Novum Alpha - Daily Analysis 4 November 2020 (8-Minute Read)
As Americans head to the polls, investors are growing increasingly optimistic that there will be at least some clarity when the dust settles and markets are strongly up in the midweek.
In brief (TL:DR)
In today's issue...
It ain't over till it's over.
Markets seem to have priced in the certainty of a clear victor in the U.S. presidential elections, instead, the race is still too close to call.
Asian markets in the morning were up strongly on the back of a bullish Wall Street with Tokyo's Nikkei 225 (+1.41%), Seoul’s KOSPI (+0.70%) and Sydney’s ASX 200 (+4.20%) all up while Hong Kong's Hang Send Index (-0.28%) was down marginally.
1. It Could Be Days Before A Winner is Declared in U.S. Elections
Americans can’t stand to wait for anything, especially the results of a match up.
From food (America invented the concept of fast food) to Facebook (+5.82%), America has always had the habit of moving fast, and of course, breaking things in the process.
It’s also the reason why football (or soccer as it is referred to in the United States) never took off – the idea that ninety minutes of play can end in a goalless tie, offends American sensitivities.
But Americans looking to see a speedy resolution to the most fractious elections in decades, may have to wait it out a little bit longer.
So far, the early counts have been predictable, with “safe” states falling along party lines, but it’s the swing states that are going to matter most and right now, it appears that the race is tight there.
And with millions of mail-in ballots yet to be counted, it’s still possible that days from now, a winner may not be called as both candidates lawyer-up and prepare for the long legal battles that lie ahead.
Stocks are expected to continue to swing wildly until the dust settles and at times like these, only a brave (or foolish) trader would take excessive positions one way or the other.
Political shocks, such as those during the 2016 Brexit referendum in the United Kingdom, or the contested 2000 U.S. presidential elections, caused market crashes, currencies to dive and just mayhem in general.
And because American election results typically start rolling in well after U.S. markets have closed, it's Asian investors, who have absolutely no control over U.S. elections, that suffer the brunt of the chaos.
But because the U.S. is voting in the midst of a pandemic, millions of mail-in ballots and laws in battleground states that bar vote counting until Election Day, mean that it will likely take longer this year to call a winner.
And early indicators are likely to be misleading, depending on which states are allowed to start counting mail-in votes, even before considering a premature claim of victory, or worse, a contested election result.
At times like these, typical retail stock investor might want to just start thinking out of the box, consider currencies like the Japanese yen, the Swiss franc and commodities like oil and gold, which could all move rapidly depending on what happens next.
And while this isn’t a time for a novice to be grabbing a book to try and educate themselves on new investment assets, it’s worth considering whether there are any implications to a portfolio from exchange rates, particularly if an investor has a large exposure to Chinese stocks.
Finally, don’t overreact.
The United States of America is bigger than any one election.
Yes, there may be chaos in the weeks and months following the election fallout, but America has been there and done that before – let’s not forget that not so long ago the country was embroiled in a bitter Civil War – it will get through this as well.
And the initial reaction of the stock market isn’t a good longer-term guide, which is why investors should avoid making big moves on early indicators.
Are analysts calling a win for Trump? Don’t pour into shale oil companies and airlines just yet, let the dust settle.
Does it look like Biden will win? Don’t dump the dollar just yet either.
Although there will be a handful of investors who will make a killing by jumping the right way early, many more will get burned as the market’s interpretation of events may evolve.
For now, stay diversified, stay calm, and maybe pour yourself another drink, it's going to be a long week ahead.
2. Ant Financial's IPO Gets Bitten By Jack Ma's Words
In Chinese society, many things remain unspoken, especially criticisms of the powers that be.
If that sounds somewhat Orwellian, that’s because it is - for businesspeople, politically sensitive points of view are seldom, if ever, profitable.
But whether it’s hubris or the presumption of invincibility, Alibaba Group’s (-7.54%) Jack Ma saw it fit to make pointed criticism of China’s banking system and has now put in jeopardy Ant Group’s US$35 billion blockbuster IPO.
Speaking at a high profile financial forum in Shanghai, the effervescent founder of Alibaba, Ma, labeled the global banking Basel Accords as an “old people’s club” and criticized China for lacking a “financial ecosystem,” likening it to a string of “pawn shops” where collateral and guarantees are needed to operate.
Ma then went on to suggest that the archaic Chinese financial system is why firms have decided to get so big they are not allowed to fail, a veiled critique of Chinese state-owned firms and banks.
To be sure, none of Ma’s criticisms are unfair, but he could have perhaps picked a better time to make them.
On Monday, Beijing’s top financial watchdog summoned Ma to give him a dressing down, and issued draft rules on online microlending, stipulating stricter capital requirements and operational rules for some of Ant Group’s most profitable consumer credit businesses.
And that was only the beginning, because on Tuesday night, the Shanghai Stock Exchange suspended Ant Group’s listing on its Star bourse, citing Monday’s meeting and subsequent regulatory changes.
Ant Group responded by saying that it would suspend its Hong Kong IPO as well, despite being scheduled to start trading on Thursday.
The news sparked a tumble in Alibaba shares which are listed in New York, dragging down the shares of other Chinese companies as well.
Yet none of the things which Ma said are all that controversial.
Bureaucrats at the Chinese central bank, the People’s Bank of China, have long used terms such as “pawn shops” as well, and it’s also painfully difficult for small businesses to get loans from state-owned banks.
One possibility is that Ant Group is simply too successful and giving state-owned banks a run for their money – literally.
With many smaller regional banks languishing and in some cases being restructured, Ant Group swooping in may be the last straw on their backs.
Because China has various special interest groups and numerous factions, resistant to change, the potential for an online microlender as large as Ant Group to upset the status quo was always going to be seen by many as a threat.
And Ma’s comments may have provided those feeling threatened with the perfect opportunity to throw some sand into Ant Group’s gears.
Sometimes silence really is golden, literally.
3. Who's Better for Bitcoin? Trump or Biden?
While the votes are being tallied up and the hyperbolic declarations from Americans that if their chosen candidate doesn’t win they’ll move to Costa Rica (no they will not) start coming in, those in the cryptosphere will no doubt be wondering which candidate will ultimately be better for Bitcoin and cryptocurrencies.
In truth, probably either one will do.
Bitcoin and cryptocurrencies in general, have had a spectacular run in the second half of the Trump administration.
Loose monetary policy and deregulation have emboldened a variety of financial institutions to tread into cryptocurrency-laden waters and the acting head of the U.S. Comptroller of the Currency was a former Coinbase (a cryptocurrency exchange) staffer.
Whatever your feelings towards Trump, he’s been very good for crypto in general, content to look the other way and let the industry find its own way.
In the four years he’s been President, Trump has presided over the rise and fall of the initial coin offering craze, Bitcoin soaring to US$20,000 and then crashing to as low as US$3,500, before now recovering to US$13,800.
Institutional participation in Bitcoin and cryptocurrencies has increased, and this year, even MicroStrategy (+0.61%) and Square (+4.66%) announced that they would be putting a portion of their treasuries into Bitcoin.
Biden on the other hand, depending on who his pick for Treasury Secretary is, may bring in a wave of greater regulation, particularly of the financial industry, just as financial institutions are dipping their toes to take a bet on Bitcoin and its brethren.
And more stringent financial regulation, coupled with tighter laws on money laundering and know-your-customer requirements, might see cryptocurrency firms caught within a vast regulatory dragnet.
Yet whoever wins the White House will almost certainly have to push forward with a fresh set of stimulus measures, working both with Congress and the Senate and ultimately, that should see a weaker dollar and a rise in the price of Bitcoin.
Biden and the Democrats are likely to create far more extensive social safety nets and push with tax hikes on the richest Americans, providing a strong incentive for the rich to push into Bitcoin and attempt to obfuscate at least some of their wealth.
More government spending should also put greater pressure on the dollar, which will provide a boost for Bitcoin.
Ultimately, Bitcoin should do well coming out of the U.S. elections regardless of who wins and any pullback, is likely to be shortlived.
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Nov 04, 2020
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