Novum Digital Asset Alpha - Weekend Edition 8-9 August 2020
I hope that you're having a fantastic weekend as the week ahead is likely to get volatile.
In brief (TL:DR)
In today's issue...
Forget the pandemic, politics is what's roiling markets in the week ahead.
Congress was unable to agree on a much-needed coronavirus stimulus package, but to be fair, the gulf is wide. House Democrats are proposing a bill that is almost four times the size of what their Republican colleagues are envisaging.
And Trump's attack against social media app TikTok has now seen collateral damage by way of Tencent's (-7.37%) WeChat as well being banned.
To be sure, WeChat's usage outside of America's Chinese and Asian communities is not significant.
More worrying however is Trump's push to increase compliance and reporting requirements for Chinese firms listed on American stock exchanges, that could see a wave of delistings and Chinese tech giants losing access to the highly lucrative and liquid American capital markets.
Chinese tech stocks, in particular those listed on Nasdaq, were hammered on Friday at the prospect, but investors have been quietly taking up stocks of the same companies across the Pacific in Hong Kong, which many are betting will see a rise in interest, as Chinese tech firms return closer to home.
The Trump administration has threatened executive action to provide stimulus to the American people, but legal experts are debating whether the President has the authority to do so - spending power is within the sole authority of Congress, a power that is enshrined in the Constitution.
But there may be loopholes which could see President Trump deliver stimulus through a backdoor route, though not as substantial, yet sufficient for him to brand himself as the savior of the American people - something Trump would be eager to demonstrate as the election draws nearer.
And that could see stocks and gold rally, especially if the pressure from Trump forces Congress to come to a compromise and not be seen as having left the American people hanging, so close to an election.
1. Trump's Saber Rattling Is a Buying Opportunity For Asian Tech Stocks
Elections in the U.S. are coming and the fate of America and the free world hangs in the balance.
And as U.S. President Donald Trump looks for new punching bags to distract an embattled American people, mired in economic woes and an ongoing coronavirus pandemic, China and Chinese tech companies have come squarely within his crosshairs.
Friday's attack by Trump on Tencent-owned WeChat was unexpected, and pushed many investors to offload Asia's technology shares en masse.
But for many others, the selloff provided a good entry gateway for Asian tech stocks.
Given that very few countries outside of China actually utilize Chinese apps other than TikTok, a U.S. ban on Chinese internet companies will have little impact on the revenue and earnings of most listed Chinese internet companies.
And while saber rattling may rankle sentiment, pushing prices lower, it creates an opportunity to buy.
Trump's escalation of tensions with Beijing, by banning U.S. residents from doing business with both TikTok and WeChat apps, wiped out US$60 billion off the market cap of Asia's four largest technology firms in a matter of hours on Friday.
But that may be an even bigger enticement to buy into Asian tech stocks, which unlike their counterparts in the U.S., are at far more reasonable valuations.
Alibaba (-5.11%), Tencent, Taiwan Semiconductor Manufacturing (-0.32%) and Samsung Electronics (-0.86%) trade at an average of 25 times estimated profit for the next year, versus some 34 times, for the tech giants atop the S&P 500.
And while Asian tech companies gained an average of 25% this year, their U.S. peers have rallied some 39% on average.
Given that internet penetration will only continue to expand in Asia and tech services will grow ever more important with one of the highest smart phone penetration rates in the world, Asian tech companies have far more room for growth and expansion compared to their American equivalents.
Regardless, U.S. capital markets remain the deepest and most diverse, and American firms continue to lead the world in corporate governance, liquidity and innovation, which may warrant their higher multiple.
But a weakening U.S. dollar may also provide an incentive for investors to look at foreign assets, with Asia providing plenty of opportunities given its structural growth drivers.
And while Trump may continue to rattle his saber all the way through to November's election, any time Asian tech stocks pullback, may be an opportunity for investors to stock up, literally.
2. Real Rates Are Rising & That's Bad News for Gold And Stocks
When real interest rates fall, the cost of holding non-yielding assets like gold also falls.
And that has been sending assets like gold rising.
But last Friday, helped in large part by a far stronger than forecast July jobs report out of the U.S., real interest rates (which strip out the effects of inflation) rose by their most in over a month.
The lurch higher from record-low negative real interest rates sent gold lower and saw the greenback have its best day in almost three months.
A persistent slide lower in real interest rates has been the primary driver for gold and stocks, as massive amounts of U.S. Federal Reserve stimulus was seen as suppressing yields, which helped to justify the multiples in technology stocks as investors sought positive returns.
But these trends unraveled on Friday, after robust economic data lifted some of the gloom that has been pinning real interest rates at record lows.
Yield-hungry investors had powered the push into growth stocks, sending gold higher and putting pressure on the dollar.
Gold's drop, together with that of the S&P 500 last week has cast further doubt on the precious metal's role as an equity hedge.
U.S. Treasury yields, which are near record lows, have of late pushed investors to consider replacing bonds with gold in traditional 60/40 stock-bond portfolio mixes.
But gold's strong correlation with stocks means that the two asset classes no longer offer the diversification that most investors are looking for.
And it's not just the strong jobs report that is putting pressure on gold and stocks, a rising dollar, signalling renewed confidence in the U.S. economy's prospects is adding to that pressure as well.
It's still too early to suggest that we can now expect to see a reversal in stocks and gold.
The coronavirus pandemic is still raging in many parts of the U.S. and the scores of unemployed are at near-depression levels, which means more stimulus and support will be required.
If nothing else, the pause may be healthy as the relentless upward pace for both stocks and gold, really needs a breather and provides an opportunity for investors to buy in again.
All parts of a balanced portfolio.
3. Bitcoin's Immovability Against Real Rate Rises A Sign of Immutability?
For all intents and purposes, Friday ought to have been a bad day for Bitcoin, and in many ways, it was.
As real interest rates rose on the back of far better than expected jobs data out of the U.S. and a slew of other positive economic news, gold slipped and stocks, in particular growth stocks all fell.
Bitcoin wasn't spared either, with the benchmark cryptocurrency falling from as high as US$11,900 at one stage before plunging precipitously to US$11,300 in the span of a day.
But as markets closed on Friday, Bitcoin continued to edge upwards, in a market which never sleeps.
Traders pushed Bitcoin towards US$11,800 again before now hovering within a range between US$11,700 and US$11,800.
And it the "after hours" trading for Bitcoin is any indication, macro factors seem to expect that Bitcoin will continue to push higher.
Over the weekend, Bitcoin broke its correlation with both gold and stocks, feeding into its narrative as an effective and uncorrelated hedge for other assets classes.
And although Congress (not altogether unexpectedly) hit a wall in trying to negotiate a new coronavirus stimulus package to assist the ailing American economy, there is broad expectation that Washington will eventually put forth a new package that will see more money printing and depressed interest rate yields.
Which is why many investors saw the brief and sharp pullback in Bitcoin as an opportunity to buy in.
Volumes were particularly robust, but sell volumes in Bitcoin also mirrored sell volume patterns in stocks and gold in the early stages of the rout on Friday.
Trading volumes have since normalized and a spike could well see Bitcoin trade above US$12,000 this week.
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Aug 09, 2020
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