Novum Alpha - Daily Analysis 20 October 2020 (8-Minute Read)

Tumbling into Tuesday and it turns out that investors have called Washington's bluff, betting that politicians will not be able to hammer together further pandemic stimulus before elections kick-off, sending markets reeling.

 

In brief (TL:DR)

 
  • U.S. stocks fell yesterday with the S&P 500 (-1.63%), blue-chip Dow Jones Industrial Average (-1.44%) and tech-heavy Nasdaq Composite (-1.65%) all down significantly.  
  • Asian stocks were almost uniformly down as a lack of stimulus from Washington is becoming more or less certain. 
  • U.S. 10-year Treasuries ticked up to 0.771%, from 0.743% (yields typically rise when Treasury prices fall) as investors stood on the sidelines. 
  • The dollar held losses versus major peers as uncertainty gripped investors. 
  • Oil continued to slide, with November contracts for WTI Crude Oil (Nymex) (-0.27%) at US$40.72 from US$40.83 as a crucial OPEC+ meeting made no mention of any changes to a plan to further ease output cuts from January. 
  • Gold pulled back with December contracts for Gold (Comex) (-0.24%) at US$1,907.20 from US$1,911.70 in the previous session as any prospect of stimulus fades. 
  • Bitcoin (+2.28%) rose sharply to trade at US$11,716, from US$11,300 as outflows from exchanges continued to outpace inflows but at a slowing pace (outflows suggest that traders are taking Bitcoin off the blocks in anticipation that price will rise). 
 

In today's issue...

 
  1. Tech Rules Everything, Including Energy 
  2. Intel Sells Its Memories
  3. Not Fed Up with a Digital Currency
 

Market Overview

 
With just hours to go before the U.S. House of Representatives Speaker, Democrat Nancy Pelosi's deadline for negotiations regarding a pandemic stimulus relief package, both the Democrat-controlled Congress and the Trump administration appear to be moving closer to a compromise. 
 
But outside of Bitcoin, other risk assets have been losing their shine, with gold and stocks tanking on dimming prospects that politicians will come forward with substantive relief or stimulus before U.S. elections. 
 
Let's not forget that these are the same people who allowed the U.S. government to shutdown on multiple occasions over the past few years, including the longest U.S. government shutdown (35 days) in history that led to furloughs of government employees. 
 
Asian markets unsurprisingly started Tuesday in the red with Tokyo's Nikkei 225 (-0.15%), Seoul’s KOSPI (-0.29%),and Sydney’s ASX 200 (-0.34%) in the red, while Hong Kong’s Hang Seng Index (+0.12%) was up marginally. 
 
1. Tech Rules Everything, Including Energy 
 
  • Solar energy is set to displace coal and oil is set to be displaced by electricity as the global shift of dominance in energy production has moved from oil to alternative sources 
  • Technology, not oil fields will determine the next giants of the energy industry 
 
After nearly a century, the decision to remove ExxonMobil (-1.99%) from the Dow Jones Industrial Average, the American blue-chip stock index, would no doubt have been seen by many as the end of an era.
 
Where once, oil executives were hauled before Congress to be grilled on their monopoly power, now tech executives are more likely to be facing the wrath of lawmakers.
 
Oil demand has been flattening for some time now, but the coronavirus pandemic has brought that fall in demand into sharp focus.
 
But it’s not like the world’s energy needs have decreased, it’s actually increased, it’s just that it’s not for fossil fuels such as oil and coal.
 
A recent forecast by the International Energy Agency (IEA) suggests that coal-fired power generation is in terminal decline and that by 2040, it will make up less than 20% of the global power supply for the first time since the Industrial Revolution.
 
The IEA instead suggests that solar will be “the new king of the world’s energy markets.”
 
And just as coal may soon be displaced by solar, oil may soon be displaced by electricity made from renewable sources. 
 
Because oil demand growth is heavily skewed to a few sectors, specifically road transport, petrochemicals and aviation, demand there can have dramatic impact on overall demand for oil.
 
Scientists have already been experimenting with biodegradable replacements for plastics made from petrochemicals, while aviation is experimenting with electric-powered aircraft, something which is increasingly becoming the norm when it comes to vehicles.  
 
With technology and electric vehicles the long-term trend for oil, it is entirely possible that the world could see peak oil consumption somewhere past 2040, at least according to the IEA, where thereafter oil demand falls below 2019 levels.
 
And as oil goes, so goes the once stock market giants that used to hold court on major indices such as the Dow Jones Industrial Average and the S&P 500.
 
Today, a handful of firms make up over 25% of the market cap of the S&P 500, none of them energy firms and all of them tech.
 
Once storied names like oil services giant Haliburton (-0.65%) and ConocoPhillips (-3.17%) have languished and whose stock prices are now a shadow of new “energy” companies like Snowflake (+1.76%) and JFrog (-2.54%) which provide cloud computing software.
 
Technology has made oil’s supremacy less certain and increasingly the main limitation may no longer be how much of it we have, but how much of it we want – same goes for stock of oil companies.  
 
 
2. Intel Sells Its Memories 
 
  • Chipmaker Intel (+0.78%) hives off its flash memory manufacturing business to focus on core competencies 
  • Memory manufacture has come under pressure for years because of commoditization and Intel will benefit from focus on high growth sectors such as data center memory manufacture which the firm will still retain
 
We are nothing except for our memories.
 
But perhaps in the case of Intel, forgetting is better as the chipmaker has reached a deal to sell its flash memory manufacturing business to South Korea’s SK Hynix (-2.54%) for an estimated US$9 billion.
 
The announcement immediately sent shares of Intel higher as the semiconductor giant looks to re-orient itself away from what it views as “non-core” business units.
 
And judging by the experience of IBM (-0.33%), which has been hiving off its non-cloud business units, such moves could pay off in spades for legacy technology companies.
 
The Intel memory unit which manufactures NAND flash memory products, primarily used in devices such as hard drives, thumb drives and cameras, has come under increasing pressure, driven by sagging prices for flash memory and stiffer competition.
 
Ask anyone who owns a personal computer whether their processor is an AMD (-1.41%) or Intel and most would be able to tell you, but ask them who makes the memory on their thumb drive or hard drive and you’re more likely to draw up a blank stare.
 
The rise of competitors has seen the commoditization of consumer flash memory manufacturing, but Intel will keep its Optane line of memory products, an advanced type of storage used heavily in data centers, crucial for the growing cloud computing sector.
 
The demand for NAND devices is still expected to be strong in the coming years though, as demand for data storage, considering the number of photos and videos we take, is expected to continue growing.
 
But demand doesn’t necessarily translate into profits, with years of oversupply of memory needing to be cleared before demand outstrips supply.
 
Consolidation is key for the memory sector’s continued growth, with many manufacturers looking to slim down and to narrow their focus.
 
For Intel at least, it’s better to forget. 
 
3. Not Fed Up with a Digital Currency
 
  • U.S. Federal Reserve indicates that the jury is still out on the issuance of a central bank digital currency by way of a digital dollar 
  • Fed has been more open to a digital dollar of late, having dismissed the prospect earlier, but a quasi-digital dollar may already exist
 
With the world’s biggest airdrop of free digital currency, China has indisputably taken the lead in the race to issue a central bank digital currency.
 
Raining US$1.5 million worth of literally free money on the citizens of Shenzhen last week, China’s central bank, the People’s Bank of China’s experiment with a digital currency, has now entered a new phase, moving it ever closer to reality.
 
But if the digital yuan is making things uncomfortable for the U.S. Federal Reserve, central bankers at the Fed are not flinching.
 
On a panel hosted by the International Monetary Fund at its annual meeting yesterday, U.S. Federal Reserve Chairman Jerome Powell, when referring to a digital dollar, said, and in a clear reference to the digital yuan,  
 
“It’s more important for the United States to get it right than to be first. We are committed to carefully and thoughtfully evaluating the potential costs and benefits of a central bank digital currency for the U.S. economy and payments system.”
 
“We have not made a decision to issue a CBDC.”
 
And while the United States was not the first country to send a man into space, it ultimately became the first to send men to the moon. 
 
If history is any indicator, the U.S. has always enjoyed playing catch-up, only to surpass the initial innovators.
 
And Fed officials have increasingly shown a willingness to consider a CBDC, having u-turned sharply from their previously cautious approach, to embracing a full-scale study on whether a digital dollar would be suitable for the country, with Powell adding,
 
“There are a number of ways that a CBDC might improve the payments system, and it is mainly this area that motivates our interest.”
 
In August, the Fed announced that it was expanding experimentation with technologies related to digital currencies, with the Boston Fed working with researchers at the Massachusetts Institute of Technology to build a hypothetical digital currency oriented for central bank use.
 
To be sure, a digital currency could dramatically change the way monetary policy works in the economy, because a CBDC would see regular consumers have a direct deposit with the central bank and stimulus would reach the digital wallets of citizens directly.
 
Payment systems that remain slow and taxing for American consumers could also be sped up with a digital dollar, with the U.S. lagging behind many other countries in this respect.
 
But Powell was quick to stress that any digital dollar was not intended as a replacement for cash (drug dealers can heave a collective sigh of relief), or current private-sector digital forms of the dollar, such as commercial bank money.
 
Central banks from Singapore to Sweden, Canada to the Eurozone are all in various stages of digital currency consideration and development.
 
Sweden started its e-krona project as far back as 2017 and has issued two reports on the matter while the Bank of Japan said earlier this month that it aims to start early phase experiments with a digital currency next year.
 
The U.S. may have tacitly greenlit a quasi-digital dollar already when last month the U.S. Comptroller of the Currency clarified that commercial banks could receive deposits for the issuance of dollar-based stablecoins. 
 

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Oct 20, 2020