Novum Alpha – Daily Analysis 24 September 2020 (8-Minute Read)

Turning into Thursday and it’s looking to be a tough day for markets. 

In brief (TL:DR)

  • U.S. stocks were pummeled on Wednesday as the S&P 500 (-2.37%), tech-heavy Nasdaq Composite (-3.02%) and blue-chip Dow Jones Industrial Average (-1.92%), fell sharply on U.S. Federal Reserve Chairman Jerome Powell’s plea before Congress to issue a stimulus package. 
  • Asian stocks were mostly down in the morning trading session, on the back of losses on Wall Street. 
  • The U.S. 10-year Treasury remained in a narrow range with yields edging up to 0.676% from 0.663% in the previous session (yields typically rise when bond prices fall). 
  • Oil dipped slightly as November contracts for WTI Crude Oil (Nymex) (-0.42%) fell alongside stocks, at US$39.45 from US$39.62.
  • The dollar continues to surge as the likelihood of any stimulus from Washington remains remote. 
  • Gold slid further with Gold (Comex) (-0.04%) at US$1,867.70 from US$1,905.40 in the previous session, for December contracts, against a strengthening greenback and gold now below the psychologically important US$1,900 level of support.  
  • Bitcoin (-0.14%) was surprisingly resilient falling to US$10,250 from US$10,265 (GMT 0130) from 24 hours earlier, with outflows from exchanges rapidly rising ahead of inflows, and on sharply rising volumes (outflows suggest that traders are holding onto Bitcoin in anticipation of price rises). 

In today’s issue…

  1. Bet on the Market, Literally 
  2. Are The Golden Times Over?
  3. Crypto Unseats Gold as 2020’s Top Asset Class

Market Overview

It’s not a problem until you ask for help. 
At least that’s how investors are viewing the economy as U.S. Federal Reserve officials highlighted the need for Congress to agree on a new round of stimulus to shore up the American economy. 
In a series of public appearances, Fed officials took the opportunity to make the case for Congress to dole out additional fiscal stimulus, leaving investors wondering if things are perhaps a lot worse than they appear. 
While economic data on housing and employment have been positive, Fed officials have stressed that more still needs to be done because the U.S. is still in an economic hole. 
And there was always the risk that this would happen. 
As the U.S. economy picked up and stocks surged, there was a palpable Republican reluctance to expand the size of further stimulus, pipping it at US$1 trillion versus the US$3 trillion that Democrats were asking for. 
But no stimulus is not what the economy ordered and Fed officials may be articulating what they see as a false sense of complacency, just when the U.S. economy is needed to reach exit velocity. 
Across the Pacific in Asia, stocks were mostly down, taking their cue from Wall Street in the pre-lunch trading session, with Tokyo’s Nikkei 225 (-0.76%)Seoul’s KOSPI (-1.21%) and Sydney’s ASX 200 (-0.97%) down, while Hong Kong’s Hang Seng Index (+0.11%)  was up modestly. 

1. Bet on the Market, Literally

  • Stocks of exchange operators attractively priced and have outperformed other financial stocks 
  • Attractive forward earnings multiple for exchange operators trade at a discount to the long term stickiness of trading behavior that should add to revenues 
When Levi Strauss headed out west to join the 19th century gold rush in California, he realized that he’d arrived a day late and a dollar short. 
But rather than give up, as thousands of prospectors around him were caught up in hunting for gold, he sold them the picks and shovels as well as the cotton denim jeans that his name eventually became synonymous with. 

The lesson? In a gold rush, don’t bet on the gold, or even the miners, bet on the pick and shovel

And while stocks may have become very expensive of late, ironically stock exchanges themselves have not. 

Shares of American exchange operators have mostly performed well this year, especially when compared to other financial companies. 

And with investors hunkered at home by lockdowns caused by the coronavirus pandemic, many have turned to day trading to supplement their income, or just to avoid boredom. 

With highly elevated trading levels, record options volumes, new public listings and the rise of zero-fee trading apps like Robinhood and SoFi, a surge in retail trading activity has helped Nasdaq (-2.91%) and the Intercontinental Exchange (-1.82%), owner of the NYSE sharply outperform. 

Compared with a 20% decline for financial stocks overall, Nasdaq is up 7% and ICE is up some 15%. 
But exchanges don’t just make money from trading activity, they also make money from trading-tape data (the price feed), with Burton-Taylor International Consulting finding that trading-tape data subscriptions grew by 63% from a year earlier, a figure which includes retail accounts. 

In terms of forward earnings, ICE and Nasdaq are on trading at about 20 times of forward earnings, versus 40 times for the S&P 500 – if you can’t beat the markets, why not just bet on them? 

2. Are The Golden Times Over?

  • Gold’s recent pullback more a function of a strengthening dollar as opposed to any major changes in the macroeconomic landscape 
  • Heightened uncertainty into the lead up to the 2020 U.S. elections will play well to gold’s narrative, making the recent pullback likely to be a short-lived one
Investors who had poured into gold in the early part of this year would have been laughing all the way to the bank by the third quarter as the price of gold has surged on a plethora of macro factors, all in their favor. 

But smugness is an unattractive quality, and the price of gold, which up till fairly recently, had set all-time highs, surpassing US$2,000 and looked set to trend even higher on fears of geopolitical uncertainty, overvalued stocks and concerns over inflation, has since pulled back.  

That self-assured air of superiority in goldbugs has been deflated of late, with gold’s slump below US$1,900 this past week forcing investors to question whether the haven asset is taking a breather, or facing a downward trend that has been in the offing for a while. 

Unprecedented fiscal and monetary stimulus, negative real interest rates and a weakening dollar have all contributed to the narrative fueling gold’s meteoric rise to over US$2,075 in early August, the bigger question is whether that’s enough. 

Analysts from some of the top banks continue to forecast even higher prices for gold, despite a resurgent dollar seeing gold give up some interim gains. 

So is now the best time to buy into gold or to cash in profits and run? 

One of the key drivers of gold right now is the dollar and in the past week, the greenback has strengthened, which has undermined gold, despite the U.S. Federal Reserve pledging to keep rates low all the way to 2023. 

The dollar’s newfound strength is due in large part to waning hopes of any further stimulus from Washington, depressing gold, even as the coronavirus pandemic ripples across Europe and fatalities from coronavirus infections cross the 200,000 mark in the U.S. 

And while the interim strength in the dollar is weighing down gold’s price, it probably won’t last, with the Fed’s expansionary policy likely to stay in place for years, helping to prop up gold’s allure. 

Yet gold has taken a bit of a breather of late because while gold prices surged over the summer, as real treasury rates slid deeper into negative territory, they’ve now been relatively flat for some time, so it’ll take clear signs of inflation to push gold higher. 

But all that could change in a Washington minute should the Democrats sweep to power by taking the White House, the Senate and the House of Representatives in November – unlikely, but entirely possible. 

In what could be one of the testiest elections in decades and with U.S. President Donald Trump not committing to a peaceful transition of power (if any), any uncertainty leading up to elections will play out well for gold. 

3. Crypto Unseats Gold as 2020’s Top Asset Class

  • Cryptocurrencies, driven primarily by gains in Bitcoin and Ethereum, surpass gold, stocks and commodities this year 
  • Unprecedented fiscal and monetary stimulus help to fuel the narrative supporting Bitcoin’s price while increased interest in decentralized finance have helped to buoy Ethereum 
Volatile? Yes. Profitable? Even more so – at least for those who were plucky enough to get in on cryptocurrencies at the beginning of the year. 

Assets across all classes surged this year, on the back of fiscal and monetary stimulus, but cryptocurrencies, in particular Bitcoin and Ethereum saw gains that exceeded gold’s jump of over 20% as well as returns from global stocks, bonds and commodities. 

Increased adoption of decentralized finance, or DeFi has seen Ethereum rise by a factor of over three since the beginning of this year and DeFi projects with food names have become all the rage over the summer. 

Using the blockchain that Ethereum is built atop, DeFi allows financial services such as borrowing or lending as well as earning interest on cryptocurrency deposits, without the need for traditional centralized intermediaries, like banks. 

DeFi’s growing popularity is part of a wider trend of increased blockchain usage running on the Ethereum blockchain has seen the dollar price of Ethereum surge this year. 

And from just over US$700 million at the beginning of this year, collateral levels in DeFi projects have soared to US$9 billion, according to Fasset. 

Meanwhile Bitcoin’s price has been fueled by unprecedented stimulus from governments and central banks, stoking inflation fears and helping to support demand for the world’s first cryptocurrency even above US$10,000. 

But investors betting on cryptocurrencies traveling in only one direction may not be familiar with just how volatile these nascent assets can be.

While overall investor interest in cryptocurrencies is broadening as derivatives markets for Bitcoin and Ethereum expand, the industry is still very much in its infancy, and while swings in price are not just expected, but the necessary price of participation. 

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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