will continue to remain depressed. 
In a prolonged low-yield environment, investors have to put their money somewhere, so that’s why the normal metrics of valuation need to be put on hold until the global economy restores its functional patterns. 
For now at least, the market rally for risk assets is not fake, it’s more or less inevitable. 

2. Dollar’s Decline Has Been Gold’s Chance to Make Silver Shine

  • Silver has dual-use purposes in portfolios, both as a bet on an economic recovery as well as a store-of-value against inflation 
  • Unlike gold, silver has far more industrial applications, especially in the electronics and automotive sectors and supply squeezes are putting upward pressure on price
Just like a business receives votes in dollars, the strength of a currency is determined from the votes of other currencies. 
And right now at least, investors are voting against the dollar. 
A surge in coronavirus cases in the U.S. has led to a weakening of the dollar as investors look towards better economic conditions in Europe and Asia that have controlled the pandemic more effectively. 
The declining dollar has caught many investors by surprise because historically the dollar has been strong during times of economic crisis. 
That dollar strength during challenging times has generally stemmed from a belief in the relative strength of the U.S. economy to its peers. 
But the botched handling of the coronavirus pandemic and a lack of leadership from Washington has led to a declining dollar and made precious metals, which are primarily denominated in dollars, a lot cheaper for buyers from other countries. 
And with declining real yields, investors have been flocking to non-yielding precious metals like gold, with gold futures increasing by 1.1% to a 9-year high and silver futures, increasing by 7.4% to a 7-year high. 
Traders are also bracing for a rise in inflation as a result of stimulus programs from the world’s governments and central banks, and part of the reason for the attraction of gold and other precious metals is their function as a store of value. 
But a central bank embrace of inflation coupled with loose monetary policy that floats all asset boats lends itself to a dangerous mix where surging prices of precious metals are being driven by investors acting on momentum – buying precious metals that they think are going up, while betting on the dollar’s downward spiral. 
Yet sharp moves, for instance a sudden withdrawal of stimulus or an abrupt end to fiscal measures, could make markets, particularly those for precious metals, vulnerable to quick reversals. 
In that vein, silver may outshine gold. 
Unlike gold, which has limited industrial use, silver can act both as a store of value, as well as having numerous industrial applications and acts as a barometer on the global economic recovery. 
Silver is the best conductor of electricity and short-term supply has been pummeled by pandemic-related closures of silver mines, which either have shut or are operating at far reduced capacities. 
And some of the savviest investors are loading up on silver. 
This year alone, silver holdings stockpiled by exchange-traded funds have surged by some 40%, against a 25% increase for gold. 
According to data from the Silver Institute, retail bullion sales of silver coins has soared by an estimated 60% in the first half of 2020 compared to a year earlier. 
Investors looking to have some of the shine from the recent precious metals rally rub off onto their portfolios may want to look beyond the gold and go for the silver instead.  

3. The Card Company Crystallizing Cryptocurrency’s Coming Out Moment

  • Mastercard facilitating cryptocurrency platform spending
  • Greater credit card company acceptance of cryptocurrency companies a precursor to adoption 
Mastercard (-1.11%) inked a deal last week with Wirex that makes the London-based firm the first native cryptocurrency platform to gain principal membership. 
The move will allow Wirex to directly issue cards on Mastercard’s network. 
To be sure, cryptocurrency payment cards are not new.
Last year, Coinbase launched its own card in partnership with Visa (-0.72%), Mastercard’s main competitor, which also recently became a Visa principal member. 
Being a principal member to the card network allows cryptocurrency companies invited to this exclusive club, to introduce more features with the card (e.g. cashback) and launch the card in new markets. 
Wirex allows its app users to buy and sell Bitcoin, Ethereum and other cryptocurrencies as well as fiat currencies like the dollar and euro. 
Although not a watershed moment for cryptocurrencies, the move by Mastercard reflects a broader adoption by key nodes in the existing financial services industry to co-opt cryptocurrencies into their ecosystems, and to allow cryptocurrency users to ride the rails of legacy payment gateways, a key for a gradual increase in adoption. 

Trading Bitcoin Today

Bitcoin edged higher over the last 24 hours, testing the resistance at US$9,600 before retracing to currently trade at US$9,580 (GMT 0200), as stock markets took a hit against worsening unemployment figures out of the U.S. as well as a declining dollar. 
Yesterday’s long trade for Bitcoin, was to consider setting up an entry closer to US$9,470 and taking profit on another test of US$9,520, with a stop loss at US$9,460 – a trade that was profitable. 
The short for Bitcoin yesterday was to wait till Bitcoin tested US$9,540 and short to US$9,460 with a short cover at US$9,550 – unfortunately this trade was stopped out. While Bitcoin did have a 15-minute surge to US$9,550, it only fell to as low as US$9,470 before recovering, missing the target. 
Looking ahead, Bitcoin looks to be moving within a range of US$9,550 and US$9,650 over the next 24 hours.
Unable to sustain its level above US$9,600, Bitcoin did not make another push towards US$9,700. 
Longs for Bitcoin can consider an entry on a pullback to US$9,570 and take profit at US$9,620, with a stop loss at US$9,550. 
Shorts for Bitcoin can wait till it makes another run to US$9,660 and then short to US$9,540 with a short cover at US$9,690. 

Trading Ethereum Today

Ethereum continued its bullish turn, overnight, soaring past US$278 and coming close to test US$280 before retracing to now trade at US$273 (GMT 0230). 
Yesterday’s long for Ethereum, was to consider an entry at US$263 and taking profit more aggressively at US$270, with a stop loss at US$262 – this trade was in the money. 
The short for Ethereum yesterday was to wait till it cleared US$269 and short all the way down to US$262 with a short cover at US$271 – this trade was stopped out. Ethereum was ultimately bullish overnight and the long trade was the profitable one. 
Looking ahead, longs for Ethereum can consider an entry at US$273 and taking profit at US$279, with a stop loss at US$272. 
While shorts for Ethereum can wait till another rally at US$279 and short to US$272 with a short cover at US$280. 
US$280 appears to be a strong resistance for Ethereum at the moment while US$272 should provide some support and trading within the range should keep one profitable.

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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