By Gerald Moser, Chief Market Strategist, Barclays Private Bank
Time to add to a portfolio?
There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.
While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.
And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.
Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.
The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.
Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.
In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.
An inflation hedge?
Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.
Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.
Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.
From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.
Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.
Cryptocurrencies are here to stay
Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.
And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.
Global stocks slide on inflation fears, dollar gains
By Herbert Lash
NEW YORK (Reuters) – The Nasdaq recovered as the bond rout retreated on Friday, but most other equity markets swooned around the world as data showing a strong rebound in U.S. consumer spending kept fears of rising inflation alive.
Shares of Amazon.com Inc, Microsoft Corp and Alphabet Inc edged up after bearing the brunt of this week’s downdraft to help the Nasdaq shake off its worst day in almost four months on Thursday.
The Nasdaq Composite advanced 0.56% while the S&P 500 slipped 0.48% after a late-session surge failed to hold. The Dow Jones Industrial Average fell 1.51%.
U.S. consumer spending rose by the most in seven months in January as low-income households got more pandemic relief money and new COVID-19 infections dropped, setting up the U.S. economy for faster growth ahead.
The benchmark 10-year Treasury note on Thursday shot to a one-year high of 1.614%, a move that rocked world markets. The note’s yield is up more than 50 basis points this year and is now close to the dividend return of S&P 500 stocks.
Yields on the 10-year note fell steadily throughout the session to trade 11.7 basis points lower at 1.3981%.
The amount of money swirling through markets and U.S. stocks at close to all-time highs has caused investor angst, said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.
“Many people are taking some profits and not necessarily reinvesting that money quite yet,” Kinahan said.
“The U.S. equity market is still the best game in terms of safety versus opportunity. But there is a shift going on.”
The scale of the recent Treasury sell-off prompted Australia’s central bank to launch a surprise bond-buying operation to try to stanch the bleeding.
MSCI’s benchmark for global equity markets slid 1.61% to 656.29 despite its large weighting to the U.S. tech heavyweights.
In Europe, the broad FTSEurofirst 300 index closed down 1.64% at 1,559.48. Technology stocks lost the most as they continued to retreat from 20-year highs.
The dollar rose against most major currencies as U.S. government bond yields held near one-year highs and riskier currencies such as the Aussie dollar weakened.
The dollar index rose 0.683%, with the euro down 0.9% to $1.2066. The Japanese yen weakened 0.31% versus the greenback at 106.55 per dollar.
Gold fell more than 2% to an eight-month low, as the stronger dollar and rising Treasury yields hammered bullion and helped it post its worst month since November 2016.
U.S. gold futures settled 2.6% lower at $1,728.80 an ounce.
Benchmark German government bond yields fell for the first time in three sessions but were still headed for their biggest monthly jump in three years after rising inflation expectations triggered a sell-off.
The 10-year German bund note fell 1.2 basis points to -0.271%.
European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.
Copper recoiled after touching successive multi-year peaks in six consecutive sessions, falling more than 3% as risk-off sentiment hit wider financial markets after a spike in bond yields.
Three-month copper on the London Metal Exchange (LME) slumped to $9,112 a tonne.
MSCI’s emerging markets equity index slumped 3.36%, its biggest daily drop since markets plunged in March.
The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.
Currencies favored for leveraged carry trades all suffered, including the Brazil real and Turkish lira, which slid for a fifth straight day, erasing all the year’s gains.
The heaviest selling earlier was in Asia, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since the market rout in late March.
Oil fell. Brent crude futures settled down 75 cents at $66.13 a barrel. U.S. crude futures fell $2.03 to settle at $61.50 a barrel.
(Reporting by Herbert Lash in New York; Additional reporting by Tom Arnold in London, Wayne Cole and Swati Pandey in Sydney; Editing by Nick Zieminski and Matthew Lewis)
Dollar gains on higher yields, risky currencies weaken
By Karen Brettell
NEW YORK (Reuters) – The U.S. dollar gained on Friday as U.S. government bond yields held near one-year highs, while riskier currencies such as the Aussie dollar weakened.
Yields have surged as an acceleration in the pace of vaccinations globally and optimism over improving global growth bolster bets that inflation will rise. That has also led investors to price in earlier monetary tightening than the Federal Reserve and other central banks have signaled.
The dollar move is “a function of what’s happening on the yields side,” said Jeremy Stretch, head of G10 FX strategy at CIBC World Markets. The 10-year yield briefly climbed above the S&P 500 dividend yield on Thursday, he noted, indicating “uncertainty that is writ large.”
The dollar index rose 0.59% to 90.847, its highest level in a week.
It gained against the yen, touching 106.69 for the first time since September.
The benchmark 10-year Treasury yield surged above 1.6% on Thursday for the first time in a year after a weak seven-year note auction. It was last at 1.45%.
U.S. yield increases have accelerated this month as Fed officials refrain from expressing concern about the yield gains.
“The Fed has not really hinted that that’s making them uncomfortable, so the bond market’s going to push that,” said Edward Moya, senior market analyst at OANDA in New York. “That’s really dictating this move in the dollar.”
Riskier currencies retreated. The Aussie fell 1.99% to $0.7713, after topping $0.80 on Thursday for the first time since February of 2018.
Marshall Gittler, head of research at BDSwiss, said the Australian dollar was underperforming despite the market signaling higher growth, likely because the country’s central bank’s yield curve control policy would restrain its bond yields from moving much higher. That, in turn, could limit the attractiveness of the currency.
The greenback is likely to continue to benefit from safe- haven flows if risk appetite continues to worsen, and emerging market currencies may be among the biggest losers.
“There’s a big, big concern that this reflation risk is going to get out of hand and that’s going to really pummel the emerging market currencies, and I think you’re going to see that investors are going to need to reassess their dollar positions,” said Moya.
Data on Friday showed U.S. consumer spending increased by the most in seven months in January, while price pressures were muted.
U.S. jobs data for February released next Friday is the next major economic focus.
Investors are also waiting on details of the U.S. fiscal stimulus bill, which is expected to be passed in the coming weeks.
The Democratic-controlled House of Representatives on Friday was poised to push through President Joe Biden’s $1.9 trillion coronavirus aid package, although it looked unlikely to be able to use the bill to raise the minimum wage nationwide.
The euro dipped 0.79% to $1.2078 after touching a seven-week high of $1.2244 on Thursday.
Bitcoin fell 0.32% to $46,946. Ethereum dropped 0.7% to $1,468.
(Additional reporting by Ritvik Carvalho in London; Editing by Dan Grebler and Andrea Ricci)
Oil drops on dollar strength and OPEC+ supply expectations
By Jessica Resnick-Ault
NEW YORK (Reuters) – Oil prices fell on Friday as the U.S. dollar rose while forecasts called for crude supply to rise in response to prices climbing above pre-pandemic levels.
Brent crude futures for April, which expire on Friday, fell 74 cents, or 1.1%, to $66.14 a barrel by 12:45 EDT (17:45 GMT). The more actively traded May contract slipped by $1.08 to $65.03.
U.S. West Texas Intermediate (WTI) crude futures dropped $1.42, or 2.2%, to $62.11. The contract was still on track to be up 4.8% on the week.
The U.S. dollar rose as U.S. government bond yields held near one-year highs, making dollar-priced oil more expensive for holders of other currencies.
“It’s a dicey time – it doesn’t seem like a time to load up on a risk-asset position,” said Bob Yawger, director of Energy Futures at Mizuho in New York, wary of a potential output increase from OPEC and allies at next week’s meeting. Also, the U.S. stockpile report this week showed a surprise build in oil inventories.
Friday’s gains also reflect profit-taking after both Brent and WTI headed towards monthly gains of about 20% on supply disruptions in the United States and optimism over demand recovery on the back of COVID-19 vaccination programmes.
Investors are betting that next week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+, will result in more supply returning to the market.
U.S. crude production fell in December, the latest month for which data is available, according to a monthly report from the Energy Information Administration.
Despite talk of tightening fundamentals, the demand side of the market is nowhere near warranting current oil price leves, they added.
U.S. crude prices also face pressure from slower refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week.
Refining capacity of about 4 million barrels per day (bpd) remains shut and it could take until March 5 for all capacity to resume, though there is risk of delays, analysts at J.P. Morgan said in a note this week.
(Reporting by Shadia Nasralla, Additional reporting by Sonali Paul in Melbourne and Koustav Samanta in Singapore; Editing by David Goodman, Louise Heavens and David Gregorio)
Robinhood plans confidential IPO filing as soon as March – Bloomberg News
(Reuters) – Online brokerage Robinhood, at the centre of this year’s retail trading frenzy, is planning to file confidentially for...
Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles
By Lewis Krauskopf NEW YORK (Reuters) – A shakeup in stocks accelerated by the past week’s surge in Treasury yields...
SoftBank reaches settlement with former WeWork CEO Neumann
(Reuters) – SoftBank Group Corp said on Friday it has reached a settlement with WeWork’s special committee and the company’s...
Sunak warns of bill to be paid to tackle Britain’s ‘exposed’ finances – FT
(Reuters) – British finance minister Rishi Sunak will use the budget next week to level with the public over the...
Exclusive: European officials urge World Bank to exclude fossil-fuel investments
By Kate Abnett and Andrea Shalal WASHINGTON (Reuters) – Senior officials from Europe have urged the World Bank’s management to...