Novum Alpha – Daily Analysis 1 December 2020 (8-Minute Read)

Turning into Tuesday and I hope your month of December is off to a terrific start!

In brief (TL:DR)

  • The end of the month saw some profit-taking in U.S. stocks with the S&P 500 (-0.46%), blue-chip Dow Jones Industrial Average (-0.91%) and tech-heavy Nasdaq Composite (-0.06%) all down slightly but still at their best month in over three decades. 
  • Asian stocks opened mostly higher as investors kicked off a new month. 
  • U.S. 10-year Treasury yields gained less than one basis point to 0.850% from 0.840% as risk appetite remained high. 
  • The dollar dipped as fund flows to more risky emerging market assets edged higher. 
  • Oil slipped slightly with January 2021 contracts for WTI Crude Oil (Nymex) (-0.13%) at US$45.28 from US$45.34 as OPEC+ continued to struggle to come to an agreement on delaying output cuts. 
  • February 2021 contracts for Gold (Comex) (+0.08%) rose to US$1,782.40 from US$1,780.90 mainly on the back of a weaker dollar.
  • Bitcoin (+6.01%) rallied to surpass its all-time high before pulling back slightly to consolidate at US$19,494 as flows reversed with outflows from exchanges continuing to lead inflows (outflows typically suggest that investors are looking to buy and hold Bitcoin in anticipation of price rises). 

In today’s issue…

  1. Forget About Stimulus, the Fed’s Figured it Out
  2. Thailand Set to Thump the Baht’s Rise Again 
  3. Bitcoin Bounces Back 

Market Overview

Like a shot in the arm, markets are looking increasingly bullish as progress on a coronavirus vaccine race along with seeking approvals and heading towards production. 
With just one month left in a year the world would soon rather forget, investors are looking towards the future and pricing assets accordingly. 
In Asia, markets started the monthly strongly up, with Tokyo’s Nikkei 225 (+1.25%), Seoul’s KOSPI (+1.11%), Sydney’s ASX 200 (+1.20%) and Hong Kong’s Hang Seng Index (+0.16%) all up.

1. Forget About Stimulus, the Fed’s Figured it Out

  • U.S. Federal Reserve has highlighted its desire to maintain certain emergency lending programs that the U.S. Treasury has sought to let lapse at the end of the year 
  • Fed still has some tricks up its sleeve to shore markets should the need arise, but remains hamstrung in the breadth of instruments available 
While Congress remained paralyzed on a fresh stimulus package, it’s now been revealed that the U.S. Federal Reserve unleashed its own economic booster that outspent them all.
In a testimony before a congressional hearing yesterday, Fed Chairman Jerome Powell said that the Fed’s unprecedented steps to stabilize financial markets had unlocked almost US$2 trillion to support business and restore the flow of credit from private lenders.
Powell’s testimony to Congress comes at a time when the Treasury Department has indicated that it would not grant extensions for five lending programs that have backstopped markets for corporate and municipal debt.
The Treasury has said that it would also not grant extensions for the Fed to purchase loans made to small businesses and nonprofits when those programs expire at the end of this month.
Fortunately, the Fed has said it would extend through next March, four backstop lending programs that helped to stabilize short-term funding markets during the worse of the coronavirus pandemic, extensions which markets had largely expected and priced in. 
U.S. Treasury Secretary Steven Mnuchin says that the programs are no longer needed because the markets have healed.
Easy access to funding has helped stave off much financial distress, enabling borrowers to raise new debt at cheaper rates and to refinance debts that they would otherwise struggle to pay back.
In the longer term however, high debt loads could increase financial fragility and undermine the ability of companies to withstand any unforeseen economic shocks.
To be sure, the programs which Treasury is cancelling did not see a high take up rate, as their terms in some cases were more onerous than from private lenders – but that’s the entire point.
By serving as a lender of last resort, albeit on slightly more onerous terms, the Fed provided an incentive to private lenders to lend to small and medium enterprises, with the assurance that the Fed would catch all if any fell through the cracks.
It’s less clear what the removal of these programs would have on markets, especially as a new U.S. President is sworn in next month.
And with rates already so low, the Fed will be somewhat hamstrung in its ability to respond directly. 

2. Thailand Set to Thump the Baht’s Rise Again

  • Thai baht has been rising amidst a weakening dollar and foreign inflows into Thai stocks and bonds 
  • A rising baht puts pressure on Thailand at a time when political unrest and economic pressure are creating a tinder box of instability  
In 1997, when Thailand ran out of foreign currency to support the Thai baht’s currency peg to the U.S. dollar, the baht collapsed in a free float that sparked off capital outflows and the Asian Financial Crisis.
Dubbed the “Tom Yam Kung Crisis,” Thailand is now having a different set of problems – a rapidly rising baht that is hitting its export-oriented economy.
The Thai economy has advanced by leaps and bounds over the decades since the Asian Financial Crisis but any time the Thai central bank intervenes with its currency raises atavistic fears of a return to the turmoil of 1997.
Thailand is one of the world’s largest exporters of jasmine rice, frozen shrimp and other packaged foods and its factories also make everything from Toyotas to hard drives.
With exports accounting for over two-thirds of Thai GDP, a rising baht has put pressure on the Thai economy.
Last month, the Bank of Thailand eased rules on capital outflows and there are hints that it will do more.
A declining dollar has seen the baht reach a 10-month high against the greenback last month, raising concerns about the impact on Thailand’s exports, with the economy expected to contract the most in over two decades, with tourism in limbo from the coronavirus pandemic.
An incoming Biden administration which is generally seen as putting further pressure on the dollar will likely see the baht soar even more.
Up over 8% since this year’s low in April, the baht has risen on the back of foreign investors plowing money into Thai stocks and bonds, with a weaker greenback boosting appetite for riskier emerging market assets which have outperformed.
According to data compiled by Bloomberg, net foreign fund flows into Thai stocks and government bonds rose to US$2.4 billion in November.
The Thai finance minister has said that the government aimed to keep the baht exchange rate stable without specifying a preferred level for the currency, laying out stringent limits on the amount of funds that can enter the country.
Thailand is understandably wary of foreign fund flows.
Memories of the 1997 Asian Financial Crisis are still fresh, and foreign funds can disappear just as quickly as they appear.
The coronavirus pandemic has also deeply dented incomes in the tourist and export-oriented economy and comes at the worst possible time as political unrest over the monarchy and what is seen as a pro-monarchy government nears a nadir.
But past Thai experiences with actively managing capital flows have demonstrated how tricky such exercises are.
Thai policymakers last imposed limits on funds entering the country in December 2006, to slow baht gains and to protect exporters.
But that move saw a divergence between the onshore traded value of the baht and the offshore value of the currency, with the Thai government forced to exempt foreign equity investors from the restrictions soon after the Thai benchmark stock index fell by 15%.
Any curbs were fully lifted in March 2008, and demonstrate the challenges facing the Thai economy in trying to manage its currency.  

3. Bitcoin Back in Business

  • Bitcoin charges ahead to all-time-high before pulling back 
  • Investors looking to “buy the dip” may want to be cautious that Bitcoin’s volatility means that pullbacks will be sharp and sudden, but unlikely to endure this time around, unlike in 2018
“The course of true love never did run smooth.”
– William Shakespeare, from a Midsummer Night’s Dream, Act 1, Scene 1
The same could be said of Bitcoin’s ascent.
Like any young relationship, there has to be drama, crisis, doubt and introspection, before some sort of breakthrough.
And breakthrough it has, as Bitcoin has now soared beyond its all-time-high after its worst rout since March last week, demonstrating a resilience in a cryptocurrency rally that’s outperformed almost every other major asset class this year.
As a reminder to investors who believed that Bitcoin’s price could only travel in one direction, Bitcoin crashed by over US$3,000 in just two days last week.
That plunge triggered massive volume in spot and futures trading with some suggesting that the cryptocurrency had become frothy, just as Bitcoin failed to set a new intraday record.
The role of the regulated futures market has also become more important with an increasing number of institutional investors participating in Bitcoin, and open interest on the CME Group (+0.15%) averaging 8,300 contracts for this year, versus 4,000 for all of last year.
But recouping sharp losses is nothing new for Bitcoin, and when it dove by over 10% in May, it took just four days to recover those losses and rise even higher.
Overnight, Bitcoin rose by as much as 8.7% to US$19,857.03, inches away from US$20,000 and pushing this year’s surge in the cryptocurrency by more than 170%.
In many ways, 2020 has proved a fertile ground for Bitcoin’s comeback, with global central banks driving borrowing rates to near zero and providing extraordinary stimulus because of the pandemic.
Bitcoin maximalists have seized on the money-printing narrative (the main reason why Bitcoin was created) to promote the idea that Bitcoin is a store of wealth, and a hedge against future inflation.
And Bitcoin’s latest rally coincides with a steady flow of investments by institutions into cryptocurrency and cryptocurrency infrastructure – from trading systems to regulated custodians.
The latest has been Guggenheim Partners which said in a filing last week that it might invest up to 10% of its US$5.3 billion Macro Opportunities Fund in a Bitcoin trust.
Guggenheim joins a growing list of institutional investors who are betting on Bitcoin as a hedge against inflation, including billionaire hedge fund managers Paul Tudor Jones and Steven Druckenmiller.
And unlike in 2017, where institutional investors had limited means for participating in Bitcoin in a regulated structure, there are now regulated exchanges and instruments that these investors are more comfortable and familiar with.
But investors wondering if now is the right time to buy Bitcoin, should be wary that the cryptocurrency remains highly volatile, posting an average 2.7% daily move compared with just 0.9% for gold, but is still comparable with stocks. 
Over the Thanksgiving weekend, Bitcoin was just US$7 shy of its all-time-high before it bugged out and lost US$3,000 within a 2-day span and right now some technical indicators suggest that it’s gotten overbought again, with any drawdown likely to be swift but not durable.
Unlike the sharp fall that Bitcoin saw in 2018, it’s unlikely that the cryptocurrency will plunge as deep or as long.

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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