Weekly Update - Mine Digital
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Weekly Update

July 12, 2020 • 
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Inflation may be increasing in markets with some strange trading for the week in USD, US Equities and the Chinese Yuan. We also saw strong inflows to tech.

The Numbers

Taking a look at the numbers, it’s hard to ignore the fact that it looks like the beginning of an inflation problem. Soft commodities were broadly bid and so was energy but basically everything was.

We had suggested this outcome back in around April, but had wondered if it would take a significant, second challenge in equity prices before the market finally accept the inevitability of total monetary expansion in the USD – with everywhere else forced to follow suit.

Given other price movements, it appears that geo-political risks are accelerating this outcome.

The Events

The last week saw some strange price action out of the gate Monday, where the S&P500 was bid hard from the futures open. The US Dollar was taken on (lower) and both assets had significant two-way action.

The Chinese Yuan strengthened against the USD – the fingerprints of the moves look Chinese. Technology stocks in China had been particularly bullish for the week beforehand (as they have been in the US), with digital assets finding strong and broad bidding across the space.

It looks like a new positioning, a combination of the devaluation of fiat currencies, and risk in holding both USD and Yuan, the geo-political risks of the Chinese and US confrontation and with the expectation of a permanent put to markets

We had suggested last week in our half-yearly report that China was under a lot of pressure given its restricted access to markets, and also with limited time before it begins to be replaced by other places in global supply chains and that they must make moves – potentially dramatic moves – in the short and medium term.

Gold traded towards the top of its trend-channel, which led us to believe that there is significant downside in equities. We first looked at the chart back in April and suggested that the high of the dead-cat bounce would show up in the S&P500 / Gold chart. When it turned around at the level, we took confidence in the framing of the market this way.

Because Gold has hit the top of its trend-channel, and equities have been well-bid, it makes sense that gold and equities comes off in the near-term, but, of course, we are also in an unusual set of circumstances.

With the potential for inflation emerging in the numbers this week you probably want to see Gold exit its trend-channel before being long equities in fiat currency.

Having framed our expectations for markets – this last week has had some interesting and strange moves, with some markets back and forth, wanting to do one thing but being pushed the other way (S&P500 pushed higher several times over the week but in the course of normal trading trending naturally lower, USD trading higher but pushed back into its down-trend to close the week).

It’s worth keeping an eye on the Chinese yuan, which could technically trade back to its technical level easily enough (the bottom of the trend-channel), as it has, but could have strange outcomes in an attempt to trade it outside of its natural technical bounds.

Bitcoin

With the high interest in digital assets recently, Bitcoin has been a major laggard. Knowing what it is – the asset has great potential for short and medium term bullishness and to radically reprice in a way that takes the market by surprise. Do the asset managers know this though?

In the context of the problems in fiat currency, of the end of globalisation, a second cold war with China and what looks like a terminal problem for the USD, Bitcoin is both a digital gold, an incredible asset for this exact moment, but it also gives access to the digital asset universe.

The market cap of Bitcoin at $170 billion is relatively small, and could be a multiple of that without raising an eyebrow here.

From the perspective of traditional institutional portfolio’s – an allocation here may still be treating digital assets like tech equities (which, frankly, they haven’t managed to fully understand either). With the fed actions appearing to be a perpetual and exponential feature in markets, and serious talk of a need to significantly depreciate the USD, with inflation threatening to do that anyway, the combination of factors will continue to send inflows to digital assets for some time.

Bitcon/USD on the Daily

Once the market accepts that Bitcoin is trading higher – probably when it gets back into its ascending triangle – it has the potential to trade all the way through these 3x resistance levels.

It will be interesting to see what it does if risk is reduced in portfolios. Bitcoin is, long-term, a risk-off asset, but is not being recognised as that yet in markets.

Options trades have collapsed the last couple of days in Bitcoin, with more puts traded than calls.

Volume

Volume was low for the week, which is very interesting considering the moves in digital assets, as well in tech in other places. We should consider the potential for an influx to Bitcoin if it manages to get the attention of this move into tech.

Sentiment

There has been little movement in this figure in the last month.

Bitcoin Dominance

Bitcoin dominance is down after breaking lower from its up-trend.

Money

Money has been an interesting study the last week, with significant pressure on the USD. Gold has not had the kind of move that confirms its place as an alternative money (nor has Bitcoin).

Gold

Gold has traded off of its trend-channel, completing several technical patterns in doing so. We think that gold trading lower the next week comes with a stronger USD and weaker equities and the opposite set of trades if markets go that way instead.

US Dollar Index

The US Dollar index looked like it was breaking out of its down-trend, before being shoved back into it to close the week.

This has been an interesting week for the asset.

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