1

THE

INTANGIBLES

Interest Rate Hike

Page 2

Bitcoin’s Wild Ride

Page 4

Oil Update

Page 7

March 2017

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On March 15, 2017, the Fed (Federal Reserve) raised the interest rate by 0.25% from 0.75% to 1%. The rise was prompted by the extremely strong economic performance by the US economy earlier this year.

The Fed is an organization that ensures that the US economy is developing at a healthy rate by implementing their monetary policy by using their financial instruments such as the Federal Funds Rate (interest rate). The Federal Funds Rate is “the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight,” (Investopedia). This implies that a change in the interest rate affects how easy it is to borrow money and how much money is in the economy which would either slow down economic growth or to stimulate economic growth depending on whether the interest rate rises or falls.

The reason for the whole idea of changing the interest rate is very intuitive. If the economy is growing at a very fast pace, the risk of inflation and a rising CPI is extremely high which becomes unhealthy for the economy as a whole if left unaddressed. In the case of rapid growth, the Fed will usually raise the interest rate to control the money supply and keep inflation in check. On the other hand, if the economy is extremely slow, the Fed often lowers the interest rate to encourage borrowing and spending to stimulate the economy. In this case, the Fed raised the rates after an extremely strong January and February economic results.

Since Donald Trump was elected as the President of the United States, the US economy has been performing very well due to the New Yorker’s pro-growth fiscal policies and plans. The US added about 298000 private sector jobs in February which is the most since April 2014, added 235 000 jobs in the first monthly payroll, lowering the unemployment rate to 4.7% from 4.8% in January 2017; hitting a 44 year low. However, inflation is often an issue with rapid economic growth. The CPI climbed at an annual rate of 2.5% in February which is the greatest increase in any 12-month span in the past 5 years which is a strong indicator of heavy inflationary pressure. Meanwhile, the annual wage growth rate is running at 2.8%. Due to these strong inflationary indicators resulting from an extremely strong February performance, it is no surprise that the Fed chose

to raise the interest rate.

What does this mean for the market and the near future? For starters, since a higher interest rate increases the opportunity cost of borrowing money which in turn increases saving (since it is much harder to obtain money to spend with a higher rate), the value of the USD may rise. However, the interest rate is only one factor in the value of the USD and there are numerous extraneous factors that can affect the greenback so a rise in the USD is certainly not guaranteed. For example, the days following the interest rate raise saw a significant drop in the greenback since the Fed announced that it would only gradually increase

Interest Rate Hike

Above: Civilian unemployment rate

https://www.theguardian.com/business/live/2017/

mar/10/markets-await-key-us-jobs-report-ahead-

of-fed-rate-decision-business-live

Above: CPI Price Index

http://www.tradingeconomics.com/united-states/

consumer-price-index-cpi#

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the interest rate raises, giving it a more dovish tone.

A rise in the interest rates also affects the value of safe haven assets like gold and silver since they are often hedged against the USD. Commodities may also see a rise in prices since USD is now harder to obtain and most commodities are traded in USD. The equities market may also take a tumble in the following days since it is much harder for them to obtain funds, pay back debt (in USD), and obtain the factors of production (if they are in the form of commodities) at the same price. However, bear in mind that these effects only happen in theory when the interest rates rise (with a hawkish Fed) but it is really the tone of the Fed’s moves determines what the overall effects on the market.

The overall effects on the market depends on the tone of the moves and the general outlook on the Fed’s actions and the rationale to support it. For this move, although the interest rate increased to fight inflation, it is not exactly a hawkish move. The Fed expects to raise the interest rates two more times in 2017 and Janet Yellen announced that the Fed will be gradually raising the interest rates to help keep the economic growth healthy. This raise is simply an indicator of the confidence in the American economy rather than a move to solely fight off inflation. In fact, the hike itself is seen as dovish instead of hawkish from Yellen and the Fed’s outlook on the monetary policy.

Due to the dovish tone of the Fed’s most recent move, our analysts at FARMSA expect the movements in the USD, equities, and the commodities to move in the opposite direction of the expected theoretical impacts of the raised interest rates. This is due to the fact that the interest rates could have moved much higher at a much faster rate but the outlook for the long run is a series of slow but gradual increases rather than a few drastic increases. This shows that the dovish outlook is prevailing during a time of phenomenal growth, implying that the interest rate is much lower than what it should have been, had the outlook been hawkish. For more information on interest rates and the theories behind the interest rate, check out FARMSA’s January edition for more information.

Definitions

Hawkish - favors relatively high interest rates to keep inflation in check

Dovish - favors low interest rates based on the belief that low interest rates increase employment and economic growth

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The financial markets have gotten off to a flying start in 2017 with the Dow Jones Industrial Average winning its battle with the resistance level at 20000, the S&P 500 Index reaching new highs and Bitcoin also managing to create a new high. Bitcoin started off the year with huge swings in both directions including an 18% surge in just the first four days of 2017, before crashing 32.2% the very next week. A financial instrument as volatile as Bitcoin can provide many opportunities for day traders, derivatives traders, swing traders and high-risk investors.

What is Bitcoin? Bitcoin is a cryptocurrency created by an unidentified programmer(s) who goes by the pseudonym, Satoshi Nakamoto. A cryptocurrency is a digital asset that can be used as a medium of exchange. Some examples of cryptocurrencies are: Bitcoin, Dogecoin and Ethereum. As of March 12th, 2017, Bitcoin had a market capitalization of $19,775,038,203 which accounts to roughly 81.6% of the total cryptocurrency market. There are currently 16,212,237 Bitcoins in circulation.

Bitcoin may seem like an interesting gimmick but it has several key benefits when compared to traditional currencies. The first benefit is that large Bitcoin transfers can potentially be faster than with traditional money. For example, a wire transfer may take a couple of days while a zero-confirmation Bitcoin transfer is a matter of milliseconds. If a confirmation is required, it may take around 10 minutes if done quickly or 1 hour if completed slowly. Other significant advantages of using Bitcoin is the lower transaction fees, the absence of chargebacks for merchants and privacy. Bitcoin is also accepted by many merchants such as Expedia, Shopify, Dell and the Sacramento Kings.

The most intriguing property of Bitcoin is its controlled supply. With traditional currency, usually, a central bank issues currency and determines the rate and size of growth of the money supply. For example, in the United States, the Federal Reserve acts as the central bank and issues currency which increases the money supply. With Bitcoin, there is no central authority that regulates the monetary base and currency is created by the nodes in a peer-to-peer network. Bitcoin has a generation algorithm which defines how much currency will be created and at what rate. This algorithm determines how

much currency is created in each block which is mined which follows the following formula on the side. This algorithm makes it so that the number of bitcoins generated per block decreases roughly at a rate of 50% per 210,000 blocks. This algorithm was also chosen because it approximates the rate of how other limited medium of exchanges such as gold are mined. The algorithm also ensures that the total number of bitcoins can not exceed 21,000,000 which will be reached at around the years 2110 to 2140. After this amount is reached, no more Bitcoin can be created. An advantage to this type of system is that it has a much lower inflation risk in comparison to a traditional currency like the American Dollar.

Bitcoin had a strong start to 2017. Within the first four days of 2017, Bitcoin already surged around 18%. However, in the next week it crashed 32.2% amidst concerns that China would start clamping down on the trading of Bitcoins. This news was pivotal to the Bitcoin because almost 100% of all Bitcoin trading is done in China. Furthermore, the largest Bitcoin exchanges imposed a 0.2% flat fee on all transactions which would hinder algorithmic traders. However, despite this setback, Bitcoin was able to slowly creep back up to around the price at the start of the year by the beginning of February.

Bitcoin’s Wild Ride

Left: Bitcoin’s

generation algorithm

Above: Bitcoin trading done primarily on Chinese

Exchanges

http://www.businessinsider.cm/bitcoin-trading-

china-yuan-remnibi-2017-1

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On February 8th, the People’s Bank of China(PBOC) held a closed-door meeting in Beijing with the nine largest Chinese Bitcoin exchanges in order to discuss money-laundering concerns. The PBOC also told the Bitcoin exchanges that it would close any exchange that violated rules on foreign exchange management, payment, and settlement. Speculators speculated that Chinese authorities were worried about Bitcoin being used to transfer money out of China. This meeting also greatly increased concerns that regulators would tighten their oversight in the trading of Bitcoin and other digital currencies. Bitcoin had started the day at a price of $1052.48 before reaching a high of $1070 which is a gain of 1.7% before reversing and dropping to $1025, down 2% from the start of the day before recovering and closing at a price of around $1050 which is similar to when the opening price. China’s three largest Bitcoin exchanges would have massive changes to their withdrawal policy the next day on February 9th. Huobi and OKCoin announced that customers were blocked from withdrawing bitcoins while BTC China stated that in order for customers to withdraw Bitcoins, there was going to be a 72-hour review. Huobi and OKCoin stated that they were doing this as they estimated they would need around a month to upgrade their systems in order to meet the new standards while BTC China did not give a time in which they would be able to upgrade their systems but stated they were working on it. The effects of these changes by the Bitcoin exchange were reflected on the market with Bitcoin dropping down to a low of $913.73(-13.1%) before eventually closing at $986 representing a daily drop of 6.25%. The next major event took place on February 23rd, 2017 as Bitcoin broke its previous high of $1163 from November 2013. The push that gave Bitcoin the momentum to break its resistance level of its historical high, came from speculation that the first Bitcoin ETF, would be approved by the SEC on or before March 11th, 2017. This ETF was submitted over four years ago, by Cameron and Tyler Winklevoss who were also at the heart of the Facebook lawsuit in which they were able to obtain $65 million. The approval of the ETF would make Bitcoin a lot more attractive to a major player on the financial market, the institutional investor. Traditional institutional investors have often avoided Bitcoin viewing it as a very risky, complicated and volatile investment along with a doubt in its inherent value. However, the regulatory approval of a Bitcoin ETF would potentially make Bitcoin much

more attractive to the traditionally cautious institutional investor market. Charles Hayter, the CEO of Cryptocompare, a digital currency analytics firm gave the following input on this matter, “If approved this would certainly give a dramatic condoning of bitcoin by the authorities and powers … Perhaps key would be the institutional money which would flow into bitcoin.” It is evident that Hayter believes that the approval of such an ETF would be a condoning of Bitcoin by the SEC and will bring in large amounts of institutional money into the Bitcoin market. Bitcoin would start the day at a price of $1130.02 and close at $1188.11. The decision for whether the Bitcoin ETF would be approved by the SEC was made on March 10, 2017. Around 7 A.M., Bitcoin surged to a new high of $1350 from $1198.49 at the beginning of the day in a matter of minutes representing an increase of 12.6%. At around 3 P.M., when the SEC published a report stating that they had rejected the Bitcoin ETF, Bitcoin dropped from a price of $1284.05 at the start of the hour to a low of $975 (-24.06%) in a few short minutes. The price would eventually stabilize at around $1120. After this setback, Bitcoin continued it’s strong upwards momentum by increasing around $100 over the next two days and closing at $1226.62. As Bitcoin looks towards the future, there are two more Bitcoin ETF’s set to seek the SEC’s approval in the upcoming few weeks.

Above: Timeline for Bitcoin

Above: Hourly chart for March 10, 2017. Notice

price changes at 7a.m. and 3.pm.

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Applying technical analysis to the monthly charts of Bitcoin shows us that the bullish momentum in Bitcoin is still very strong. The RSI of Bitcoin has been in a steady uptrend since September 2015 and there is no divergence of the RSI when compared to the price of Bitcoin which is a healthy sign as it means momentum is not slowing. The RSI right now is around 80 meaning it is overbought, but it is often required for the RSI to be in overbought territory for the stock price to have a prolonged uptrend. Furthermore, the MACD of Bitcoin had a crossing of the zero line in November 2015 and has been in a steady uptrend ever since which further confirms that the monthly bullish momentum is continuing. Despite there being confirmations of a bullish momentum, caution should be used around if trading bitcoin. One reason for this is a long-legged doji found in January 2017. A long-legged doji appears when the opening price is around the same as the closing price but there is a lot of price movement throughout the day as evidenced by tall upper and lower shadows. This doji represents indecision in the price of the security and can potentially foreshadow a future reversal of trend. Furthermore, due to an overbought signal in the RSI, caution must be exercised with the trading of Bitcoin which means the use of either hedging or stop-loss orders is greatly advised. However, stop-losses must be set far from the market price due to the high volatility of Bitcoin. In our opinion, the shorting of Bitcoin is very dangerous right now due to Bitcoin still having bullish momentum as explained above.

Definitions

Chargeback - A chargeback voids a credit card transaction, withdrawing funds that were previously deposited into the merchant’s bank account and applying credit to the consumer’s credit card statement. Institutional Investor – An entity which pools money to purchase securities, real estate and other investment assets. Some examples are banks, insurance companies, pension plans, hedge funds and mutual funds. (Long-Legged) Doji – A doji is a pattern found in a candlestick chart with the opening and closing price being virtually equal. It represents indecision in the market. A long-legged doji has long upper and lower shadows and represents great indecision. Shadow – The upper shadow represents the area between the body of a candlestick and the high price while the lower shadow represents the area between the body and the low price.

Above: Monthly chart for Bitcoin

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Oil prices have experienced a drastic decline over the past month, with the WTI plummeting about 13% from February’s high of USD$55 to around USD$48 to USD$49. Brent Crude fared no better as the major oil benchmark fell 11% from US$57.41 to under US$52 in mid-March. Oil prices were propelled late last year with OPEC’s agreement to cut supply (For more information on oil prices, read the January edition of the FARMSA newsletter) which resulted in a huge oil rally that continued for months, pushing the WTI and the Brent Crude through numerous seemingly unbreakable resistance levels. This sudden drop in oil prices comes as a shock to the predominantly bullish oil investors and traders since the expectation was for oil to stabilize at a mid US$50 to low US$60 price level. The decline reversed almost all the gains which oil enjoyed for the past four months and pushed prices back down to the pre-OPEC agreement levels.

So why has this been happening? The sudden decrease in the price of oil is a result of numerous factors (explained in depth in the January edition). The increased production from the US , the resiliency of the shale industry, and the huge oil stockpile that is slowly disappearing is the key driver behind this move. Oversupply has always been a huge issue and with the original oil cut, prices rose but with the rise of oil, investments in US oil increased substantially with US oil production. In fact, the domestic crude production increased 0.7% from 9.03 million barrels to 9.08 barrels in a week (in early March) while the US crude inventory is also up 7.7% at 528.4 million barrels from last year’s inventory levels and have increased for nine weeks in succession as of March 8, 2017. To make matters worse, Saudi Arabia raised oil production to 10.01 million barrels per day from 9.74 million barrels in January while Russia did not cut output in accordance with the agreed terms since their February outputs remained the same as January’s output.

With the severe inventory overhang and the rapidly increasing supply, the short-term future for oil seems very bearish since oil’s biggest drivers are its’ supply and demand fundamentals. To illustrate the severity of the oversupply issues, OPEC is considering on cutting supply for the rest of the year instead of finishing the supply cut in June as they agreed on last year. Intuitively, given oil’s volatility, this

announcement should have at least sparked a small rally in oil prices but oil continued to decline and fluctuate in a tight price range of around US$52 to US$50.50 for Brent Crude and US$48 to US$49.50 for the WTI. From a fundamental analysis standpoint, it is evident that oil is looking quite bearish in the short term as the world figures out how to deal with the large oil surplus.

From the price charts of the WTI and the Brent Crude, it is evident that oil was trading in a very tight range from mid-January to late February. In fact, the oil traded in the tightest range since 2004 in mid-February 2017. Brent Crude traded between US$55.60 to just below US$56 throughout the week of February 13 to February 17 while the WTI experienced a similar trend as it’s price fluctuated in the range of just under US$53 to US$53.40. The Bollinger Band for both the WTI and the Brent Crude did not contract or expand for the almost two months which is quite unusual for the technical analysis tool since it is prone to experience massive upper and lower movements from changes in oil’s price. The tight trading range illustrates the fact that for the past two months, there was a lot of uncertainty regarding oil and its future prompting the bears and the bulls to

Oil Update

Above: https://www.tradingview.com/chart/

jmoldDAP/

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react very indecisively. As the news of the alarming increases in US inventory and production came in, the OPEC’s progress was erased and prices fell. However, oil experienced another tight trading period in mid-March which is an indicator that uncertainty is still present.

However, despite the negative developments, most technical indicators have been giving a positive signal for oil since the drop caused the prices to fall below the lower bound of the Bollinger Band while the RSI fell below 30 before rising, sending a very strong oversold signal (buy signal). On a short term basis, oil seems to be holding steady with the WTI trading just under US$50 and the Brent trading at around US$52. On a long-term basis, it is highly likely that oil will rebound as the oil market is still rebalancing itself during this time of uncertainty. However, for the next few months, OPEC’s decision to continue cutting supply and the US’s supply conditions will play a heavy role in the price of oil and all the oil dependant industries and resources. For more information on how to estimate and predict oil prices, check out FARMSA’s January edition.

Definitions

Bollinger Band - A technical analysis tool that has 3 lines. The middle line is the 20 day moving average. The top line is the moving average plus one standard deviation and the bottom line is the moving average minus one standard deviation. The band is used to determine volatility as well as identifying potential buy and sell signals. One common trend for Bollinger Bands is the fact that a period of contraction (tight trading period with low volatility) is often followed by period of expansion (higher volatility with more and/or larger price movements) and vice versa.

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FACT SHEET Major Indices Ticker Open High Low Close

Change (Points)

Change (%)

Dow Jones Industrial Average DJI 20957.29 21169.11 20412.80 20728.49 -228.80 -1.09% S&P 500 Index SP500 2380.13 2400.98 2322.25 2368.06 -12.07 -0.51% NASDAQ NDX 5874.86 5928.06 5769.39 5914.34 39.48 0.67% Nikkei 225 N225 19226.94 19668.01 18973.75 19063.22 -163.72 -0.85% SSE Composite Index SSEC 3240.07 3283.24 3193.16 3210.24 -29.84 -0.92%

SPDR SECTOR ETFS Ticker Open High Low Close Change ($) Change (%)

Consumer Discretionary XLY 87.30 87.95 85.65 87.94 0.64 0.73% Consumer Staples XLP 55.13 55.50 54.41 54.74 -0.39 -0.71% Energy XLE 72.04 73.14 67.86 70.14 -1.90 -2.64% Financials XLF 25.01 25.30 22.98 23.93 -1.08 -4.32% Health Care XLV 75.44 76.75 72.33 74.57 -0.87 -1.15% Industrial XLI 66.43 67.19 63.55 65.33 -1.10 -1.66% Materials XLB 52.73 53.44 51.04 52.42 -0.31 -0.59% Real Estate XLRE 32.06 32.25 30.54 31.46 -0.60 -1.87% Technology XLK 52.67 53.66 52.33 53.41 0.74 1.40% Utilities XLU 51.03 52.23 50.50 51.11 0.08 0.16%

Equities Ticker Open High Low Close Change ($) Change (%)

Apple AAPL 137.89 144.50 137.05 143.93 6.04 4.38% Alphabet GOOGL 851.38 874.42 824.30 849.48 -1.90 -0.22% Microsoft MSFT 64.13 65.98 63.62 65.71 1.58 2.46% Amazon.com AMZN 853.05 877.06 833.50 876.34 23.29 2.73% Facebook FB 136.47 142.95 136.08 142.41 5.94 4.35% JPMorgan Chase JPM 92.79 93.98 85.23 89.03 -3.76 -4.05% Exxon Mobile XOM 81.70 84.25 80.31 83.70 2.00 2.45% Wells Fargo WFC 59.11 59.99 54.24 56.24 -2.87 -4.86% General Electric GE 29.98 30.43 29.25 29.87 -0.11 -0.37% Proctor and Gamble PG 91.05 92.00 89.59 90.20 -0.85 -0.93% AT&T T 41.78 42.70 41.26 41.76 -0.02 -0.05% Bank of America BAC 25.37 25.80 22.16 23.87 -1.50 -5.91% Pfizer PFE 34.27 34.75 33.72 34.35 0.08 0.23%

Commodities Ticker Open High Low Close Change ($) Change (%)

Gold XAUUSD 1248.05 1260.95 1194.86 1248.05 0 0.00% Silver XAGUSD 18.29 18.46 16.84 18.25 -0.041 -0.22% Platinum XPTUSD 1020.50 1027.40 932.56 947.81 -72.69 -7.12% Palladium XPDUSD 770.01 815.50 740.89 795.00 24.99 3.25% Copper XCUUSD 2.69675 2.75000 2.54291 2.64444 -0.05231 -1.94% WTI USOIL 53.97 54.41 47.03 50.75 -3.22 -5.97% Brent UKOIl 56.51 57.01 49.75 53.67 -2.84 -5.03%

Fixed Income Open Close Change(bps)

US Treasury 5 YR 1.982 1.961 -4.6 US Treasury 10 YR 2.435 2.416 -11.6 Canada Treasury 5 YR 1.111 1.121 1. Canada Treasury 10 YR 1.761 1.635 -12.6 Britian Treasury 5 YR 0.637 0.553 -8.4 Britian Treasury 10 YR 1.452 1.151 -30.1 Japan Treasury 5 YR -0.097 -0.139 -4.2 Japan Treasury 10 YR 0.094 0.053 -4.1

High Yield Corporate Bonds Open Close Change($)

iShares iBoxx $ High Yid Corp Bond(HYG) 88.18 87.809998 1.18022

Central Banks Previous(%) Current(%)

Last Change Date

Canada BOC Key Interest Rate 0.75 0.5 July-15-2015

US FED Federal Funds Rate 0.75 1 Mar-16-2017

Britiain BoE Official Bank Rate 0.5 0.25 Aug-04-2016

Europe ECB Refi Interest Rate 0.05 0 Mar-10-2016

Japan BoJ Overnight Call Rate 0.1 0 Feb-01-2016

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ABOUT THE AUTHORS Danny Jiang, Chief Editor

Danny is a first year Financial Analysis and Risk Management student at the University of Waterloo. With a passion for learning, and a love for exploration, he has been able to partake in many leadership experiences in and out of the University of Waterloo. During his high school career, he captained the track and field team, the math team, and coached the soccer team. He is currently a Research Analyst in the University of Waterloo’s Finance Association. In addition to his wide range of skills, Danny

was also a Senior Contributor at

givemesport.com, one of England’s most

popular online sports websites and has

extensive knowledge in journalism and writing.

He is also very passionate about the financial

markets and follows the major indices as well

as commodities such as gold, silver, oil, and

industrial metals. As the Chief Editor, Danny

hopes to further develop his interest for writing

while learning and sharing information about

the world of finance.

Steven Lin, Editor

Steven is a first-year student studying Financial Analysis and Risk Management at the University of Waterloo. He is preparing to specialize in Financial Analysis in his third year and pursue a CFA. He has taken previous leadership positions in high school such as an accounting and finance trainer in DECA and sport teams such as table tennis. Steven is very interested in the financial

markets and the field of trading. He follows the

NYSE and NASDAQ along with the underlying

options of stocks in those markets closely each

day and commodities such as oil and gold. To

help him grow in this field, he has read many

books such as Technical Analysis of the Futures

Markets. Steven has also completed his

Canadian Securities Course. Steven hopes to

further enhance and communicate his

knowledge about the financial markets through

the role of editor at FARMSA.