Despite a record-high close on the S&P 500 last Friday, Asian equities edged lower, led by Korean markets. Chinese stocks continued to decline after having the biggest one-day selloff in 17 months on Thursday, as rising government and corporate bond yields signaled tighter liquidity conditions. Whether the selloff is a slight correction after a strong surge in 2017, or steeper declines on the way, remains to be seen. However, rising bond yields, particularly junk bonds, should keep investors worried.
Bitcoin, no signs of slowing down
Bitcoin continued to gather pace over the weekend rising to above $9,000, despite warnings of bubble being created in this relatively new asset class. From a fundamental perspective it is still almost impossible to give the cryptocurrency a fair value, however, there has been a strong correlation between the price of Bitcoin and number of users opening new wallets. It is not just retail investors showing interest in the cryptocurrency, but many hedge funds have decided to join the party recently by including Bitcoins in their portfolios.
Given that number of users haven’t exceeded 0.1% of the global population, there’s still more potential for this momentum trade to continue. Whether the price will be justified in the foreseeable future, depends on the adoption and the application of the new currency, but so far it still looks unstoppable.
On Thursday OPEC and Russia will finally end speculations on whether the deal to cut output will be extended beyond March 2018. Brent crude is undoubtedly pricing in good news and probably a little geopolitical risk premium. The 32.5% surge in Brent price from a year ago reflects expectations that production cuts will remain in play for 2018 and failing to do that, will have negative consequences. At this stage, I think that the upside in Brent should remain limited, if tensions in the Middle East don’t escalate. However, the downside move will look ugly if OPEC & Russia fail to show a strong commitment to extending the production cuts. Investors and speculators are sitting on record net-long positions and upsetting the oil bulls at this stage isn’t a good idea.
U.S. stocks and dollar awaiting tax reforms
Expectations of tax reforms, in my opinion, have kept Wall Street optimistic throughout the year and stocks at record highs. It’s time for U.S. policymakers to deliver, or the long-awaited correction will likely occur soon. The Senate is back from recess and President Trump will meet senators on Tuesday. At this stage, neither economic data nor monetary policy will be given a lot of attention. It’s all about fiscal policies, and without meaningful progress it’s likely to be painful for stocks and the dollar.