Europe’s Momentum Crash

Not only did the Federal Reserve cut interest rates last week, but on Tuesday, the Chinese launched a bazooka of the financial kind. They pledged to cut rates by 0.5% and potentially another 0.25%to 0.5% later in the year. There was also a 0.5% cut on interest rates for existing mortgages and a reduction in the downpayment to 15% for home purchases. There’s also a $113 billion stabilisation fund for the stockmarket, and liquidity facilities for financial firms. (HT Macro Strategy Partners).   

Not everyone was convinced, as China has longer-term issues such as malinvestment, an ageing population, and an economy that needs to see higher consumer demand. But as with all financial bazookas, the markets took it well, with asset prices jumping around the world. Renowned hedge fund manager David Tepper took to CNBC saying he was “buying everything”.

Here in Europe, it caused a momentum crash, whereby many of the lagging assets (red) jumped ahead of the prevailing leaders (blue), causing a momentum crash (black winners relative to losers). This isn’t a stockmarket crash but a rotation within. In this case, growth stalled while value surged. The 20-year chart doesn’t show the move particularly well, but the black line is maybe telling us something. The last great momentum crash was in late 2020, as the market started to price in the end of lockdowns.

European Momentum Crash

One thing I love about financial markets is they are full of surprises, and you never stop learning. Until this week, I had little idea that the European momentum effect was inversely correlated with Chinese equities. Whenever China has been doing badly, European investors bought growth and defensive stocks, ignoring commodities and cyclicals. Since China’s stimulus package on Tuesday, the Shanghai CSI 300 has surged, mimicking the inverse of the momentum effect. This means that the cyclical trade has become highly correlated with China, probably because that has been the primary source of global growth for the past two decades. These things are always so obvious in hindsight.

Chinese Equities and European Momentum

Not only did Chinese equities rise but so did silver, gold, copper, Bitcoin, and even the House of Gucci (Kering), which I was rude about last week. I’m not sure President Xi intended to stimulate bourgeois fashion, but commodities and hard assets took it well.

Beneficiaries of Stimulus

A Week at ByteTree

In another busy week, ByteTree Research had an unusually high focus on Bitcoin and Gold, even by our standards. With markets on our side, if not now, when?

If you want to do the ByteTree Marathon this weekend, there are seven pieces of research. Starting with gold, I did my monthly update of Atlas Pulse (free to read) last week, which will set the scene. Then, in The Multi-Asset Investor, I wrote about junior mining and blockchains, with two new trades.

In ByteTree Venture, I carried on my search for undervalued miners and came up with two more to add to the four we already held. One was an explorer sitting on a vast deposit, and the other, a more conservative and long-standing company with a bias toward silver.

In my monthly ATOMIC (free to read) on Bitcoin, I discussed the seasonality and the likelihood of a strong fourth quarter. As I write, Bitcoin is $66,297, having been $52,856 three weeks ago. Clearly, I am not the only one thinking that. Also in crypto, ByteFolio discussed the “ETH-killers” NEAR and Solana, alongside the DeFi platform Aave and more. In our opinion, crypto will also enjoy a bull market, with Bitcoin leading the way.

If that’s not enough, in the Adaptive Asset Allocation Report, Robin and Rashpal told us how the Fed went big. They are focused on the strongest trends in financial markets, and they too are fans of gold. But they warned of a soft patch for US markets, which have been on fire this year, as the election looms. Their insights are always fascinating.

Elections must be tough for politicians because you must be careful what you say. This is a tweet from the current UK Prime Minister in 2019.

These things can bite back.

Have a great weekend,

Charlie Morris
Founder, ByteTree