Macro Monday: Is Bitcoin ringing the bell?

James Gerrish

Market Matters

Last week saw the ASX200 push to a fresh post-COVID high, finally ending the week less than 2% below its previous peak as local equities danced the bullish risk jig. Under the hood, we saw reversion towards stocks & sectors who enjoy a lower yield environment such as IT, gold and real estate but importantly there was relatively limited selling of the value end of town who usually outperform as interest rates rise i.e. banks and resources.

The choppy advance which commenced late last year remains intact with only the dip in the last week of January likely to have unnerved the bulls. At MM we are looking for a decent pullback over the ensuing months but there aren’t many indicators yet that we are correct.

MM continues to believe the ASX200 will follow the path illustrated below 

ASX 200

Bitcoin

Over recent months MM has discussed how the price of Bitcoin can often lead stocks primarily because it’s a great indicator of the free/speculative cash in circulation. The last 4-days has seen the major crypto plunge -20% in an almost stealth-like manner, if this correlation is going to remain true investors should be watching carefully for potential weakness in equities & risk assets over the coming days. At this stage, we believe that Bitcoin is set to correct the whole advance from late 2020, an ominous call for the new army of crypto traders/punters.

MM is bearish Bitcoin looking for ~20% downside

Bitcoin ($US)

Global Indices

The MSCI World Index has punched higher since the pandemic revelling in the lower interest rate & high stimulus environment, governments / central banks are in a hurry to reduce unemployment and lift inflation creating the perfect nirvana for equities. To add fuel to the fire many stocks/sectors of the stock market are performing strongly as the world slowly emerges from COVID, we feel it's going to need a clear change in the economic landscape such as rising interest rates to arrest this strong market undertone.

MM is bullish the MSCI World Index medium-term, but cautious short term

MSCI World Index

NASDAQ 

The tech-based NASDAQ has followed our forecasted roadmap and punched above the psychological 14,000 level however it’s what we felt would come next is cause for concern i.e. probably another ~15% correction as the market continues its 3 steps forward 2 back rhythm since March 2020.

MM is cautious US tech around the current 14,000 level

NASDAQ 100 Index 

Interest Rates/bond yields

US bond yields have started consolidating right on cue and we believe there’s more to come which theoretically should continue to help the growth stocks from a relative performance perspective. However, after being the major influence on equities this year we believe yields will now take a back seat and risk assets will look for another driver of prices, MM will be watching carefully to see what starts influencing risk in the months ahead.

Our “best guess” is the US 10-year bonds are set to consolidate between 1.4 and 1.9% over the coming months

US 10-year Bond Yield

Australian 3 & 10-year Bond Yield

The local yield curve appears to be struggling to stretch any further as rising longer-dated yields have started dragging the 3-years higher even while the RBA attempts to fix them closer to 0.1% – it’s this pledge by the RBA which has enabled banks to offer 3 & 4-year fix term mortgages below 2%. At this stage, until our central bank changes its tune we believe bonds are likely to go quiet for at least a few months but if the economy continues to improve yields will ultimately rise again eventually creating a headwind for the stock market.

Australian 3 & 10-year Bond Yield 

Currencies

The $US appears to have failed around 93.50 which we flagged as likely in recent reports, our preferred scenario is the greenback now weakens towards fresh 2021 lows ~88 before regaining its mojo. This view towards the currency implies US bond yields will continue to drift lower over the coming months.

MM remains bearish the $US medium-term


$US Index 

Australian Dollar ($A)

The $A remains in sync with bond yields and the $US targeting another break above 80c before MM would adopt a more neutral to slightly bearish stance – a great example of how financial markets act like an interlocking mosaic with a few major pieces dictating where the others fit into the puzzle, the dominant force tends to vary with market mood & sentiment.

MM remains mildly bullish the Australian Dollar

Australian Dollar ($A) 

Commodities

Commodities have largely continued to rally throughout 2021 even as the recent drift lower in bond yields implies inflation fears are diminishing – a case of yields having simply rallied too far too fast in our opinion. Although at MM we remain committed to the reflation trade moving into 2022 a pullback in base metals feels overdue following their 70% appreciation in just 13-months hence we are adopting a neutral stance from a risk/reward perspective in the short-term.

MM is neutral base metals at current levels

Bloomberg Base Metals Index

Iron Ore May Futures

Iron Ore has enjoyed a major ~20% recovery over recent weeks but equities don’t believe it with heavyweight producers Fortescue (FMG), RIO Tinto (RIO) and BHP Group (BHP) all languishing well below their respective 2021 highs. At this stage, we are neutral the bulk commodity following its strong bounce making it hard to imagine the sector will enjoy meaningful gains in the short term.

MM is neutral iron ore ~1100 CNY/MT

Iron Ore May Futures (CNY/MT) 

Copper ($US/lb)

Conversely copper has bounced recently but it remains ~5% below its 2021 high however the leading stocks in the space are making fresh highs for the year illustrating a very different belief to that with iron ore. Our best case with this influential base metal is we see a ~8% push higher to fresh 2021 highs before a period of consolidation – the common theme in today’s report being that a number of markets are due to follow bond yields and start consolidating/correcting their recent gains.

MM is bullish copper short-term

Copper ($US/lb)

Volatility

No major change with the index moving into our buy zone – The VIX (Fear Index) shows investors are becoming increasing complacent towards risk assets including stocks although not surprisingly we remain well above the pre-COVID levels. A wobble by equities could easily see the VIX pop back towards the 20 areas which have almost been a magnet in recent years i.e. 25% above where it closed on Friday.

MM looking to increase our exposure to volatility through the (VXX US) ETF

Volatility / Fear Index (VIX) 

Chart of the Week

Gold stocks have led a small recovery in precious metals which we feel will follow through over the coming weeks. However what we like the most with today's chart is the risk /reward, we are bullish with technical stops only 3% below Fridays close.

MM is bullish gold with stops below $1720

Gold ($US/oz) 

The Bottom Line

• Equities and related financial markets have followed our road map into what we believe may be an important juncture for 2021:

• We are now looking for a decent pullback by stocks over the coming months but no triggers have been pulled yet, other than a shot across the bow of Bitcoin.

• We still believe investors should be looking to accumulate stocks into this correction if it does unfold.

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Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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