May 26, 2021
Volatile Month Crushes Crypto But Stocks & Bonds Are Unshaken
Market Recap & Boxscore
Markets whipsawed in May, with the S&P 500 swinging over 4% within the month. Despite the volatility and several events that could have sunk markets, the S&P 500 is ending the month in positive territory, up 0.3%. European strength helped power the MSCI World Index to a 0.7% gain. Financials, energy, and materials paced the TSX to a 1.25% return.
US Treasury bonds continue to consolidate since the 10-year yield hit its 2021-high in March at 1.74%. Similar to equity markets, which discarded negative news, US yields shook off the US inflation surprise. The Consumer Price Index jumped 4.2% for the 12-months ending in April. This was the sharpest slope since September 2008 and it briefly caused rates to reach 1.70% on 12-May-21. However, that benchmark settled back to 1.56%, as of 26-Mar-21. Bonds have been rising and falling in tandem with equities lately, which has temporarily impaired balanced strategies. The Bloomberg US Aggregate Bond Index is still down 2.2% this year, despite price gains in May.
Front and centre in May was the crypto crash of 2021. Newly minted Bitcoin bulls witnessed the value of their holdings fall by over 50% from the peak on 14-Apr-21. While Bitcoin was the main event, there was nowhere to hide across crypto world as alternatives such as Ethereum and Dogecoin also plunged 58% and 63%, respectively. There has been no shortage of narratives to justify the fall. For example, Elon Musk’s erratic tweeting which included his announcement that Tesla will no longer accept Bitcoin to purchase vehicle. Further, China announced on two separate occasions that financial and payment institutions were banned from facilitating crypto transactions. Additionally, the US Treasury demanded stricter tax reporting standards on cryptocurrency transfers.
Under-the-radar but perhaps most important were two additional factors. The first was around the long-debated backing of stablecoins, which are cryptocurrencies pegged to a specific instrument like the dollar, allowing for the benefits of cryptocurrencies without the volatility. They are also a key piece of plumbing within the $2 trillion global crypto market, facilitating transactions into and out of various cryptocurrencies without cash. The role of stablecoins resembles the traditional market liquidity function provided by money-market mutual funds. During May, Tether, the largest stablecoin, reported its holdings which back and maintain its USD peg. Rather than dollars or Treasuries as they had previously stated, it was reported that over half of its reserves were commercial paper of unknown issuers. This revelation cast doubt on Tether’s soundness and security as a mechanism for liquidity. The second factor was concern that companies such as Microstrategy (NYSE:MSTR) would selling their crypto holdings. Their well-promoted purchases helped stimulate interest in cryptos. However, MSTR and other buyers borrowed heavily to finance their investments. Accordingly, the market became frightened that lenders would pressure MSTR to sell its holdings to ensure that the loans could be serviced and recovered. So far there have not been any liquidity events and the peg on key stablecoins has held. The system appears to have passed this initial test.
Commodities had another eventful month. Starting with lumber, the futures market hit its daily limit (approximately +4%) multiple times but has since fallen 5.2% for the period. High prices seem to be its Achilles heel. Home builders are stuck with pre-sold homes that are now unprofitable to build. Also contributing to the record number of “homes-sold-not-built” reported in May, was the widespread shortage of appliances, doors, windows, moulding and other supplies.
High-flying grain prices pulled back in May. Corn fell 15% from its 10-May-21 high as China announced the cancellation of some imports. The soft commodity has been powered by seemingly endless demand from the Far East and record dry weather in the US and Brazil, which similarly has started to ease. Oil finished the period up 2.8%, but some of its strength waned as Iran readies sixty-nine million barrels of oil for export when U.S sanctions are lifted. Finally, gold is having a very strong month, up 6.9% to once again breach $1,900/ounce. It broke through its downward trendline since its August peak. Not surprisingly, the move corresponded to rates backing up a bit in May, while the USD also failed to appreciate. Surely the pace of future growth and inflation data, and in turn rates, will decide the extent to which gold continues its run.