WHO LET THE BITCOIN OUT ?

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Jamie Dimon may well be eating his words over bitcoin. Adding to Jamie’s comments about bitcoin, Nobel laureate Stiglitz also fired a shot suggesting that bitcoin be outlawed for a variety of reasons.  Some of those reasons include regulatory oversight and taxation.

The attraction of bitcoin is that one can transfer money without middlemen or crossing spreads and it’s international. Which is why it also has become the currency of choice for criminal activity. Some of the drawbacks include security and what happens if fraud occurs. Given JPM spent some $3 bio on cyber security and were still hacked, one wonders how long it will be before bitcoin is hacked, but that’s another matter.

Yet bitcoin has all the attributes a trader loves. Today, bitcoin hit $11,000 in Asia but then tumbled 20% in just 5 hours. The reason being rather simple service outages. That’s just one of the issues with bitcoin. When a number of people want to exit, the system cannot handle the volume. Adding to its popularity,  bitcoin will soon be traded on NASDAQ.

On a day where bitcoin suffered a rout, the FANG stocks also were routed. The FANGs lost some $60 bio on the day. The reason for the rout was speculation that U.S. tax reform would have little benefit for these stocks. As such, investors rotated out of the FANGs and are investing in companies that will benefit from a reduction in taxes such as banks.

Adding fuel to the fire, Yellen, in her final address to Congress, suggested that the U.S. economy was now growing across a broad base. There is still no inflation and productivity remains low.  However, the Fed is expected to tighten in two-weeks’ time. The Beige Book showed the economy expanded at roughly 3.3% annualised for the third quarter which is slightly higher than the 3% initially reported.

After Yellen’s testimony, bonds sold off. The selloff can be attributed to the stronger than expected growth rate for the U.S. economy. There also was a causal link to the UK gilt market as long gilts sold off on an expectation that another rate hike is looming and the terms of the Brexit divorce loom. Gilts rose some 9 bp to end the day at the highest level for almost a month.

Of concern for the U.S. bond market is the pending tax bill. The deficit is expected to increase should the GOP pass the Tax Bill.  It is expected to blowout by $1.2 tr over the next ten years and add to the $20 tr of national debt. For the Bill to pass, the GOP requires at least 50 votes and with a 52/48 majority the GOP cannot afford to lose more than 2 votes.

There is now a slight revision of a tax cut for business, now 22% rather than the touted 20%. The bond market may start to focus on the looming debt ceiling which also needs to be addressed shortly.  The Democrats were able to extract some mileage last time.  So Pelosi and others may find it opportune to push the GOP hard to make concessions. This may well be why Trump tweeted the other day about no deal and why the leading Democrats did not attend the meeting at 3pm at the White House, Tuesday.

Recap:

Equities: The S&P 500 fell 0.04%. The Dow rose 0.43% the NASDAQ fell 1.4%. The Stoxx 600 rose 0.2%.

Currencies: The Bloomberg Dollar Spot Index gained 0.05%. The euro rose 0.2%.

Bonds: the 2-year rose to close at 1.76. The U.S. 10-year closed at 2.37%a rise of 5bp. The 30-year closed at 2.84 %. The 2/10 closed at 61.2, the 2/30 at 105.4 bp and the 10/30 closed at 43.70 bp. The yield curve steepened about 5 bp however this could be a little bit of profit taking on the curve mixed with expectations that the Tax Bill will be passed shortly.The European 10-year benchmark closes were, gilts closed at 1.34%, bunds at 0.382% and OAT’s 0.547%.

Commodities: Gold rose fell 0.7% and WTI fell 1.1%. Copper fell 0.7%.

Aussie Market Today.

Aussie bonds may well be sold today. With a spread of just 12 bp between U.S. 10-years and Aussie 10-years, either the currency gets sold or the spread widens as Aussie bonds are sold. It would be difficult for the status quo to remain for long at these levels.

The RBA remains concerned about growth and recently indicated that a rate hike is not on the agenda. That being the case, the Aussie dollar looks especially vulnerable. If the dollar is sold, then bonds can remain at current levels and even trade through the U.S.

There may be a flight to bonds following the recent launch of a missile by North Korea. Tensions have certainly ratcheted up.  However, this is more a nuance now rather than a concern. Expect a small rally if there is no major chest beating.Equity markets will continue to hold steady around current levels.

Geopolitical tensions have risen.  However, the markets now see North Korea as a minor irritant and missiles being lobbed over Japan look more likely to be treated as an irritant. North Korea could be an issue if it detonated another nuclear device.

Demand for solid investment grade credits look likely to continue as the hunt for higher yielding assets continues to gather pace. There a few new issues on the books at present and these should meet demand. Spreads look likely to grind tighter.

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