What is the Fed telling us?
It is as they say, the rise in interest rates in the longer end of the curve (for example, the 10 year US bond yield) is a consequence of economic growth and is what they expect to see if their policy is working.
The minutes of the previous policy meeting of the Federal Reserve shows that members of the committee think that the rise in long end US bond yields is a natural response to a strengthening economy and that they are nowhere close to considering tightening policy.
Several Fed speakers last night pretty much stuck to the same message. It is as they say, the rise in interest rates in the longer end of the curve (for example, the 10 year US bond yield) is a consequence of economic growth and is what they expect to see if their policy is working.
There’s no need to worry, for now, and any market jitters in response to this should be opportunities to take advantage of.
Coinbase posts blowout Q1 profit of $730-$800 million days before public listing
Coinbase announced its 2021 first quarter earnings, the crypto giant made a profit of between $730 million and $800 million (more than double what it earned in all of 2020) on revenue of approximately $1.8 billion. Coinbase’s blowout Q1 performance is likely to drive the price of Coinbase shares, which sold at an average price of $343.58 in private transactions between January and March, to new highs before the April 14 listing date. But the results will also increase expectations for Coinbase, whose public listing is both a key milestone for the company and for the crypto industry as a whole with Bitcoin and its merry gang taking on more real-world credence as days go by (“I am Inevitable” — Thanos, Marvel).
The minutes for ECB’s March policy meeting (Thu) likely will show the ECB poised to ease should the economic recovery be threatened. Unlike the Fed, the ECB has taken an aggressive stance against the rise in bond yields, arguing that they could lead to premature stiffening of financial conditions. After all, the European recovery is much more fragile than America’s and Eurozone bonds have simply been caught up in the global yield storm. This “unwarranted tightening” is what persuaded the ECB to announce a faster pace of asset purchases at the March meeting, with the subsequent negative impact on the euro providing an additional incentive for policymakers.
1. Currencies : Keep short USD and long NZD, & CNH. Fx seems to be consolidating for now. Stay patient.
2. Commodities : Silver — Neutral for now.
Key risks: Spikes in US bond yields may lead to a stronger USD and weaken risk sentiment. .
3. Equities :
Equity Index: : Long Nasdaq futures. The positive price action continues. Stay long.
Single Stocks: As expected, the market is starting the new quarter on a positive note, certain sectors which have been trending higher will resume their strong rallies. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields and inflation fears are the key risks.
WHAT HAPPENED YESTERDAY
As of New York Close 7 Apr 2021,
- The market saw a brief uptick after the FOMC Minutes from the March 16–17 meeting highlighted the known view that it would likely take some more time until substantial further progress toward the Fed’s maximum-employment and price-stability goals are realized. This view suggested that the current accommodative monetary policy will remain appropriate until the Fed signals otherwise. Prior to the minutes, Dallas Fed President Kaplan said the Fed can start withdrawing emergency measures once the country has moved on from the pandemic. Note, Kaplan won’t be a voting FOMC participant until 2023.
- One of the notable headlines yesterday came out of JPMorgan Chase (JPM 154.93, +2.39, +1.6%) CEO Jamie Dimon’s annual shareholder letter. Dimon said that an economic boom could easily run into 2023 but also cautioned about the “the not-unreasonable possibility that an increase in inflation will not be just temporary.”
- US 10-yr Treasury Bond yield increased 1 basis point to 1.68%. The 2-yr yield was unchanged at 0.16%. The U.S. Dollar Index increased +0.1% to 92.42. The currency markets have been trading in a relatively tight range recently as the market seems to be in a consolidation phase.
- S&P 500 (+0.2%) eked out a closing record high on Wednesday in another narrow trading session. The Nasdaq (-0.1%) and Dow Jones Industrial Average (+0.1%) finished within 0.1% of their previous closes, while the Russell 2000 underperformed with a -1.6% decline.
- In other developments, President Biden said he is open to compromising on the $2.3 trillion infrastructure package. Consumer credit increased by $27.6 billion in February — its largest increase since November 2017, and the CDC will reportedly allow U.S. cruises to resume operations by mid-summer with restrictions.
HEADLINES & MARKET IMPACT
Notable Snippet: President Joe Biden has championed raising the U.S. corporate tax rate to 28% from 21% as the main way to fund his $2 trillion infrastructure plan, but few people in Washington, including inside the White House, really think the rate will land there. The U.S. corporate tax rate dropped to 21% from 35% after the 2017 tax cut pushed by former President Donald Trump and his fellow Republicans, but many big U.S. companies pay much less. Increasing what companies pay into the more than $4 trillion federal budget is an important part of Democrat Biden’s plan to restructure the U.S. economy to reduce inequality and try to counter China’s rise.
THEMATIC CONTEXT: “We believe there is more than meets the eye in this development as America embarks on the grandest monetary experiment in the form of Modern Monetary Theory (MMT). In the grand scheme of this experiment, taxes are not needed to pay for the deficit spending (because in MMT, a government with a sovereign printing press can issue as much fiat currency as it wants), it is instead a feature used to control the after effects of such money printing. There are predominantly two ways to quell inflation if it runs hot. 1. Raise Interest Rates, making Government Bonds more attractive so money gets sucked out of the private sector, 2. Raise Taxes. 1. is politically inexpedient given that no one is more short USDs and bag holders of USTs than the US government itself with current Debt/GDP of more than 100%. This leaves the US with choice number 2. when push comes to shove and higher taxes in the US alone will cause a brain and talent drain as companies will find more friendly pastures to set up. The conversation that Yellen is having with the rest of the world is showing that the US on a sovereign level is systematically fragile at the moment and the release valve will have to be a much weaker USD.” — 6th Apr 2021
Notable Snippet: The U.S. Senate Commerce Committee will hold a hearing on April 14 on a bipartisan measure to bolster U.S. technology research and development efforts in a bid to address Chinese competition. The bill, titled the “Endless Frontier Act,” was first proposed in 2020 calling for $110 billion over five years to advance U.S. technology efforts and cosponsored by Senate Democratic Leader Chuck Schumer and Republican Senator Todd Young. Schumer said last month multiple committees will have hearings and mark-ups on bipartisan legislation “designed to bolster American competitiveness and counter the growing economic threats we face across the globe, especially from the Chinese Communist Party.” Schumer also wants to move legislation on boosting U.S. semiconductor production. Both proposals could total $200 billion, congressional aides said.
THEMATIC CONTEXT: “The aforementioned comments makes it clear why Taiwan Semiconductor Manufacturing (TSM) is expanding outside of Taiwan. A key piece of information that will fly over most people’s heads is the fact that TSM is expanding a very crucial and specific technology in Japan (fiercely staunch US ally), that is 3D manufacturing of semiconductor chips (a topic we covered in depth in our latest webinar). 3D manufacturing is the final frontier for advanced chip packaging technology and a key Intellectual Property know-how that will put US and western allies far ahead of current chip technology in China. With software eating the world and the next advanced civilization being built upon chips, we cannot greater stress the importance of these seemingly nuanced moves with deterministic implications for who might be the next superpower.” — 10th Feb 2021
COMMENTS/IMPACT: The tech race is on and we believe that the semiconductor industry in the US will be the beneficiary of targeted fiscal spending. We remain extremely bullish on the sector. Find out the specific stocks we are involved in to express this view.
Notable Snippet: Diplomats from major powers met separately on Wednesday with Iran and the United States to discuss how to bring both back into compliance with the 2015 nuclear deal that Washington abandoned three years ago. The deal’s remaining parties — Iran, Britain, China, France, Germany and Russia — agreed on Tuesday to form two expert-level groups whose job is to marry lists of sanctions that the United States could lift with nuclear obligations Iran should meet.
THEMATIC CONTEXT: “ Iran is back at the table and no middle-east diplomatic negotiations are without the threat to US Dollar hegemony (Iran has begun settling Oil in RMB. If the US doesn’t give in to Iran, it is likely that the ayatollahs will ramp up their oil sales to China settling in RMB, further disrupting the Dollar settlement flow in oil.). This is one to watch as Iran is a sworn enemy of Israel, but Israel is a staunch ally of the United States. Allegiance and friendships will be tested, along with Dollar settlement in oil and sharing of advanced technologies between Israel and the US.” — 5th Apr 2021
Phan Vee Leung
CIO & Founder, TrackRecord