Novum Alpha – Weekend Edition 16-17 January 2021 (10-Minute Read)

Welcome to your weekend respite, away from the madness of the markets to recharge and ready for a brand new week! 

In brief (TL:DR)

  • U.S. stocks added to losses on Friday with the S&P 500 (-0.72%), tech-centric Nasdaq Composite (-0.87%) and blue-chip Dow Jones Industrial Average (-0.57%), all sharply down as banking giant Wells Fargo (-7.80%) dragged down the market with disappointing fourth quarter results.  
  • Asian stocks closed the week a mixed bag, with weaker U.S. economic prospects weighing down sentiment. 
  • The U.S. 10-year Treasury yield slipped to 1.09% from to 1.12% as risk appetite fell amidst concerns over the pace of any economic recovery (yields rise when bond prices fall). 
  • The dollar strengthened as the banking sector was not recovering as fast as anticipated and with reports of deaths from coronavirus vaccinations in Norway. 
  • Oil slipped with February 2021 contracts for WTI Crude Oil (Nymex) (-2.26%) down at  US$52.36 from US$53.76 on a rising dollar and concerns that the economy is still under immense stress. 
  • Gold added to losses with February 2021 contracts for Gold (Comex) (-0.25%) at US$1,829.90 from US$1,846.80 as investors rotated into the dollar. 
  • Bitcoin (-3.11%) slid to US$37,000 over the weekend as the expected retail rally failed to materialize on souring sentiment as inflows into exchanges led outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today’s issue…

  1. Bet on the Dollar in a Recovery? 
  2. Coronavirus Vaccine Kills 23 in Norway – What Next for the Global Economy?
  3. Regulation is Catching Up to Cryptocurrencies – That’s Both Good & Bad 

Market Overview

What a weekend! 
 
If you’re having a drink this weekend, best to make it a double.
 
Banking profits, despite the expected release of provisions did not provide the fourth quarter rally that many had been expecting, disappointing the broader market. 
 
In vaccine news, as many as twenty-three people in Norway have died from complications resulting from their receipt of the Pfizer (-0.14%) and BioNTech (-4.02%) coronavirus vaccine, causing some other jurisdictions to consider delaying their inoculation exercises. 
 
In Asia, investors closed the week a mixed bag with Tokyo’s Nikkei 225 (-0.62%) and Seoul’s KOSPI (-2.03%) down on concerns that the absence of a sharp U.S. recovery could weigh on exports, while Sydney’s ASX 200 (+0.00%) was flat and Hong Kong’s Hang Seng Index (+0.27%) was up marginally. 
 

1. Bet on the Dollar in a Recovery?

  • The dollar may see unexpected gains if the U.S. economy recovers faster than others
  • Capital flows into the U.S. and higher real yields may see a rebound of the greenback, but not necessarily in the immediate term with continued fiscal and monetary stimulus
 
“Everyone has a plan, until they get punched in the mouth.”
 
– Mike Tyson, World Heavyweight Boxing Champion
 
And for many investors during a crisis, that plan is to pour into dollars and sit the round out until things settle down.
 
As has been the case during the post-war era, during times of uncertainty, the U.S. dollar has held its own as a safety trade for global investors.
 
Whether they were selling down commodities denominated in dollars or American assets purchased in greenbacks, the dollar has long been a safe haven to park funds temporarily until deciding what to do next.
 
But could the dollar also be a bet on the global economic recovery?
 
As capital flows to the U.S. increase, so might bids for the currency, much to the chagrin of traders who have been betting on the dollar’s demise amidst loose monetary policy and generous fiscal measures from an incoming Biden administration.
 
Fiscal spending is a double-edged sword for dollar-doubters.
 
While printing more money should in theory lead to a sliding dollar, if that money is spent on infrastructure and investment, a resurgent U.S. economy could draw foreign investors back to the U.S. market in droves and that will spark fresh demand for dollars to buy American assets.
 
Shorting the dollar has become the second-most crowded trade, outside of going long on tech stocks, according to a Bank of America survey conducted last month.
 
Data from the U.S. Commodities and Futures Trading Commission shows the most bearish bets against the greenback in almost a decade.
 
But there are technical factors suggesting that the dollar may rebound sharply, putting into jeopardy the rally in dollar-denominated assets that have done well against a sliding greenback.
 
Nominal bond yields have risen sharply in the aftermath of the takeover of the U.S. Capitol by a mob of Trump supporters last week, and that could give real yields a boost, making dollar-denominated debt relatively more attractive than negative yielding paper from places like Germany and Japan.
 
But any rebound in the dollar is unlikely to be overnight, nor is it likely to be vertical.
 
There is still a massive influx of both monetary and fiscal stimulus looming over the horizon, which provide strong headwinds for a resurgent dollar and as the economy recovers, investors are likely to abandon the dollar and buy risk assets, especially in emerging markets.
 
But that rotational trade may not prove durable, especially as the subsequent spike in yields and U.S. stocks will inevitably attract investors back to American shores, buoying the dollar’s prospects.  
 

2. Coronavirus Vaccine Kills 23 in Norway – What Next for the Global Economy?

  • Deaths in Norway demonstrate just how experimental the coronavirus vaccine using mRNA technology continues to be 
  • Anti-vaxxers may use the deaths as a banner to encourage others to avoid vaccination and slow down any priced-in reopening of the global economy 
It is a fundamental tenet of the business of medicine to first do no harm.
 
Yet alarming reports out of Norway have revealed that twenty-three people died within days of receiving their first dose of the Pfizer-BioNTech coronavirus vaccine, with 13 of those deaths all nursing home patients.
 
According to health officials in Norway, the deaths had been related to the side effects of the coronavirus vaccine.
 
While common reactions to the coronavirus vaccine include fever and nausea, in a statement on Friday, Dr. Sigurd Hortemo, Chief Physician at the Norwegian Medicines Agency, the Pfizer-BioNTech coronavirus vaccine that had been administered “may have contributed to a fatal outcome in some frail patients.”
 
The news of the additional coronavirus vaccine-related deaths in Norway, comes just over a week since officials there reported the deaths of two other nursing home residents who also received the Pfizer-BioNTech coronavirus vaccine.
 
And while health officials in Norway are expressing serious concern about the side effects of the coronavirus vaccine, they are also not stopping the inoculation process.
 
Nonetheless, the deaths in Norway are already forcing a rethink in some other jurisdictions about the haste with which coronavirus vaccines are being approved and administered.
 
Hong Kong health experts have already announced over the weekend that they would not rule out a delay in their coronavirus inoculation drive over concern with the possible side effects of the Pfizer-BioNTech coronavirus vaccine, following reports of the deaths in Norway.
 
Unlike traditional vaccines, the coronavirus vaccine Pfizer-BioNTech and Moderna’s (-0.05%) coronavirus vaccines use novel mRNA technology that alters the function of cells to trigger an immune response.
 
Transfecting molecules of synthetic RNA into immunity cells, a person receiving an mRNA-based coronavirus vaccine receives genetic material that encodes the viral protein, in essence mimicking what the coronavirus itself does to the body, but to a much lesser degree.
 
While companies like Moderna have experimented with mRNA technology for years, to treat other diseases including Ebola and the Zika virus, their track record has been patchy, and Moderna’s coronavirus vaccine remains the only drug that the firm has ever had approved.
 
Other attempts, including one in 2017, to treat rare diseases, were eventually abandoned when animal trials demonstrated that the side effects caused by Moderna’s treatments would be too dangerous to ever be administered in humans.
 
Of principal concern is that if the Pfizer-BioNTech coronavirus vaccine is already resulting in potentially fatal side effects, could dangers lurk in the Moderna coronavirus vaccine as well that have not yet been fully appreciated?
 
At stake is a world that is effectively still waging war against an unseen enemy and a global economy under lockdown.
 
In an effort to speed up the approval of coronavirus vaccine candidates, clinical trials which usually take years before a vaccine is approved, were shortened to mere months.
 
Unfortunately, in the business of clinical science, time is not a luxury, it’s a matter of life and death.
 
And while bureaucracy was often blamed for the slow approval of previous vaccine candidates, time was also needed to observe any potential side effects in the administration of new vaccines.
 
The danger with the mRNA vaccines is that there simply hasn’t been the luxury of time to consider what (if any) long term effects such vaccines could have on their recipients.
 
And that could be the spanner in the works when it comes to assumptions of a speedy reopening of economies this year.
 
Investors have already priced in a recovery coinciding with an expansive roll out of coronavirus vaccines in the fourth quarter of this year, with value stocks mostly coming off their lows. 
 
But delays in the administration of coronavirus vaccines with fresh concerns over their potentially deadly side effects may hamper such efforts.
 
And that may also explain why investors in the know are still sticking to pandemic-themed sectors such as tech stocks in anticipation that the recovery may be delayed.
 
A Bank of America survey suggests that the most crowded trade last month continues to be stocks in the tech sector and despite a US$1.9 trillion fiscal stimulus being proposed by the Biden administration, the dollar has also rebounded in recent times. 
 
Better safe than sorry. 
 

3. Regulation is Catching Up to Cryptocurrencies – That’s Both Good & Bad

  • Biden’s likely pick to helm the U.S. Securities and Exchange Commission is an expert in cryptocurrencies and blockchain technology and favors more expansive regulations to police the industry  
  • Greater regulation could lead to more widespread acceptance and adoption of cryptocurrencies, but also favors rent-seeking incumbents and stifles innovation from startups
It’s often heard in the cryptocurrency circles that regulation is a bad thing, but not necessarily for the reasons one may think.
 
Given the Wild West reputation of cryptocurrencies, surely some regulation wouldn’t hurt would it?
 
Since one of the features of cryptocurrencies is that they require no permission for participation, regulation also has the potential to stifle innovation.
 
Because there is no bank to act as a gatekeeper to determine your access to financial services on the blockchain and no insurance firm to determine the premiums that you pay, cryptocurrencies have democratized access to financial services, warts and all.
 
The blockchain is fair in the sense that it will approve your transfer of cryptocurrencies (provided you pay the requisite amount of transfer fees) whether you’ve had good credit, bad credit or indeed, deserve no credit.
 
But all that may be set to change as U.S. President-elect Joe Biden’s pick for Gary Gensler to lead the U.S. Securities and Exchange Commission (“SEC”) could be seen as ushering in an era of greater federal oversight over the US$1 trillion cryptocurrency market.
 
Gensler is no cryptocurrency noob and until recently taught about cryptocurrencies and blockchain technology at the venerable Massachusetts Institute of Technology, had previously chaired the Commodity Futures Trading Commission and was also a former partner at Goldman Sachs (-2.27%).
 
Known for pushing back at banks and corporations in search of greater investor protections, the runaway cryptocurrency markets might just have a new sheriff in town.
 
Revealed in talks and editorials over the last decade, Gensler has ben a strong advocate for a U.S.-wide method to register and monitor cryptocurrency exchanges instead of leaving oversight at the state level.
 
If appointed as Chairman of the SEC, Gensler’s rolling out of more comprehensive and federal-level oversight of American cryptocurrency exchanges could have implications for America’s biggest cryptocurrency exchange Coinbase, which has plans to go public.
 
And if outgoing SEC Chairman Jay Clayton was wielding a sword against initial coin offerings or ICOs, Gensler is likely to use a sledgehammer to go after thousands that he believes are nothing more than unregistered securities.
 
In an interview with Bloomberg in 2018, Gensler noted,
 
“If it (cryptocurrencies) gets broad adoption, if we really think the crypto world is going to be part of the future, it needs to come inside of public policy envelope.”
 
“That means we need to guard against illicit activity. And yes, we need to protect investors. The crypto exchanges, big exchanges like Coinbase, need to come within the SEC or the CFTC.”
 
But while Gensler believes that greater oversight could lead to more mainstream adoption of cryptocurrencies, it also favors incumbents more than upstarts because there are always parasites benefiting from regulation.
 
Regulation often provides the means with which businesspeople can use their influence and connections to leverage the government to derive profits.
 
Often disguised as protective regulations, these “regulated entities” are in effect nothing more than members’ only franchises and cabals which could lead to regulatory recapture, and potentially cancel the benefits that cryptocurrencies were intended to create, or erode many of the efficiencies that are inherent in blockchain technology.
 
Is it any wonder then why Goldman Sachs is now considering starting up its own digital asset trading desk?
 
The prospect of one of their own at the helm of the SEC may be just too irresistible to pass up.

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

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