Friday, Feb 3, 2023

How central bank woes explain the crypto pull-back, why this is welcome, what Coinbase has to do with it all, and more...

“It does not do to leave a live dragon out of your calculations, if you live near him.” ― J.R.R. Tolkien ||

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MARKETS

Central banks are ignored now?

Yesterday we saw that the market’s lack of respect for central banks is not isolated to the US. Both the European Central Bank and the Bank of England raised rates by 50bp, both signalled more rate increases ahead, and yet bond yields fell. Italian 10-year yields dropped by the most in one day since March 2020. German 10-year yields fell by over 20 basis points in just four hours.

(chart via TradingView)

This largely explains the jump in the DXY, when, intuitively, other major central banks raising by more than the US Federal Reserve should have sent the index in the other direction. That dollar move could go some way toward explaining yesterday’s pull-back in BTC.

(chart via TradingView)

A slight correction in crypto doesn’t mean that “risk-on” sentiment is over, however. The handover from “value” stocks to “speculative” stocks continues (I’m using qualifying quotes here since both labels are somewhat vague), with the Nasdaq continuing to outperform the S&P 500, as shown by the declining SPX/IXIC ratio:

(chart via TradingView)

Nasdaq’s continued strength is in spite of the three Nasdaq anchors – Apple, Amazon and Alphabet – posting results that flagged weakening demand, which brings me to an unrelated observation: If economic cycles can play such a significant role in their growth prospects, should these assets still be considered speculative tech stocks? Maybe its time to treat them less like high-growth innovation plays and more like manufacturers, media companies or conglomerates. All have significant R&D divisions, but so do General Electric and Toyota. And future revenue from augmented reality, electric cars, etc., may be significant, but will for some time be dwarfed by the now almost commoditized main businesses of selling equipment, distributing consumer goods or serving ads.