A fantastic Friday to you and congratulations on making it to the end of the first work week of a brand new work year!
In brief (TL:DR)
- U.S. stocks roared higher with the S&P 500 (+1.48%), blue-chip Dow Jones Industrial Average (+0.69%), and tech-centric Nasdaq Composite (+2.56%) all higher as investors bet on Democrats leading fiscal stimulus, disregarding the unrest in Washington.
- Asian stocks followed their U.S. peers higher Friday as investors focused on the prospect of more stimulus and the likelihood that calm will prevail as Joe Biden takes the White House.
- U.S. 10-year Treasury were steady at 1.08% after climbing toward 1.10% Thursday (yields rise when bond prices fall) in line with broader risk appetite.
- The dollar held an overnight advance having been oversold for the most part.
- Oil edged higher with February 2021 contracts for WTI Crude Oil (Nymex) (+0.22%) at US$50.94 from US$50.83 on the back of expected dollar weakness and increased consumption expectations.
- Gold was little changed with February 2021 contracts for Gold (Comex) (+0.01%) rising to US$1,913.80 from US$1,913.60 as the dollar held steady.
- Bitcoin (+5.72%) pared an advance to US$39,148 after topping $40,000 as increased fiscal spending was anticipated in the world's largest economy and outflows led inflows into cryptocurrency exchanges (outflows typically suggest that investors are holding Bitcoin in anticipation of further price increases).
In today's issue...
- A Blue Wave is Crashing for Tech Stocks
- Treasury Yields Breach 1% But Fed Is Not Blinking
- Bitcoin Blasts Through US$36,000 on Democratic Takeover of Senate
Market Overview
Nothing it seems can keep the market down. Not pandemic nor pandemonium in Washington D.C.
To be sure, the relentless flow of liquidity has turned into a tsunami of cash that has flowed into all manner of risk assets.
Asian markets were sharply higher taking their cue from Wall Street with Sydney’s ASX 200 (+0.30%), Tokyo's Nikkei 225 (+1.38%), Hong Kong's Hang Seng Index (+0.30%) and Seoul’s KOSPI (+2.15%) all up.
1. Never Waste a Good Crisis to Make a Quick Buck
- Markets shrugging off the graphic scenes of supporters of U.S. President Donald Trump storming the Capitol building did little to dampen appetite for stocks
- Sheer weight of money and other positive factors mean that the rally in all manner of risk assets shows no signs of abating, increasing bubble risks
Even as supporters of U.S. President Donald Trump stormed the Capitol building in Washington D.C., something not seen since 1814, when the British burned that building and several other key government structures, investors were focused on the big picture, a seemingly infinite rally in equities.
Perhaps in any other set of circumstances, investors expecting a pullback in markets because of the visceral threat to American democracy, splashed out in shameful images broadcast across the world from the capital of liberty, would have been right to do so.
But given that even a pandemic hasn’t been enough to slow stocks down, it was altogether unsurprising that investors instead chose to ignore the mayhem unfolding in Washington.
Instead of focusing on the graphic, but ultimately futile skirmish in the U.S. Capitol, investors looked forward to greater spending from a Democratic government that pushed stocks higher, focusing on the optimistic narrative.
The sheer volume of money flowing into markets was more reflective of Democrats wrestling the Senate from the Republicans than anything else, paving way for broad government spending, with investors pricing in better corporate earnings from increased fiscal measures.
U.S. President-elect Joe Biden is expected to expand on the existing US$900 billion pandemic stimulus package, with greater spending on infrastructure, clean energy and education.
If nothing else, investors shrugging off what in “normal times” would have sent shockwaves rippling across the market, reaffirms that little stands in the way in terms of macroeconomics, to slow down the current rally.
And the prospect of a Biden administration has not only increased investor confidence in greater government spending, but inflation as well.
The yield on the benchmark 10-year U.S. Treasury breached the 1% level for the first time since March and while traditional inflation hedges such as gold slipped, less traditional Bitcoin soared.
Nonetheless, there remains the outside risk that markets are running a little ahead of themselves.
While the positive news of coronavirus vaccines, expanded fiscal policy and central bank dovishness are buoying markets, a sudden spike in interest rates or some unknowable unknown could curb risk appetite.
For now, even threats to the world’s spiritual home of democracy hasn’t been enough to dampen appetite for risk and that says a lot about the conditions investors are operating in.
2. A Global Wealth Tax is Looming
- Deficit-laden governments are once again considering a wealth tax on assets of the rich
- Institution of wealth taxes may lead to more creative means to lower tax burdens among the ranks of the super rich, from using cryptocurrencies to re-domiciling, even as resentment over income inequality soars
From Singapore to Sochi, Buenos Aires to Boston, there are luxury homes that no one’s ever lived in, yachts docked at glitzy marinas that their owners have never been on and cars sitting in garages that have no miles on them.
Playthings of the super-rich, the once celebrated ranks of the wealthy global elite are proving to be a thorn in the side of governments who have long sorted to court them for their influence, resources and to house their business empires within their borders.
As the coronavirus rages seemingly unabated, gaping income inequality, already high before the pandemic, has been brought into even sharper relief and left-leaning governments and politicians are making their voices heard to tap on some of these billionaire's bounties.
Rather than impose a higher income tax, governments are looking increasingly to taxes on assets.
Argentina leveled a one-time wealth tax last month and while U.S. President Elect Joe Biden is not keen on one, progressives in the ranks of his Democratic Party are increasingly making their voices heard.
With the Democrats holding a razor-thin majority in the Senate, the prospect of increased taxes on both wealth and assets cannot be dismissed and Biden will have to appeal to more moderate voices within his party to prevent being seen to lurch America sharply towards the left in the early days of his administration.
A broader wealth tax on assets could have wider implications, and may cause investors to rethink their asset allocation strategies.
CEOs and other leaders of industry, for whom significant portions of their net worth are tied up in the value of their stocks may also consider paring down their holdings if taxes on assets are increased and that may ultimately affect stock investors.
There are some who suggest that a blanket wealth tax is a blunt tool which the rich can avoid with their myriad shell companies and complicated legal holding structures – the other problem is how do you value some of the assets held by the wealthy?
And while Biden may not have the appetite to tax the assets of the wealthy at the federal level, there appears to be plenty of appetite at the state level.
At its root, local, state and national governments are struggling with a pandemic that has crippled their tax revenues and placed governments such as the United Kingdom in the worst deficits ever.
But for the wealthy global elite, their response to such wealth taxes may be to vote with their feet and even legions of highly paid professionals may look to plant their feet elsewhere, affecting the wealth and prospects of regions from London to Los Angeles.
With governments strapped for cash, the bounty of their billionaires seem like fair game. Germany, which has the largest proportion of billionaires in the European Union would stand to suffer the most from a wealth tax, but may be set to pass one.
And California, with its legion of tech elite is looking to pass a wealth tax at the state level.
The implications of such wealth taxes could reverberate throughout the rich world, leading to reallocation of resources not just from the rich to the poor, but from one country to another as well.
3. Bitcoin Breaks Records & Exchanges Too
- Unprecedented rally in Bitcoin has put immense strain on the existing infrastructure of cryptocurrency exchanges
- Service disruptions at some of the world's biggest cryptocurrency exchanges likely to be led by retail investors pouring into Bitcoin and other cryptocurrencies
In what has been a stellar year so far for the world’s largest cryptocurrency by market cap, Bitcoin has been breaking records faster than they can be set, surpassing US$40,000 yesterday at one stage before correcting just as sharply to US$38,000 and now trades above US$41,000.
But broke was the trail of cryptocurrency exchanges that Bitcoin’s most recent rally left, including America’s biggest exchange Coinbase.
Over the past day, cryptocurrency exchanges from across the world have experienced surges in traffic, many of which experienced slower response rates as retail investors rushed to buy Bitcoin.
Even the world’s largest cryptocurrency exchange Binance experienced disruptions because of the unprecedented surge in volumes.
For most of 2019, cryptocurrency exchange volumes were relatively muted, driven primarily by bot-led trading.
However, since Bitcoin’s low in March 2020, cryptocurrency exchanges have seen progressively expanding volumes, concentrated primarily in the largest and most prominent ones, as Bitcoin was increasingly championed by institutional investors, from Paul Tudor Jones to Stanley Druckenmiller.
And while cryptocurrencies were generally off the radar for most retail investors during the bulk of 2020, with many choosing to bet on stocks instead, using zero-fee trading apps such as Robinhood, that changed towards the end of 2020.
PayPal’s (+3.62%) announcement that it would facilitate cryptocurrency payments to merchants this year sparked off renewed retail interest and the Democratic sweep of the Senate this month in Georgia’s Senate runoff has investors betting on higher inflation.
And that’s helped to boost Bitcoin’s attractiveness as an alleged hedge against inflation, lifting its price further.
Whether or not the most recent rally is sustainable is anyone’s guess, but if protesters storming the U.S. Capitol building wasn’t enough to shock markets, it’s hard to foresee what will shock the seemingly insatiable appetite for risk assets.
As the coronavirus pandemic continues to rage, governments are continuing to pump money into their economies to keep them afloat, even as vaccinations are continuing in earnest.
If and when such fiscal and monetary support gets withdrawn, the chickens will come home to roost and whether risk assets can continue to command the premium that they currently enjoy remains to be seen.
In the meantime, that Bitcoin you just bought may take a little bit longer to arrive because the exchange got broke.
Novum Digital Asset Alpha is a digital asset quantitative trading firm.
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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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