Risk sentiment cooled a bit Tuesday on the heels of a six-session rally on Wall Street.
The narrative hadn’t changed. Reflation is still the story, even as evidence to support the notion that the developed world is anywhere near the cusp of a durable recovery that manifests in robust growth outcomes and “desirable” levels of real-world inflation remains scant, mechanical bounces in euro-area CPI and PMI anecdotes stateside notwithstanding.
The dollar retreated a third day and yields looked loath to extend the recent move higher consistent with “bond bear fatigue” ahead of the refunding, which is on deck and could conceivably inject some “excitement,” although I’m not sure that’s the right word. I doubt it’s going to make a difference, if by “difference” you mean something with the potential to break the range. Bloomberg pointed out that the US and German curves are the furthest apart in almost a decade (figure below).
Bitcoin continued to grab headlines. Tesla’s decision to add it to the balance sheet has the market pondering a bizarre scenario: S&P 500 investors are now exposed to Bitcoin, whether they like it or not.
Speculation that other blue chip US corporates will follow Musk down the yellow brick road is rampant. Bitcoin rose above $48,000.
All manner of crypto-related shares were higher both in the US and overseas. It’s hard to begrudge anyone their gains here. There’s a pseudo-fundamental thesis developing, albeit seemingly by accident. If enough large companies go down this road, it could stifle any regulatory push or at least ensure that regulation isn’t so onerous that it poses an existential threat.
Of course, across-the-board corporate adoption remains a pipe dream — for now. Nevertheless, what seemed totally ridiculous has been upgraded to merely far-fetched. And that’s saying something when it comes to crypto.
Still, there are hurdles. Tesla’s decision came despite Bitcoin “having recently been called a ‘funny business’ by the ECB; in the process of being banned in India; and [Janet] Yellen thinking cryptocurrencies are mainly used for illicit financing,” Rabobank’s Michael Every wrote Tuesday. “Central banks [are] planning their own national digital coins that will, if history is any guide, then preclude being ‘funny’ with your own made-at-home business,” he went on to quip, dryly noting that “you can print anything you like at home — except banknotes.”
For now, though, the only people laughing are the crypto proponents. It’s just a matter of whether it all ends in tears. I suppose I’d just reiterate that recent “wins” aside, there’s still something annoying (for central banks) about the idea of an alternative currency that isn’t a yellow metal.
Governments aren’t just going to cede their monopoly on the proverbial coin of the land without a fight. And importantly, they haven’t even begun to fight. So, this isn’t so much a “war” that Bitcoin is “winning,” as much as it is an amusing phenomenon that’s being allowed to persist. At the end of the day, conversion is still paramount. The y-axis on any Bitcoin chart is always denominated in dollars or gold or some other “real” store of value. That raises uncomfortable existential questions. Sure, you can make a chart of Bitcoin/Ether or Ether/Doge, but what do such charts actually show? Arguably nothing.
Anyway, it’s fun. Fun times. And funny business, too.
“US Treasurys hold the key to markets this week (and possibly for much of this year),” SocGen’s Kit Juckes wrote Tuesday. “With 10-year US breakeven inflation rates up by 24bp so far in 2021, and over 50bp higher than they were this time last year, you have start wondering how much further this move has to go,” he went on to say, adding that “breakeven inflation correlates better with headline than core CPI, and not that well with either to be fair, but surely such a huge rethink needs empirical support to keep it going?”
That hints at an important distinction folks have been keen to make lately: “Reflation” is just a trade until it starts to show up in the real world.