Is the Fed changing their tune?
The headlines suggested that this was a move away from Fed Chair Powell’s consistent and insistent message of “it’s not yet time to talk about talking about tapering”.
The Federal Reserve policy meeting minutes surprised the market when “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”.
The headlines suggested that this was a move away from Fed Chair Powell’s consistent and insistent message of “it’s not yet time to talk about talking about tapering”. However, note that it is also just a mild shift, if any, as it relies on continued “rapid progress” towards the Committee’s goals of full employment and actual average inflation at 2%. If that were the case, it “might” be appropriate to “begin discussing” at “upcoming meetings”.
It shows, in my opinion, that they will shift in micro-steps as they move away from current stance. The price action in stocks is telling as the US stock indices were barely down 0.5% despite being down almost 2% earlier in the day (on the back of weakened sentiment due to the cryptocurrency market selling off by 30–50% at one stage). In fact, the tech-heavy Nasdaq which would be most vulnerable to any signs of Fed changing policy was slightly positive (+0.15%), far off its lows of down nearly 2%.
The tune remains the same. Keep dancing to it for now.
Leverage & Speculative Manias and Cycles
The sell-off in Cryptos yesterday was a harrowing one for the uninitiated, but not the first rodeo for Bitcoin veterans who have had to endure such episodes throughout its history. As we can expect, the naysayers led by its chieftain Peter Schiff (infamous Bitcoin adversary on twitter) will come out in hordes to say “I told you so”, and the war between the differences of opinions will never end.
This is the beauty of free markets — where ideas are pit against each other and winners emerge as a new generation vote with their capital on a technology or good that will iterate on the existing civilization built by their predecessors for the better. We see this in Amazon + Google (Gen X), Facebook (Millennials), and in recent times TikTok + Discord (Gen Z) etc.
The adoption of new technologies or goods has never been a linear process as catallaxy (free market competition) is at play with a constant tug-of-war with the incumbents. The extreme volatility we are seeing now in Bitcoin and cryptos is what happens when a new entrant threatens to disrupt legacy beliefs systems of older cohorts (.ie. USD is a Safe-Haven, Bonds are good etc). To detail this further, the older generations (albeit much richer as they have spent much more time in the economy) have a different set of beliefs, but want to hedge their ignorance by buying Bitcoin on the back of Michael Saylor’s, Elon Musk’s and Paul Tudor Jones’ adoption of the asset. As a result, they FOMO-ed into Bitcoin as price drove the narrative for them, and that Bitcoin was a great asset. However, these are weak hands, although a lot of them are “new whales”. As soon as price sold off, they dumped. Since price drove the narrative for them, panic selling was a natural reaction. In response, these Bitcoins were snapped up by astute technologists and a new generation (with lesser purchasing power) each time it happens (see chart attached).
Bitcoin is a long game peppered with such cycles. Invest accordingly, knowing that each sell-off is necessary for the emergence of this asset class.
Whales: >1,000 Bitcoins
Sharks: 500–1000 Bitcoins
Dolphins: 100–500 Bitcoins
There are no notable events for the day ahead. Risk will continue to be driven by Interest Rates, Virus Situation and Dollar strength. The sentiment in the Cryptocurrency market will also affect risk sentiment if the sell-off should accelerate further.
1. Currencies: Keep short USD and long NZD, & CNH. The resistance for USDCNH is at 6.55–6.57 and support is at 6.38–40. FX is stuck in a range for now. Stay short USD
2. Commodities: Uranium — Long Uranium stocks. Stay patient and invested.
Key risks: Inflation fears which lead to higher US bond yields and a stronger USD and geopolitical risk (US-China tension & Mid-East conflict risk).
Equity Index: Long Nasdaq futures. Support is at 12,950–13,000. Federal Reserve policy meeting minutes showed that some participants wanted to start talking about tapering easing measures in upcoming meetings but the sell-off in stocks were relatively subdued. Lows touched prior to the release of the minutes were not re-tested. Price action is positive. Stay long.
Single Stocks: Fundamentals continue to favour the continued rally of risk assets in the weeks ahead and the move could happen sooner than you think. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields due inflation fears and geopolitical worries are the key risks.
WHAT HAPPENED YESTERDAY
As of New York Close 19 May 2021,
- FOMC Minutes from the April meeting revealed that some participants thought it might be appropriate to start talking about tapering asset purchases in future meetings if the economy continues to make rapid progress towards the Fed’s goals on employment and inflation. The market’s reaction to this FOMC passage was rather calm, arguably due to a view that it might have been more surprising to see no mention of the need to start talking about tapering asset purchases. Longer-dated Treasury yields moved higher following the Minutes.
- US 10-yr Bond yield settled higher by +4 basis points to 1.68% while the 2-yr yield was unchanged at 0.16%. The U.S. Dollar Index rose +0.5% to 90.22. Dollar gained ground on Wednesday, snapping a four-day losing streak and bouncing off a multi-month low following the release of the minutes from the Fed’s most recent monetary policy meeting. Bitcoin briefly plunged (closed, -14.4% $36,720.5, Day’s Lows -30%, $30,261.7) to its lowest level since January in the wake of China’s decision to ban financial and payment institutions from providing digital currency services, but pared its losses after Elon Musk tweeted “Diamond (emoji) hands”, which in the retail trading jargon means that he’s holding onto his BTC and not selling.
- S&P 500 declined -0.3% on Wednesday, although it was down as much as -1.6% in early action and spent most of the session on the comeback trail. The Dow Jones Industrial Average (-0.5%) and Russell 2000 (-0.8%) underperformed but also closed off intraday lows. The tech-heavy Nasdaq which was down nearly 2% at one stage due to the free
- Profit-taking efforts were mainly concentrated in the S&P 500 energy (-2.5%), materials (-1.5%), financials (-0.6%), and industrials (-0.6%) sectors. The information technology (+0.3%) and communication services (+0.1%) sectors, however, sneaked their way into positive territory on a closing basis. The Philadelphia Semiconductor Index rose +2.0%.
HEADLINES & MARKET IMPACT
Notable Snippet: U.S. President Joe Biden will unveil the first detailed budget proposal of his term in office on May 28, a day later than originally planned, the White House said on Wednesday. The budget blueprint will cover the fiscal year starting in October. It will be the first exhaustive list of the programs Biden wants to expand or cut — from foreign aid to immigration and policing.
THEMATIC CONTEXT: “As we have been saying, we are in the era of great power competition and this has invoked a “Sputnik Moment” not seen in the US since the space race (with Russia), where there is no fiscal budget too large to ensure America wins and stays ahead. This is not just a novelty, but the nature of national security and maintenance of a “world order” the US has gotten too used to. Talk about hating change, this is one where no cost is too great. Expect infrastructure, cyclicals, commodities, energy and critical tech companies to outperform in the years or even decade ahead.” — 10th May 2021
“We suspect that inflation is going to be anything but transitory in the longer term as the trajectory of domestic and geopolitical policies are not in the interests of lowering costs through globalization, but one of protectionism and instigation to form new alliances. We have 1. Reshoring of supply chains and building up of strategic reserves, 2. Return of the Labour Union in America, 3. Unlimited Fiscal spending fuelled by the Sputnik Moment in tech and 4. Rise of economic factions that are not in sync with a US led unipolar world.” — 17th May 2021
Notable Snippet: European Union countries agreed on Wednesday to ease COVID-19 travel restrictions on non-EU visitors ahead of the summer tourist season, a move that could open the bloc’s door to all Britons and to vaccinated Americans. Ambassadors from the 27 EU countries approved a European Commission proposal from May 3 to loosen the criteria to determine “safe” countries and to let in fully vaccinated tourists from elsewhere, EU sources said.
THEMATIC CONTEXT: “We are likely to see countries setting up travel bubbles with those with “successful vaccine drives”. This might be the preliminary Standard Operating Procedure (SOP) for the foreseeable future between countries who want to recommence business. In such scenarios, we believe there will be a positive impact on a country’s currency whose vaccine drive has a higher success rate and whose industry derives a decent portion from tourism (i.e. Japan, Europe) etc.” — 15th Mar 2021
Notable Snippet: Europe’s drug regulator on Monday recommended extending the storage time for the Pfizer-BioNTech COVID-19 vaccine at normal fridge temperatures to 31 days from five days, easing logistical challenges during rollouts in the region.
The change is applicable to unopened vials, the European Medicines Agency (EMA) said, adding that the advice by its human medicines committee came after assessing additional stability study data submitted by Pfizer and BioNTech.
Phan Vee Leung
CIO & Founder, TrackRecord