Stocks pick up some bid after textbook S&P 500 bounce

Morning Note

European stock markets were modestly higher on Thursday after a rebound in the US and another dip for Asian equities overnight. Hong Kong down 1.7% as casino stocks fell again, and is now testing the lows struck in July and August, down about 20% from its Feb peak. Indebted real estate group Evergrande fell another 7%. Gold struggled to hold the $1,800 level as Treasury yields climbed a touch. The dollar is a bit stronger after yesterday’s decline. 

 

FTSE 100 in the middle of the range after the decline of last week. Industrials and healthcare to the top, basic materials the only sector in the red. Ashtead is the top gainer, up 3%, after reporting Q1 revenues of £1.85bn and said it sees the full-year performance ahead of previous guidance. The company now expects growth of 13-16%, ahead of the 6-9% prior guidance. Rolls Royce also rallied 3% after the UK struck a security deal with Australia and the US to help supply the former with nuclear submarines. BAE Systems, another mentioned in the press statement from the government, also rose.

 

Buy the dip: The S&P 500 rallied 0.85% as it found support once more at the 50-day simple moving average, taking it back to where it was a month before – still down almost 1% MTD. The bounce off the 50-day line was pure textbook. Mega cap growth delivered, but cyclicals also got a boost as breadth was solid. Microsoft did some serious heavy lifting after announcing a mega buyback programme. The company will launch a share buyback programme of up to $60bn and raise its quarterly dividend by 11%. A mild gain for MSFT added almost 5pts to the S&P 500, even more to the NDX. Energy led the sectors with a gain of almost 4% as oil prices continued their ascent. Natural gas made another 8-year high. 

 

We’ve digested a couple of inflation readings this week and it’s clear it’s stickier than central bank Panglosses told us. It comes to down to there being too much money – aka liquidity – and not enough stuff to match. People can moan about the supply chain problems and labour shortages, and claim ‘there’s nothing the Fed can do about bottlenecks at ports, or ‘what can central banks do about chip shortages?’, but this is all about the inflationary environment unleashed by governments and central banks through their printing vast sums of cash during the pandemic and failing to suck it all back in afterwards. Instead, they run it hot in the vain quest for jobs when there are plenty of jobs out there, and let inflation get higher to eat into any wage growth and make people poorer. Meanwhile the asset rich get richer. 

 

I talked about this in May, referring to comments made a year before: “Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s.” 

 

Briefly: 

 

Ray Dalio on Bitcoin – if it gets really successful, they’ll kill it and they have ways to kill it. Neatly sums up my long-standing position. Price higher today, but the rally off the Monday dip is losing momentum as it runs into near-term resistance around $48,500.

 

Bank of Japan boss Kuroda – If necessary, BOJ will further relax monetary policy such as by reducing interest rates. The comments ahead of the government’s first cut to its economic outlook in 4 months. USDJPY steady around 109.30 after touching its weakest since Aug 17th yesterday.

 

Cathie Wood reducing Tesla exposure: A $3,000 price target on the stock, but Ark Investment Management has sold more than a million shares in Tesla in the last 5 months, according to a Bloomberg report. 

 

WTI is holding onto gains after briefly rising above $73 after the EIA reported US inventories fell by 6.4m barrels last week, though the impact of Hurricane Ida is to blame.  

Cryptocurrency update: Institutions ride correction into Bitcoin

More institutional investors entered the crypto world last March, helping support a sector some are still reluctant to back.

Cryptocurrency update

Wood suggests Bitcoin correction tempted institutions into crypto

Founder and CEO of ARK Investment Management Cathie Wood has said March’s cryptocurrency market correction was a buy signal for institutional investors.

Referencing on-chain analysis undertaken by ARK researchers and data from crypto research firm Chainalysis, Wood said institutions moved money into Bitcoin during this time.

According to Chainalysis, large institutional trading transactions, i.e., those transactions above $10 million, accounted for over 60% of decentralised finance (DeFi) market movements in Q2 2021. In Q3 2020, the share was more like 20%.

Institutions now hold close to $70bn in Bitcoin, according to research from Buy Bitcoin Worldwide. $40.1bn of that total is controlled by BTC asset managers. Of thee, Greyscale is the largest digital asset manager, holding around $31bn in the world’s most popular cryptocurrency.

Greyscale itself is an important vehicle for institutional-level investors looking for crypto exposure. It’s also interesting that Cathie Wood flagged how such investors made a move into digital tokens in March. She was very likely one of them. Wood’s own ARK Investment Management is the largest shareholder in the Greyscale Bitcoin Trust with a $350 million stake of 9 million shares.

Bitcoin itself broke above $50,000 for the first time in months last week. At the time of writing, it was trading for around $47,412, down some 2.76% on the day. The coin is eyeing support at $49,000.

We’ve seen plenty of institutional-level support from moneyed investors for BTC and other tokens across the past year. However, some are not so convinced of cryptocurrency’s validity as an investment vehicle.

Paulson goes hard on Bitcoin

Billionaire investor John Paulson has fired a few harsh words Bitcoin’s way.

Paulson, who gained notoriety as a subprime shorter back in 2008, has stated that cryptocurrency’s inherent volatility would put him off from “even shorting it”.

Speaking in an interview with Bloomberg, Paulson said Bitcoin and digital tokens are not an ideal store of value since they are a “limited supply of nothing”, and hold “no intrinsic value”.

Paulson went even further. The investor said he would not recommend investing in digital tokens to anyone.

“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless,” Paulson told Bloomberg. “Once the exuberance wears off, or liquidity dries up, they will go to zero.”

So, what does Paulson recommend investors put their cash into? The old standby gold. The talk of Bitcoin becoming the new “digital gold” has been floating around the markets for a while now, but many investors still prefer gold as a store of wealth over its upstart rival.

Some investors prefer the physical nature of gold, plus its inherent value, as making it a stable value store over cryptocurrencies.

Expecting increasing inflation to result in the metal appreciating thanks to it being regarded as a safe haven asset, Paulson heavily supports gold.

On-chain metrics could spell the return of BTC & ETH bull run

Despite Poulson’s protestations, there is a growing belief that Bitcoin and Ethereum could be about to stage another bull market surge.

Glassnode, a crypto and blockchain analytics firm, has said there is a tremendous crossover with today’s on-chain metrics and those seen in mid-to-late 2020 when cryptocurrencies began a fresh surge.

“As the Bitcoin and wider cryptocurrency market rallies higher, a remarkable on-chain divergence continues to form across both Bitcoin and Ethereum,” Glassnode’s latest Week-on-Chain report states.

“On-chain activity on both chains has remained quiet relative to bull market highs, even as price momentum continues upwards, and bullish trends in supply dynamics remain in play.”

Indicators that a new bull run is on the way are currently observable, including higher network participation and record transaction values.

Active entities on the Bitcoin blockchain are particularly noteworthy. Despite prices being near $50,000, these are still one-third below all-time highs but growing rapidly.

“It is notable that current activity on both chains is similar to the stable pre-bull accumulation range established in mid to late 2020,” Glassnode said.

“Whilst the divergence between price and on-chain activity is historically abnormal for a full-scale bull market, it is not an uncommon signature for the pre-bull, and pre-supply-squeeze dynamic,” the report continues. “These periods often accompany the end of bear market accumulation where the investors who remain, are the strong hands, those with the highest conviction.”

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