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By David Absolon, Investment Director at Heartwood Investment Management

Reflation has been the opening gambit in financial markets at the start of 2018. While global equity sentiment remains well supported by the stronger fundamental backdrop, the long-end of the US treasury market is turning increasingly bearish. It is telling that even after a disappointing January payrolls report, the thirty-year US treasury yield continued to edge higher, illustrating investors’ rising confidence in the US inflation outlook.

The key event to shift the bond market narrative is the Trump administration’s tax cuts, which received Congressional approval at the end of December. Reductions to corporate tax rates represent a large fiscal boost to the US economy, albeit temporary, and will significantly add to the US government debt burden. These measures come at a time when the US domestic growth is already benefiting from near full employment and rising capital expenditure.

With or without US tax cuts, we have held the view for some time that cyclical inflation pressures are rising. Higher oil prices are expected to have an inflationary impact on headline measures, as well as the feed through from the likely higher import costs arising from a weaker US dollar. More important, though, will be the culmination of several months of strengthening global momentum feeding into prices across developed economies. In our view, inflation is a lagged response to growth since stronger demand should translate into higher spending and, ultimately, higher prices. Specifically in the US, business surveys and regional bank surveys indicate that upside price risks are developing. Admittedly wage growth has been disappointing so far, but we expect that tighter labour market conditions will eventually feed into higher wage setting. Moreover, the recently approved tax legislation has incentivised companies to use their tax windfall to boost wages and/or distribute bonuses.

Adjusting to a more ‘normal’ cycle?

All that said, we are not suggesting that the US economy will see significantly higher levels of inflation as seen in prior periods of history. However, the nature of the current extended cycle of low-interest rates and low inflation is changing, and this trend is now being acknowledged by bond investors. As we enter a more ‘normal’ cycle, we expect central banks in developed economies to stay on a journey of withdrawing emergency levels of monetary stimulus and lifting interest rates. In this regard, the US Federal Reserve is ahead of the European Central Bank and the Bank of Japan. It is worth noting that despite five interest rate rises since the Fed began its tightening cycle in December 2015, financial conditions in the US have actually eased over the last year {Source: Chicago Fed National Financial Conditions Index}, so there is still some way to go, especially if inflation rises as we anticipate.

Looking forward, we should also consider the US treasury market’s vulnerability to supply and demand pressures. US Treasury selling in the last few days was further prompted by media reports that the Chinese authorities may reduce its buying of US treasuries. While these reports have since been denied, the US treasury market’s reaction is nonetheless indicative of its sensitivity to supply factors. This is particularly noticeable in an environment where we are seeing a regime shift among global central banks from quantitative easing to quantitative tapering. Reduced global market liquidity is likely to receive more market attention as the year progresses. With the Fed already reducing its balance sheet, the European Central Bank will end its asset purchase programme in September. Furthermore, this week the Bank of Japan announced that it will reduce longer-dated Japanese government bond purchases, contributing to both a stronger yen and higher domestic and US Treasury yields at the start of January.

As central banks step back from supporting financial markets, we expect to see more bond market volatility in 2018. Shorter dated US treasury yields had already moved meaningfully in the final quarter of 2017, but longer-dated bonds were still fixated to the low-interest rate and low inflation backdrop. Evidently this view is now shifting, and we believe that our longstanding underweight duration position in developed sovereign markets remains the most prudent stance.


European stocks mark best day in nearly four months after bond-driven rout



European stocks mark best day in nearly four months after bond-driven rout 1

By Sruthi Shankar and Ambar Warrick

(Reuters) – European stocks ended higher on Monday after bond markets stabilized from a sharp selloff last week, with travel and leisure stocks leading gains on optimism over COVID-19 vaccination programmes and a large U.S. stimulus package.

The pan-regional STOXX 600 index rose 1.8%, its best day since early November, after losing more than 2% last week. Travel and leisure stocks added more than 3%.

Data also showed manufacturing activity picked up pace in major euro zone economies in February, inspiring some confidence about an economic recovery this year, while a separate reading showed German inflation held steady in the month.

European stocks had retreated from one-year highs last week as the possibility of rising inflation and higher bond yields fuelled concerns over monetary policy tightening by central banks.

Accommodative policies and bumper stimulus measures have enabled stocks to recover from pandemic-driven lows last year.

Global stocks rallied on Monday tracking a pullback in yields, while the rollout of a third COVID-19 vaccine in the United States, along with progress towards a $1.9 trillion stimulus package, also boosted sentiment. [MKTS/GLOB]

“Equities should prove resilient, but the recent pick-up in real yields deserves to be watched. It is more toxic for highly valued risk assets, including growth stocks,” analysts at Generali Investments wrote in a note.

Overall, the analysts said they maintained “a moderate pro-risk tilt”, with potential pullback in stocks providing buying opportunities as economies look to re-open.

British stocks rose in anticipation of Finance Minister Rishi Sunak announcing more borrowing on top of his almost 300 billion pounds ($418 billion) of COVID-19 spending and tax cuts in a budget statement on Wednesday.

Homebuilders such as Persimmon, Taylor Wimpey and Barratt Developments were the top gainers on the FTSE 100.

Among other movers, Spanish travel booking group Amadeus topped the STOXX 600 as expectations of a 2021 recovery in travel demand drove a slew of price target hikes by major brokerages.

British Airways-owner IAG also jumped 7% on similar upgrades.

French food group Danone rose 1.4% after it said it was taking a first step toward selling its stake in its Chinese dairy partner Mengniu Dairy, and would use the gains to buy back its own shares.

Swiss-listed shares of computer goods maker Logitech International rose 1.6% after it raised its sales growth forecast to about 63% for fiscal 2021, up from the 57-60% range it previously expected.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Anil D’Silva)


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Crypto investments: how niche opportunities become mainstream



Banks need to start reporting crypto derivatives before it's too late

By Rhian Lewis, author of The Cryptocurrency Revolution

February 2021 marked some key moments in the evolution of Bitcoin. Tesla’s SEC filing on February 8 stating that it had bought $1.5 billion worth of Bitcoin and planned to begin accepting Bitcoin for its products marked the beginning of a busy week for the virtual currency, during which America’s oldest bank, BNY Mellon, announced plans to institute a custodial service. And that’s without mentioning the fact that February also marked the month that Bitcoin’s price rose above $50,000 for the first time ever.

Never mind the fact that only five per cent of finance executives say they would buy Bitcoin: this feels like a seismic shift in the cryptosphere. The mainstream media may be surprised, but for those who have followed the progress of Bitcoin since the beginning, this felt inevitable. Few analysts outside the crypto echo chamber would have predicted in 2010 – or even 2015 – that by 2021 assets such as Bitcoin (or even Dogecoin, Bitcoin’s meme-inspired baby brother) would have become mainstream, or that terms such as ‘mining’, ‘halving’ or ‘hash power’ would be referenced in non-specialist publications.

Perhaps it is worth stepping back and wondering which crypto products or opportunities that seem impossibly niche now will be hitting the mainstream in ten or even five years’ time.

Staking rewards and interest-bearing crypto accounts

One of the criticisms that many analysts have aimed at cryptocurrencies is that they offer no return, other than the speculative possibility that their price will increase. They do not return a dividend or interest.

Rhian Lewis

Rhian Lewis

This has begun to change, and investors with an appetite for some risk are now able to gain returns of around 8% APY. By committing your cryptocurrencies to a lending platform such as BlockFi or its many competitors, generous returns are possible. The down side, of course, is that the holder is making a choice to trade off security (holding their cryptocurrency themselves) against trusting a third party, which may or may not be regulated or insured, depending on the company and the jurisdiction.

Another way of making your cryptocurrency work for you is via a process known as ‘staking’. While various tokens offer rewards via this process, the big story around staking over the last couple of months has been about Ethereum, the best-known cryptocurrency after Bitcoin. While Bitcoin and Ethereum currently rely on the expenditure of computer processing power to record and validate transactions on their networks, a change to Ethereum’s software means that validation will be done in a different way. This update means that Ethereum 2.0 will use a process known as Proof of Stake, which requires the computers that run the software to lock up a certain amount of Ether to prove they have skin in the game.

While the sum required for this is offputting for many retail investors, at more than $60,000, some wallet providers and exchanges now allow investors to pool their deposits and stake smaller amounts. Interest rates can fluctuate but are expected to be around 7%.

Expect the word ‘staking’ to start popping up regularly in the personal finance pages of the mainstream press..

NFT Collectibles and Art

Collectibles such as trading cards have long attracted high prices at auction. A digital reproduction of an image – the 21st-century version of a trading card – in the past had zero intrinsic value, as it could easily be copied.

However, the technology behind Bitcoin that stops the same payment being made twice (the so-called ‘double spend problem’) can also be leveraged to register the ownership of a digital asset, and thus ensure that there is only one original, whose provenance can be verified.

These non-fungible tokens are most often registered on the Ethereum blockchain, and come in many different forms. CryptoKitties, a game in which collectors bred and sold virtual cats, was the first to take off in any meaningful sense, but has now been superseded by various others, including CryptoPunks. The most expensive CryptoPunks – tiny pixelated graphics – have sold for hundreds of thousands of dollars, surprising even seasoned crypto investors.

While some of these niche NFT products might be assumed to be in bubble territory, the idea of tokenized digital art has been quietly moving into the mainstream, and this month Christie’s will become the first major auction house to offer a digital work in this format (an artwork by Beeple).

Virtual real estate

Non-fungible cryptoassets come in all shapes and sizes, and while a traditional investment portfolio might contain land or commercial property, certain forward-thinking investors are snapping up land parcels that exist only in virtual spaces. This is not as strange as it sounds. The Covid pandemic has hastened the adoption of virtual-reality technology for workspaces, training, gaming and social networking, and in shared gaming and social experiences, virtual real estate in prime locations is becoming as attractive as property in the physical world, as businesses vie to set up shop in places where our digital presences will congregate.

Decentralized worlds such as Decentraland, Somnium Space and The Sandbox are attracting as much interest from investors and gamers, and prime land parcels such as those in Decentraland’s Genesis Plaza have sold for tens of thousands of dollars. It is worth noting that because these ‘land’ assets are registered on public blockchains as non-fungible tokens, they can be traded freely without the permission of a gaming company, which was not the case for the earlier generation of world-building games, such as Second Life.

Nothing is impossible

There are many other examples of areas where cryptoassets and blockchain technology are pushing the boundaries of financial products and investment. The whole area of decentralized finance ‘DeFi’, where users can create and participate in disintermediated financial services such as collateralized debt positions and swaps, would take many more thousands of words to explain.

As recent developments in the Bitcoin ecosystem have shown, investments that seem impossibly niche and fanciful now have a habit of gaining mainstream acceptance. Perhaps you would not pay thousands of dollars for a jpeg right now (neither would I), but it would not be wholly surprising if this becomes entirely normalized behaviour in the medium term.

Gartner source:

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Homebuilders, miners spur bounce-back in British stocks



Homebuilders, miners spur bounce-back in British stocks 2

By Shivani Kumaresan and Amal S

(Reuters) – British shares rose on Monday, led by homebuilders and miners on reports of more domestic fiscal support, while relative stability in bond yields also helped stocks recover from last week’s losses.

The blue-chip FTSE 100 index ended up 1.6%, its best session in two weeks, with homebuilders Persimmon Plc, and Taylor Wimpey plc among the top gainers after a media report that British finance minister Rishi Sunak was expected to announce a mortgage guarantee program as part of the budget.[nL3N2KZ2GR]

“A mortgage guarantee scheme for first-time buyers would be a better, more targeted policy than the blanket stamp duty holiday, to give a helping hand to those who otherwise might not be able to get on the housing ladder,” said Laith Khalaf, financial analyst at AJ Bell.

British Airways-owner IAG led gains in the FTSE 100 as optimism over a 2021 recovery in the travel sector spurred a slew of price target hikes.

The FTSE 100 fell 2.1% last week, snapping three consecutive weeks of gains as expectations of a spike in inflation and rising bond yields rattled sentiment.

But hopes of an economic recovery this year were pushed to the forefront as Sunak geared up to announce more borrowing on top of almost 300 billion pounds ($418 billion) of COVID-19 spending and tax cuts as part of his annual budget statement on Wednesday. [nL5N2KY08C]

British Prime Minister Boris Johnson also said the country’s economy could recover more strongly after the coronavirus pandemic than some “pessimists” had predicted.

The domestically focused mid-cap FTSE 250 index rose 1.5%, even as British manufacturers reported their slowest output growth since May last month due to supply-chain disruptions and rising costs linked to Brexit and COVID-19.

Ladbrokes owner Entain rose 2.3% as it raised its offer for rival sports betting firm Enlabs AB, valuing the Sweden-based company at about 3.7 billion crowns ($440.16 million).

Reach, publisher of Britain’s Daily Mirror and Daily Express, fell 8.6%, after reporting a 12.8% drop in annual profit.

(Reporting by Shivani Kumaresan and Amal S in Bengaluru; Editing by Subhranshu Sahu and Paul Simao)

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