Novum Alpha - Daily Analysis 5 November 2020 (8-Minute Read)
It's turning out to be a Terrific Thursday for markets as I hope it continues to be for you!
In brief (TL:DR)
In today's issue...
For now, investors can breathe a collectively sigh of relief.
Democrats haven't had the "blue wave" that they had hoped for, meaning that proposed rollbacks of Trump-era tax cuts seems unlikely.
And the Republicans, for now, appear to be holding to their Senate majority.
What happens in the race for the White House then becomes less significant, because either ways, political gridlock, which is what investors are used to, will prevail in Washington.
And in the morning trading session, Asian markets responded strong to those assumptions with Tokyo's Nikkei 225 (+0.99%), Seoul’s KOSPI (+1.56%), Sydney’s ASX 200 (+1.21%) and Hong Kong's Hang Seng Index (+2.38%) all up.
1. Markets Rally on Diminishing Risk of Tax Hikes
While it’s looking increasingly likely that Democratic Presidential contender Joe Biden will win the White House, don’t count those electoral college votes until they’re, well, counted.
But while the drama over the White House is capturing everyone’s attention, markets have been rallying because the bigger risk, that a Biden administration would usher in rising corporate taxes, is now less assured, because Republicans look to maintain their razor thin Senate majority.
And because any proposed tax hike will need to pass through the Senate, investors and markets breathed a collective sigh of relief.
For many, whoever takes the White House now is just gravy.
For markets, the true battle lay in the legislature and the risk that a so-called "blue wave" would sweep over the Senate failed to materialize.
The better-than-expected showing for Trump also meant that Democrats who were looking to flip at least three seats in the Senate were always going to be a day late and a dollar short.
A split legislature is seen as a godsend for markets because it makes it unlikely that Trump’s 2017 corporate tax cuts, an important driver to stock gains, are rolled back, as Biden has pledged to do.
And while the failure by the Democrats to make a clean sweep of Congress does pare back bets that traders made on massive fiscal stimulus, some aid remains likely this year.
What politics has done however is put the ball squarely in the U.S. Federal Reserve’s court, to pump money into an economy that has been throttled by the pandemic.
For now, whoever occupies the White House is more a matter of politics than profits.
2. Don't Bet Against Tech
While the ballots are still being counted to figure out who has won the White House, one clear victor is emerging – tech stocks.
And with the Republicans likely to hold onto their majority in the Senate, tech can breathe a sigh of relief.
While tech companies tend to be populated with hoodie-wearing, Democratic-leaning libertarians, their business models and interests are better served by Republicans and their tax cuts.
Which is why Democrats with a diminished majority in Congress and a Republican Senate should help to keep things humming along for tech – there’ll be less progress on moves to break-up big technology companies, pursue anti-trust measures or roll back Trump’s 2017 tax cuts, which benefit tech companies the most.
Despite the sector’s increasingly lofty valuations, the stocks of Apple (+4.08%), Microsoft (+4.82%), Amazon (+6.32%), Facebook (+8.32%) and Google (+6.09%) all soared with ballots still being counted.
Political gridlock actually helps big technology, as politicians become mired in partisan bickering, lessening the likelihood of a capital gains tax, which would have weighed heavily on high growth sectors such as technology.
And while the tech sector will remain under scrutiny from both sides of the political divide, a gridlocked government would make it almost impossible to legislate to disrupt the dominance of big tech companies.
Finally, political paralysis puts pressure on the U.S. Federal Reserve to intervene, and almost as if on cue, the yield on the U.S. 10-year Treasury Bill fell, on expectations that interest rates will stay lower for longer.
In many ways, a Biden presidency, a Democratic Congress and a Republican Senate is more or less status quo, which is why investors have simply reverted to trading existing themes and big tech firms have proved to be well placed to benefit from these circumstances.
Consistently solid profit growth and fat balance sheets have turned tech companies into safe haven plays.
3. Big Bets on Bitcoin & Biden
The stores are boarded up and the streets of America’s major cities are looking like a scene from The Purge: Election Year.
Looters have pillaged every available store that has not been defended with arms, while roving bands of Trump supporters, armed to the teeth, terrorize the remaining non-aligned population.
Once-prized dollar bills are now used as wallpaper and as kindling to light fires, reminiscent of the German Papiermark, the worthless currency that was circulated during Germany’s failed Weimar Republic period.
The air, now fouled with the thick acrid smoke of tire fires and burned flesh, smells of death and destruction.
The only currency that can be used to buy fuel oil and water is Bitcoin, updated using what’s left of America’s internet infrastructure, but largely working off radio waves which continue to function to update the blockchain.
And while this dystopian version of America exists (for now) only somewhere between The Purge and Mad Max, it’s also helping at least to contribute to some of the bullishness in Bitcoin.
One of the things which doesn’t favor Bitcoin is certainty.
Certainty in elections, certainty in legislation.
And with political gridlock almost guaranteed, regardless of who wins the White House, Bitcoin has been on a tear.
Shooting past US$14,000, Bitcoin rallied by over 4% at one point to its highest level since January 2018.
The rise took along Ether as well but has otherwise left other cryptocurrencies out of the party.
And with investors remaining on edge, political uncertainty feeds well into Bitcoin’s narrative, but more importantly, the higher odds of legislative logjams mean that the U.S. Federal Reserve will need to step in to shore up the economy, further fueling the narrative that Bitcoin and cryptocurrencies are a means with which to hedge against inflation.
Bitcoin has soared this year, doubling as more traditional financial firms express greater interest in the cryptocurrency.
Digital payment service provider PayPal (+8.05%), with its 364 million-strong user base, sent Bitcoin over US$13,000 last month as it announced that starting next year it would enable users to buy, sell and trade Bitcoin and other cryptocurrencies and facilitate their use for payment to merchants, who need not accept cryptocurrencies but can choose to accept fiat currencies instead.
And as Biden increasingly looks likely to take the White House, bets are being raised on both Biden and Bitcoin.
What can Digital Assets do for you?
While markets are expected to continue to be volatile, Novum Alpha's quantitative digital asset trading strategies have done well and proved resilient.
Using our proprietary deep learning and machine learning tools that actively filter out signal noise, our market agnostic approach provides one of the most sensible ways to participate in the nascent digital asset sector.
Nov 05, 2020
Important Risk Information
The information provided on this site is for informational purposes only. It is not to be construed as investment advice or a recommendation or offer to buy or sell any security. Prospective clients should always obtain and read an up-to-date product and/or services description or prospectus before deciding whether to invest. Any views expressed herein are those of Novum Alpha SPC (“the Company”) are based on available information, and are subject to change without notice. There are no guarantees regarding the achievement of investment objectives, target returns, or measurements such as alpha, tracking error, asset weightings and other information ratios. The views and strategies described may not be suitable for all clients. The Company does not provide tax or legal advice. Prospective subscribers should consult with a tax or legal advisor before making any investment decision. Investing in any investment product entails risks and there can be no assurance that the Company avoid incurring losses or achieve any of a prospective subscriber’s investment goals.
Performance quoted represents past performance, which is no guarantee of future results. Investment and principal value will fluctuate, so you may have a gain or loss when assets are sold. Current performance may be higher or lower than that quoted product’s expenses and other liabilities, and such product may be unable to meet its investment objective