Risk-On with Energy Leading the Way

Macro Perspectives: Mon 18 Oct 21

We ended the week with a broad "risk-on" mood for markets. This follows very strong earnings for the big banks this week. We are in the very early stages, but thus far, Q3 earnings are looking like Q2: a lot of positive earnings surprises. Positive earnings surprises are fuel for stocks.

That said, we came into the week knowing that the big banks were going to have blowout numbers. Thisweek, we should start seeing a more realistic picture on how "costs' are affecting businesses across industries.

The winning sector of last week was energy.

Crude oil closed on a higher high for the eighth consecutive week - the price of oil finished the week above $82. That means those producers that have survived the attack on the U.S. shale industry, can now sell oil for about double the price it costs them to produce it.

As we've discussed for the better part of the past year, the vow to kill fossil fuels in the name of climate action, only builds a moat around the existing producers.

Let's talk about bitcoin...Bitcoin was up 7% on the last day of the week, ending the day above $62,000 - driven by news that the SEC would approve a bitcoin futures ETF.

Now, back in 2017 Chinese citizens circumvented government capital controls using bitcoin as a way to get money out of China. China responded with a total ban on crypto trading activities (in China). The price of bitcoin initially plunged, and then proceeded to rip seven-fold higher. Three months later, bitcoin futures launched, which gave hedge funds a liquid way to short the madness - Bitcoin topped the day the futures contract launched. A few months later, it was worth 1/6th of its value at the top.

Fast forward to today. China has, as of September, declared bitcoin trading, or mining, illegal. The initial move on the news was down to below $40k. But now its up over 50% from the lows of three weeks ago and we have the announcement that the first bitcoin futures ETF was approved by the SEC and will begin trading on Tuesday. Is this another catalyst for a bitcoin crash?

Not likely.

The ETF structure will enable a large institutional audience to allocate to bitcoin. This looks like it may be another GLD like moment (spot gold chart below). When the gold ETF, GLD, launched in 2004, institutions piled in. It offered a unique way to allocate to gold, within the mandate of the long-only equity crowd. We will see if this plays out in a similar way.