The increased spread in Volatility has led to a marked increase in United States, and European Treasury and Gilt bonds. This new phenomena which has been partially precipitated by the sell off in U.S. equities, has it’s roots in the high risk, high volatility Cryptocurrency markets. This new paradigm, I predict, could break way into a new pattern for this market cycle that favors higher Treasury Bond yields; lower equity prices, and equity yields in the United States; higher Commodity prices, and yields; whether or not the perceived bubble in Cryptocurrencies remains. Cryptocurrencies, a highly unregulated market are perceived to be trending higher than resistance levels which are demarcated at an aggregate of the top six(6) Bitcoin trading exchanges of $54,036USD. This is lower than the current real aggregate of the top six(6) Bitcoin exchanges which as of the afternoon of February 3rd, 2018 were trading at $55678.03USD. This is a perceived weakness in the global economy because of its highly speculative nature.
This perceived weakness, along with a marked enhanced United States Treasury Bond rates over just the last week alone has caused a rethink about the current U.S. economic cycle. The decline in equities over the last couple of trading days since the beginning of February, along with the continued strength in highly speculative financial instruments such as Bitcoin, plus with what the market has perceived as a rather robust Treasury repurchase round by the Federal Reserve on the 1st day of February of this year, has led to the overall story of the uptick in U.S. Bond yields. It is not only the perceived bubble in Cryptocurrency assets which is driving these market forces but rather a covering for these bets in relatively volatile, and highly unregulated assets, by rational buyers, both legitimate, and illicit, whom have turned to legitimate longterm assets, an order to cover the spreads of their bets in the Cryptocurrency markets, and also convert some of the monies which were formerly in the Cryptocurrency exchanges into real, tangible, longterm, stable assets. This calculated, and very prudent move by Cryptocurrency investors will have a longterm effect on Treasury Bonds, and their yields, for the foreseeable future.
This change is expected to take place and last, no matter what the eventual outcome of U.S. equities in this economic cycle are. This new paradigm has far and broad reaching consequences for the global economy which cannot yet be quantified.
Commodities and Bitcoin
One area where we may begin to see movement by more speculative Bitcoin, and other Cryptocurrency traders is in Commodities, and Commodity futures. If Treasuries continue to rise at rates which are expected to move at multiples of what they currently trade at in the coming years, you could start to see a move by traders into two main Commodity markets my research tells me: Oil, and Gold. A precipitous rise in Treasuries, and Gilt bonds in the UK could foreshadow a precipitous increase, and bubble in asset prices in the global Oil markets. A sharp rise in this asset could bring a positive bearing on U.S. and European Equity markets, however in the longterm, this move could foreshadow the end of the current economic cycle here in the United States, and the broader Global Economy. One(1) main driver of this outcome could be the Saudi debut of their Aramco IPO on what is expected to be a Saudi held exchange. Such a glut of an IPO in a sector that is already seeing highly speculative bets in its asset classes could precipitate a windfall for the Saudi’s and the Aramco IPO. Along with more boutique assets in the United States, and Europe, As well. And more speculative gains in assets based in Africa, South America, and Asia. Either way the Aramco IPO success has already been “baked” into the banking fees, and other associated trades which are largely anticipated. As mentioned earlier the Aramco IPO, which is expected later this year, would come at a time of increased speculative trading in Commodities in general, including Oil asset classes.
However if there is less speculative trading coming from the Bitcoin surge, and the covering trades instead go to more tangible, and longterm assets, then a surge in Gold should be widely anticipated. The most troubling outcome from this scenario is the prospect of a currency war, which could lead to a more destabilizing Geo-Political environment. Whatever the case maybe the outcome still remains the same for bonds: a permanent influx of currency into bond, and bond trading assets will invariably lead to an increase for the foreseeable future, in short, medium, and longterm bond yields.
Cryptocurrency Reform and Regulation
The added segue of Cryptocurrencies such as Bitcoin into the bond markets, and their invariable influence on bonds, and bond related asset classes, and how they influence the overall global economy will be the story of the year for 2018. The desire to reform, and regulate cryptocurrencies is their, however the need has not arisen as of yet, or at least there is no immediacy in the overall global economy to gain ahold of what has become a very valuable, but also highly speculative instrument. If we do not reform them while we can. We may bear a heavier burden for the cost of tarrying, when we cannot, and it maybe more difficult to find consensus on the topic of cryptocurrency reforms and regulation. The correct forum I believe, and that I have always believed is the Basel Forums. The entering into negotiations for a fourth Basel accord will become, I believe one of the most important events to have transpired in the world of finance since the Great Recession of 2008. In a perfect world these reforms would be a natural outgrowth of the changing dynamics of the Global economy. As such BaselIV should be pursued post-haste and with all expediency, if we are to capture the hearts and minds of the global investment community, and propel that sentiment into meaningful and lasting reforms for welfare of all in the Global Economy.