Morning Comment - AFS Group
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Morning Comment May 20, 2021
Arne Petimezas • Some Fed Officials Signal Open to Taper Talk at ‘Upcoming Meetings’
Analyst • Crypto ‘Recipe for Disaster’ Keeps Bitcoin, Ether Under Pressure
+31 20 522 0244
a.petimezas@afsgroup.nl
• Like all the other market commentators, we cannot ignore the elephant in the
room that is yesterday’s crypto crash. Since crypto is outside our reservation and
since we are simply not able to track all these coins, we only refer to the
Bloomberg crypto index. At pixel time it was down 36% from its peak:
Page 1 of 5
Mind you, at the lows yesterday the losses were 50%. But apparently because of
a tweet of one Elon Musk, Bitcoin staged a miraculous recovery from $30,000 to
$40,000 or there about. That lifted the entire crypto universe.
• Apparently, with the benefit of hindsight some predicted the crash in advance:
We sincerely hope these folks became filthy rich on their bearish calls.
• We also read Bloomberg columnist John Authers’ excellent column on the Great
Crypto Crash of May 2021. He cited the Coinbase IPO, Musk’s SNL appearance,
the fallout between retail trader guru David Portnoy and Musk, yesterday’s
announcement of China clamping down on crypto and the increasingly
widespread prevalence of Do-It-Yourself coin minting, also known as creating
shitcoins as all signs of a top approaching. Now, notice how no one cites the
prospect of tighter monetary and/or fiscal policy.
• And speaking of central bankers, we reckon they are breathing a sigh of relief
that the bubble in crypto is deflating without them making the faintest attempt
of trying to prick it. Of course, we have already lived through one crypto boom
and bust back in 2017 and 2018. As the chart on page 1 shows, In early 2018 the
crypto universe, as measured by the Bloomberg crypto index, plunged by 66.6%
peak-to-trough.
• Thus, we have a hunch that crypto won’t die with this bust. No one expects fiscal
and monetary policy to become truly tight in – say – the first half of this decade. In
fact, the burden of proof is on those who claim that the monetary largesse Covid
unleashed will at least be partially reversed (it won’t). Thus, all the liquidity
sloshing around and the fiat money debasement claims will continue to fuel the
crypto mania.
• The problem with the crypto bubble is that it is effecting the real economy and
financial markets in a bad way. The notion that the parasitic ‘wealth effect’ from
inflating asset prices will spur real economic activity, was plain to see yesterday.
When crypto crashed, so did equities and bond yields. When more and more
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normal people join the frenzy or simply feel the urge to join – that’s the power of
a bubble – because of greed or the realization that it has become the only way to
get ahead in society, we have an epic policy failure. Everyone realizes someone
will have to pay for the deficits that governments racked up in response to the
pandemic. Assigning those costs can be transparent and as fair as possible by
raising taxes, or this way: by monetary financing of deficits and the tidal wave of
liquidity creating winners and losers in society in a rather unfair way.
• But back to normal business. Yesterday evening’s FOMC minutes suggest
tapering sooner might have a wee bit more support than Fed-speak would
suggest. We reckon there are three or four members wanting to announce the
taper in June or July: Dallas Fed chief Kaplan; St. Louis Fed chief Bullard; and
Kansas Fed chief George. There might be one or two more hidden hawks lurking
about. However, unless the bloc around Chair Powell has a change of heart or
simply loses its nerve because market excesses, or unless the May labor market
report shows job growth to the moon, it's unlikely the Fed will announce the taper
in June. Or July for that matter.
• Surprisingly, by June the ECB, Bank of England and Bank of Canada will probably
all have taken some modest steps in dialing back bond purchases. And that’s
despite US GDP growth strongly outperforming all these nations (bloc in case of
the euro area).
• An interesting titbit for us is that Fed is now really contemplating to make the
repo facility permanent as to prevent turmoil in the future (when the balance
sheet shrinks, if that ever will happen). However, right now the problem is too
easy policy. Nonbanks are piling into the Fed's reverse repo facility, and recourse
to the facility is at its highest level since 2017:
Page 3 of 5• Surprisingly, too easy money market conditions were not discussed by the
FOMC. There was only a mention of a market survey showing consensus
expectations of a technical rate hike at the June meeting.
• Looking ahead, economic data on tap include the now noisy US jobless claims
plus some second-tier data (leading index, Philly Fed survey). Today’s central
bank speakers include none other than ECB President Lagarde and her Chief
Economist, Philip Lane. As mentioned before, we do not expect them to weigh in
yet on rising bond yields as real yields have remained low enough.
Page 4 of 5TIME REGION EVENT PERIOD CONSENSUS PRIOR
09:30 Riksbank's Breman in Panel on Climate
10:00 Eurozone Current Account SA Mar -- 25.9b
10:00 Norges Bank Financial Infrastructure Report
10:30 Italy Current Account Balance Mar -- 3737m
10:30 Greece Current Account Balance Mar -- -840m
10:30 Portugal Current Account Balance Mar -- -52m
10:30 Spain Sells Bonds
10:50 France 0% 2024; 0% 2027; 0.75% 2028 Bonds
11:00 Ireland Sells Bills
11:00 ECB's Lane, Eurogroup Chief Donohoe Speak
11:00 Eurozone Construction Output MoM Mar -- -2.10%
11:00 Eurozone Construction Output YoY Mar -- -5.80%
11:50 France France Sells 0.1% 2032 ; 0.1% 2036 Linkers
12:00 Czech Rep. Sells Up to CZK5 Billion 182-Day Bills on May 20
13:50 ECB's Lagarde, Holzmann, IMF's Georgieva at Event
14:30 US Philadelphia Fed Business Outlook Index May 41 50.2
14:30 US Initial Jobless Claims May/15 450k 473k
14:30 US Continuing Claims May/08 3630k 3655k
16:00 US Leading Index Apr 1.30% 1.30%
16:30 Fed’s Kaplan Speaks
17:30 US Sells 4-Week; 8-Week Bills
17:30 US U.S. Sells 8-Week Bills
19:00 US Sells USD13 Bln 10-Year TIPS Reopening
SARB Announce Interest Rate May/20 3.50% 3.50%
Sohn Investment Conference in Hong Kong
Consensus data: Bloomberg News; All Times Are in Central European Time
AFS GROUP AMSTERDAM
The AFS Morning Comment only summarizes recent market movements and contextualizes upcoming political, economic and central bank
events. Any views expressed in the AFS Morning Comment are limited in scope. Under Recital 29 and Article 12(3)(a) of the MiFID II
Delegated Directive, such publications are considered a minor non-monetary benefit which can be freely distributed without charge.
AFS Group does not accept any liability whatsoever for any direct or consequential loss arising from the use of this document. This
document is for information purposes only and is not, and should not be construed as, an offer to buy or sell any securities or derivatives.
The information contained in this document is published for the assistance of the recipient, but is not to be relied upon as authoritative or
taken in substitution for the exercise of judgement by any recipient.
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