The Daily Prophet: Bitcoin Goes Vertical, Wall Street Harrumphs

Connecting the dots in global markets.

Forget Donald Trump or the Federal Reserve. It seems the only thing Wall Streeters want to discuss is the meteoric rise in the price of bitcoin -- and not in a good way. The crypto-currency has soared above $2,200, more than doubling since late March. In fact, if you were lucky enough to buy $1,000 worth of bitcoins in 2010, you'd have $36.7 million today.

Even with that jaw-dropping performance, bitcoin is struggling to gain any respect. Brown Brothers Harriman came out with a report today eviscerating bitcoin and other crypto-currencies, saying they are currencies in name only because they contain a fundamental contradiction. According to the firm, if they’re a supposed to be an alternative to fiat currencies, they should be hoarded as a store of value. But if they’re hoarded, they can’t develop the critical mass of networking needed to fulfill the other functions of money, such as a means of exchange. Their volatility also means they're not a good store of value. Whereas bitcoin often moves 2 percent to 3 percent or more per day, the dollar usually doesn’t move more than 1 percent. To the extent that some retailers accept them is a bit of a novelty and marketing fluke, not confirmation of its currency status.    

"These are not currencies in any meaningful sense," Brown Brothers strategists led by March Chandler wrote in the report. "They are currencies to the extent that contacts on Facebook are friends and the 'grande' means medium size at Starbucks." About 16.3 million bitcoins exist, with about 1,800 new ones created, or mined, per day. That puts the size of the market at about $36 billion, versus the $5.1 trillion that typically trades daily in the traditional foreign-exchange market. Reasons for the rally vary, but include a decision by Japan last month to recognize bitcoin as a legal payment method as well as enthusiasts rotating out of riskier digital assets and into the more established crypto-currency along with the U.S. Securities and Exchange Commission's decision to review a ruling it made in March 10 that blocked a proposal for a bitcoin ETF.

It wasn't pretty, but U.S. stocks managed to eke out a small, 0.18 percent gain to stage their longest rally since February. The S&P 500 Index has risen for four straight sessions, the most since it gained six consecutive days between Feb. 7 and Feb. 15. With a strong earnings season now behind them, investors are wondering what will be the catalyst to keep pushing stocks higher. In one ominous sign, the biggest exchange-traded fund tracking the S&P 500 Index lost $16.2 billion in outflows over the last seven weeks, the largest drawdown for a period that long going back two years, according to Bloomberg News' Oliver Renick. Michael Hartnett, the chief investment strategist at Bank of America’s Merrill Lynch unit, figures stocks are poised for a “speculative overshoot.” Hartnett cited a ratio between the MSCI USA Growth Index, dominated by technology stocks, and the MSCI World Value Index of developed markets as an indicator, according to Bloomberg News' David Wilson. The ratio surpassed its March 2000 peak and set a record within the past month.

The bond market is sending some very mixed signals these days. A weekly JPMorgan Chase survey of fixed-income clients showed they are net bearish by the most since the start of 2017. Yet, the Treasury Department's auction of $26 billion in two-year notes drew the most demand in a year despite the consensus that minutes of the Federal Reserve's last meeting to be released Wednesday will bolster speculation that policy makers will raise rates again next month. Investors put in bids for 2.9 times the amount offered. Indirect bidders -- a class that includes pension funds and mutual funds -- bought 57.2 percent, higher than the 42.6 percent average at the previous 10 auctions. This week's auctions of coupon-bearing notes continue Wednesday with the sale of $34 billion in five-year notes before wrapping up Thursday's $28 billion offering of seven-year notes.

The market for U.S. natural gas may be about to break out of a rut, if hedge funds are to be believed. Hedge funds are the most bullish on gas since 2014, when prices rocketed to $4 per million British thermal units after a frigid winter depleted stockpiles of the heating and power-plant fuel, according to Bloomberg News' Naureen S. Malik. Money managers are betting that forecasts for one of the hottest summers on record will pan out, straining supplies as exports rise and production from shale basins stages a slow recovery. “People are incredibly bullish about the summer overall, that we are going to see a ton of demand and that it’s going to be a hot one,” John Kilduff, partner at Again Capital LLC in New York, said by phone May 9. “$4 is definitely possible in the July and August time period.” Gas futures for June delivery fell 3.3 percent to $3.219 per million British thermal units on the New York Mercantile Exchange, making  worst performer in the Bloomberg Commodity Index after sugar.


There's a tug-of-war happening with the yuan that illustrates the tension at the heart of China’s currency market. Almost every day, China’s central bank pushes up the yuan and traders push it down. Officials have used the daily fixing to guide the currency higher against the dollar for eight of the past nine days, surprising market watchers with its strength. That’s failed to inspire confidence in the yuan, which has closed lower than the reference rate on all but one of those days, according to Bloomberg News' Emma Dai and Tian Chen. As a campaign to cut risk in the financial sector weighs on the nation’s bonds and stocks, the authorities are keen to maintain stability in the yuan -- as expressed through the stronger-than-expected fixings -- and limit outflows. Yet, with the deleveraging campaign showing little sign of ending, and an economic rebound looking shaky, traders see a weaker outlook for a currency that’s still slumping against peers outside the dollar.

The big event Wednesday will be the release of the minutes from the Fed's May 2-3 meeting. The release of the May post-meeting statement was a relative non-event, as the decision to hold interest rates unchanged was unanimous and the economic assessment was straightforward -- attributing first-quarter economic weakness to transitory factors, according to Bloomberg Intelligence economists. Given the stable outlook at the time of the meeting, officials likely had extra time to evaluate scenarios to start reducing the central bank's $4.47 trillion balance-sheet, the BI economists conclude. The minutes are likely to reveal the results of additional staff analysis, as well as signal the evolution of officials' inclinations toward the timing and speed of any reduction.

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Vanguard's Irritating Perch on Moral High Ground: Jared Dillian

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