The Printing Presses likely to go into Overdrive
Fed speakers are coming out to reiterate their intention to keep interest rates low and keep the money printing presses going. Expect this to continue as they will not want interest rates to trend higher just when the economic recovery seems to be stalling.
President-elect Biden will be unveiling his stimulus plans today and that should set the tone for the market. His ambitious spending plans may cause another spike higher in US yields if the amount is larger than expected, but have faith in the Fed. The Fed has got our back and will continue printing.
- Commodities : Gold & Silver — Support for Silver are at 21.80–90 and at 24.70–80. Gold major support is at 1750–60 and at 1840–50. Gold is once again testing the near-term support. Position reduction in Gold is prudent given the lackluster price action. .
Key risks: Higher US interest rates and a stronger USD.
2. Equities : Keep long US Tech and China A50 Index Futures. This dip in China A50 is a good opportunity to add to longs. Support is at 18300–350.
Key risks : Higher US interest rate. Growing concerns of possible unrest leading up to and on Biden’s inauguration day.
3. Currencies : Keep short USD and long NZD, CNH & TRY. Stay the course.
WHAT HAPPENED YESTERDAY
- Compared to November, U.S. Total CPI increased 0.4% in December (expected 0.4%) while core CPI increased 0.1% (expected 0.1%). The uptick in total CPI was driven largely by an 8.4% increase in the gasoline index, which accounted for more than 60% of the overall increase. The report won’t trigger inflation alarm bells in an aggregate sense. Total CPI is up just 1.4% vs the previous year, and, core CPI held steady at 1.2% for the third straight month, while Fed’s target inflation remains an average of 2%.
- On a day that US stocks were trading well and US yields were down on the day, USD was strangely stronger, with the USD Index rising 0.29% against a basket of major currencies. The recent narrative of higher US yields driving USD stronger did not seem to have the reverse effect when the yields were going lower. Bitcoin continued to grind higher after the recent panic sell-off as steadier hands resumed buying on dips. Dips to low 30K will be supported by buyers who thought they could get it cheaper below 30K.
- Treasuries rebounded strongly after recent losses, sending the 10-yr yield down 5 basis points to 1.10%. Federal Reserve Vice Chair Richard Clarida reiterated that the U.S. central bank won’t raise interest rates until inflation reaches 2% for at least a year, and he expressed confidence that market participants believe in that promise, a key element in the Fed’s strategy. Federal Reserve Governor Brainard pushed back against suggestions the central bank could taper its bond-buying program later this year, arguing the U.S. economy will need that monetary support for “quite some time.” and the Fed stands ready to increase the amount of purchases if needed.
- The stock market finished Wednesday on a slightly higher note. The Nasdaq (+0.4%) outperformed throughout the day while the S&P 500 (+0.2%) and Dow (unch) were relatively flat on the day. The Russell 2000 (-0.8%) underperformed after a strong start to the week.
- Equities recorded the bulk of their gains in morning trade while afternoon action saw some backtracking from highs. The modest advance unfolded in quiet fashion as gains among influential sectors like technology (+0.7%), health care (+0.3%), and consumer discretionary (+0.2%) outweighed losses in financials (-0.2%) and industrials (-0.9%).
- The technology sector received an early boost from Intel (INTC 56.95, +3.71, +7.0%) after the company announced that its CEO will be replaced by VMWare’s (VMW 133.20, -9.71, -6.8%) current CEO in February. Intel’s strength did not invite significant buying interest in other chipmakers, as nearly two thirds of the names in the PHLX Semiconductor Index (+0.1%) finished in the red.
Notable Snippet: As the United States recorded its highest single-day death toll since the coronavirus pandemic began nearly a year ago, New York Mayor Bill de Blasio on Wednesday said the city would fall short of its inoculation goals unless it could get more vaccines.
THEMATIC CONTEXT: “Vaccine efficacy is a key development to monitor. Societies around the world have a bifurcation of sorts where some countries are still experiencing the full brunt of Covid-19 while others are having Covid-19 fatigue and just want to get on with their lives. Vaccine is the key to level the field with herd immunity and markets are clinging onto this hope. If severe allergic reactions halt the process, this will weigh on risk sentiment, what we need to know now is if these allergic reactions are within the scope of expectations.” — 7th Jan 2021
“If the trend continues, the government will probably be forced to do quicker vaccine rollouts and then the case study of herd immunity will be clearer. Will this prove the efficacy of the vaccine or that it’s ineffective in combating the virus, the truth will definitely bear a huge impact on the market. At this point the UK is the benchmark as they have been fastest in vaccinating the population under dire circumstances.” — 12th Jan 2021
Notable Snippet: “As we get into the end of the second quarter, I’m hoping enough people are vaccinated that we can start spending, particularly in those areas where we haven’t been able to spend,” Rosengren said.
Notable Snippet: The changes strengthen the initial order by requiring Americans to completely divest their holdings of securities of the blacklisted companies effective Nov. 11, 2021. In the initial version of the order released last November, U.S. investors were only restricted from buying those securities by that date. Reuters had previously reported that the change was under consideration.
THEMATIC CONTEXT: “As tensions between Washington and Beijing rise, the potential decoupling of the world’s two largest economies presents significant risks, a prospect that is firming China’s push towards more reliance on its own vast domestic market (Dual-Circulation). We believe this will be positive for the CNH in the long run (USDCNH to trade lower over time).” — 10th Sep 2020
“The expanded blacklist is seen as part of a bid to cement outgoing Republican Trump’s tough-on-China legacy and to box incoming Democrat Biden into hardline positions on Beijing amid bipartisan anti-China sentiment in Congress. Banning SMIC is a key move in the U.S.-China tech war as semiconductor is the key ingredient which underpins technological progress. According to reports, China is 5 years behind the U.S. and Taiwan in semiconductor technology and they “cannot be allowed” to catch up. It will be crucial to keep track of semiconductor advancements and Taiwan’s Taiwan Semiconductor Manufacturing (TSM) manufacturing foundry is now a key strategic asset and of global importance.” — 3rd Dec 2020
President-elect Joe Biden is expected today to unveil his long-awaited stimulus plan, with those familiar with the legislation suggesting the transition team is hoping to draw bipartisan support for the bill in Congress. The details of Biden’s stimulus proposal will be closely watched. The more he promises, the better the US growth outlook. For example, a package worth $3 trillion — as has been suggested by some reports — would likely reignite the ‘growth trade’, whereas something closer to $1 trillion may even be seen as a disappointment.
The Value Of Anything
In the grand scheme of things, value is subjective. It is what humans as a consensus deems worthy that something has value. In ancient times it was seashells and then came about the monetary system which allowed a common unit of account for goods. Value has been measured by this unit of account ever since. In modern times, value is measured by the market capitalization of a certain good and that is why the likes of Apple, Amazon and Microsoft crossing the trillion dollar market capitalization was such a big deal.
The other side of the story is also important to consider, are things really gaining value or is the unit of account to measure value is losing its pricing power? A unit of account tends to lose pricing power when the “issuer” recklessly “increases its quantity”, hence value will shift from a less finite (due to money printing) to a more finite resource which in these days are hard assets like stocks, commodities, land, real estate and etc.
Bitcoin as a commodity is one of the beneficiaries of the incessant money printing (destruction of pricing power of the unit of account), hence more units of accounts flows into the Bitcoin in hopes of exchanging a less finite asset for a finite one, increasing the market capitalization of the asset and hence the value of each Bitcoin. The value of anything shifts through time, hence staying abreast of the global system is one of the ways to effectively hedge one’s wealth.
In plain English, as the Fed continues to print money to fund the government’s relentless spending, the USD will lose its value. Bitcoin, being a finite asset, will by default, rise in value as money printing continues.
Phan Vee Leung
CIO & Founder, TrackRecord