Energy had a good week this week. Most financial assets were flat on the week with the VIX relatively unchanged, but up from its low.
Soft commodities were deflationary during a time that fiscal stimulus is being discussed but withheld in China and the US. We expect that it is a tool for a weak market at the right time. There may also be a proper geo-political timing for it for China and the US.
In a fortnight where we had expected markets to get a bit strange, there has been some direction, biased towards risk-off. This direction could be the market trading longs out of itself and could also be a reversal.
53% of fund managers surveyed by shares magazine UK think that it has been a bear-market rally and recession expected in 46% of their respondents compared to 93% in April.
The big question is whether bearish sentiment takes the market back through the low or if February and March is simply shaken off.
In timing this market, it is worth remembering that it took 6 months to establish new lows after the initial shock in August and 12 months for the GFC to develop into total panic. This time there has also been over 20% of global GDP pumped into the global Economy as stimulus.
S&P500 During GFC
Against rationality and what ‘should’ happen, we wonder if the market now is likely to do nothing at all for the upcoming months – besides stopping out anybody developing short positions. It goes without saying that the market ‘should’ come off, but if it has become a zombie market, if most ‘rational’ holders exited during the chaos of February and March and did not re-enter the market, then the only real decision-making actors left are short-sellers.
So even though markets are broken, globalisation had definitively peaked 2018, China is antagonising its neighbours, a global pandemic, enormous social upheaval in the US and a cultural deficit in Western countries that is unable to interpret facts into any coherent narrative to create functioning reality, where does the panic come from if it hasn’t already set in?
Risks worth monitoring could show up early in the US Dollar, Chinese Yuan, debt-contagion scenario’s (a low cash-flow environment with potentially rising costs (although things are looking more deflationary right now)) and financial system liquidity requirements. Risk-takers could probably withstand emerging market default but not corporate default – and the Fed is buying corporate debt.
So do we take a deranged path back through the high before developing a stronger consensus that all is not well? We think that if the next week is bizarre – if the S&P500 fails to definitively selloff, that it rips back to stop-out shorts, and that a process like this continues until it breaks the high and establishes a firm consensus after things deteriorate further.
With many assets enjoying inflated prices, decentralised finance tokens have been performing well the last week, suggesting some cut-through to institutional finance, with Compound and Aave both highly performing tokens. It looks like the early days of a broad buying of digital assets as ‘alternative investments’. It is a vote of confidence in digital assets, but also a search for new investments given the state of capital markets.
China got what they want the last week, where after antagonising most of their neighbours the last couple of weeks upto 60 Indian and Chinese soldiers were reported to be killed in hand-to-hand combat, an incredible number of casualties of this type of confrontation. On the Indian side, Modi’s India is ascendant and is highly unlikely to back-down from a Chinese threat.
Although the self-conception of the CCP has not changed, with the rest of the world increasingly seeing China as a bad actor we saw the Australian government give Australia a warning over Chinese cyber-attacks. This is potentially to act as a premise on limiting Chinese access to the internet worldwide. After being limited from world trade in trade wars, from global commerce in non-Chinese corporations moving into China and the global financial system in the crackdown in Hong Kong, the internet is likely the next channel through which to limit the ability of the communist party upsetting the global order.
Bitcoin has been very quiet in the last week, trading sideways for most of it and recently breaking out of its down-trend.
The framing we like for the asset is as a rising wedge, that was broken out of to the downside. However after establishing a down-trend, it has formed an inverse head and shoulders of sorts. It may be the case that the asset is almost ready to make a move.
Bitcoin USD Chart
Volatility has dropped off significantly for Bitcoin
Crypto sentiment has declined over the last week
BTC dominance continues its creep along its trend-line. It is hard to know what to make of its reluctance to move – whether it precedes a drop or a bounce.
Gold made an interesting move during the week, rejecting lower prices and trading back to the resistance level we highlighted last week.
US Dollar Index
The US Dollar has continued to retrace its selloff in late May. We expect that it is far too early to call the end of the move, but it is noteworthy that the US Dollar appreciated as Gold traded higher.