Risk Ambiguity & Mild Inflation - Mine Digital
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Risk Ambiguity & Mild Inflation

November 23, 2020 • 
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The ducks are no longer in a row for risk after last week as new developments suggest a quieter, even slightly bearish end to the year.

Data

The numbers over the last week show inflationary conditions again for the week and a broader look at soft commodities shows that many assets have traded above their range, further building the case for inflation. Price levels (inflation) will begin to show their hand in December and January whether this is a permanent feature in markets and will begin to impact other assets in 2021 if it continues.

Capital Markets

The expected fiscal policy in the U.S. is being radically revised the last week.

In the lead-up to the election, there had been talks of a $1.5 upto almost $3 trillion spend on fiscal stimulus. A notable Donald Trump tweet on stimulus was to ‘go big or go home’ on the stimulus and Republicans wanted a lower stimulus while Democrats wanted a higher stimulus. Additionally, house Democrats in the U.S. passed a $2.2 trillion package in October.

So even in spite of calls by the U.S. Federal Reserve Chairman Jerome Powell for more fiscal stimulus as late as September the recent figures given for potential stimulus are much lower. Goldman Sachs analyst Alec Phillips expects a $700 billion stimulus while Mitch McConnell’s Republicans have signaled that their number is $500 billion. Meanwhile Treasury Secretary Steven Mnuchin is tightening the existing stimulus program created in response to the Coronavirus by asking for the return of funds and to close the spigot for programs that still exist.

Perhaps decision-makers may be starting to appreciate the gravity of expanding the money supply by over 20% in the U.S. in 2020, a figure that puts the US ahead of many African nations in expanding money supply.

Meanwhile, Alec Phillips wrote that ‘The longer Congress waits to pass further fiscal measures, the smaller the bill is likely to get’.

Another change we saw develop in the last week has been the potential Biden presidency making it clear that they would not pursue a nation-wide lockdown for the coronavirus.

On the presidency, and remarkably, the claims of fraud in the voting continue with extraordinary claims of fraud made by lawyer Sidney Powell that Tucker Carlson asked for and did not receive evidence of. This morning Trumps legal team have put some distance between themselves and Ms Powell with a statement that ‘Sidney Powell is practising law on her own’.

With a handful of superficial pieces of evidence on voter fraud, evidence of a systematic attempt at subverting the will of the voting public has not been produced and there is now likely to be open confusion on the side of Trump supporters trying to make sense of events.

Globally we are potentially seeing the beginnings of trouble in China in debt-markets. In a year that we saw a record level of new debt taken on in China (11% of GDP in new debt in Q1 and 17% – a record – in Q2) we also saw global demand stall, capacity shift to competitor nations and new structural inefficiencies in global markets on top of the trade tariffs.

Now in the fourth quarter 3 state-owned firms have defaulted on bonds within a short period of time.

The Chinese economic miracle required momentum – new capital into new growth – that it may not longer have. This in spite of opening debt markets to foreign investors recently and reporting having strong interest internationally, especially in Europe.

And on debt, and for similar reasons, it is hard to see how the rest of the world gets out of U.S. denominated debt without a much weaker USD. Depending on policy responses, the time is coming for these long-time coming issues to be resolved, and even with a coronavirus vaccine it is quite possible that 2021 is the year.

All in all we expect an air-pocket for risk for the rest of 2020 and early 2021 where positions are trimmed, liquidity is low, uncertainty still reasonably high and some bullish expectations must be reviewed downwards. 2021 could see extraordinary events, including the unbounded pursuit of risk but more information is needed on how things will play out.

Bitcoin

Bitcoin has recently rolled over near its high as the $19k number may be a bridge too far for now. It would take the asset 90% higher from September low to November high.

With a Citibank analyst making the news for implying a possible price of $318k by December 2021 and Bitcoin making headlines in major financial news publications in the last week, some traders are expecting the price to consolidate here, although the asset is capable of surprise.

BTC/USD Chart: Daily

The chart below shows the major technical levels in Bitcoin. The asset had cleared major levels between $13k to $14k before exploding towards highs. Bitcoin had been well controlled before this break-out move through selling volatility and holding the price lower for institutional accumulation. This type of market behavior could conceivably continue until early next year.

Digital Assets

There is already broad weakness in digital assets with the failure of bitcoin to make a new high this morning. Alts have had a great run the last week with Ethereum up 24%, XRP 62%, Link 18.5%, Cardano 43% and Stellar 27% amongst a fairly broad bullish market in alts. Some DeFi projects had underperformed this week but had already made their moves the week prior.

Volume

Daily volumes the last week have been reasonably high in BTC

With the weekly volume being amongst the highest weekly volumes in the last 6 months and November shaping up to be a high volume month.

Sentiment

With sentiment almost maxing out on this indicator it may be a good place for the market to consolidate its gains.

BTC Dominance

Showing a shorter time-frame this week, BTC dominance has turned around significantly, failing to get much higher than 67% as it approached $19k USD per BTC.

Money

Bitcoin has been the market darling for monetary store of value of choice the last month or two. The USD is still trading very low, threatening to break down lower in a significant way. It currently trades in a down-ward trend-channel.

USD

Gold

Gold has traded very weakly since failing to break higher at $1960. It could have been abandoned in the short-term for bitcoin as a type of money and will continue to be worth looking at – especially for early hints into unrestrained risk taking. In this case, gold could sell while the S&P500 is bid as the presidential election, fiscal and monetary policy are made clear, the coronavirus is overcome, the money supply has expanded at a record amount and there is significant funds on the sideline for risk into a ‘riskless’ environment.

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