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Novum Alpha - Daily Analysis 9 December 2020 (10-Minute Read)

Bitcoin (-5.22%) plunged to US$18,225 from US$19,229 as flows into exchanges rose and investors continued to cash out of cryptocurrencies

 
Wishing you a wonderful Wednesday! 
 

In brief (TL:DR)

 
  • U.S. stocks rebounded Tuesday with the S&P 500 (+0.28%), blue-chip Dow Jones Industrial Average (+0.35%) and tech-centric Nasdaq Composite (+0.50%) all pushed higher on the prospect of stimulus from Washington. 
  • Asian stocks were mostly higher, taking their cue from Wall Street. 
  • U.S. 10-year Treasury yields rose less than one basis point to 0.938% as investors bet on fresh stimulus (yields rise when bond prices fall). 
  • The dollar was steady, despite the prospect of fresh stimulus, having been oversold in previous sessions. 
  • Oil was mostly flat with January 2021 contracts for WTI Crude Oil (Nymex) (+0.20%) at US$45.69 from US$45.60. 
  • February 2021 contracts for Gold (Comex) (-0.17%) fell to US$1,871.70 from US$1,874.90, as investor risk appetite rose. 
  • Bitcoin (-5.22%) plunged to US$18,225 from US$19,229 as flows into exchanges rose and investors continued to cash out of cryptocurrencies (outflows typically suggest that investors are looking to hold Bitcoin in anticipation of price rises). 
 

In today's issue...

 
  1. Asia's Red-Hot Markets Are Getting Hotter
  2. A Coronavirus Vaccine Inoculates the Prospects of Some Firms
  3. SIX, SBI and Singapore Get Serious About Digital Assets 
 

Market Overview

 
There may yet be some juice left in America's democratic institutions and that may have lifted market sentiment. 
 
A functioning democracy requires an independent and (hopefully) impartial judiciary and in a blow to U.S. President Donald Trump's electoral challenges, the U.S. Supreme Court has rejected a Pennsylvania Republicans to undo the certification of Joe Biden's victory in the state. 
 
Most remarkable was that not a single of Trump's appointed Supreme Court justices had any notable dissents. 
 
Democracy may not be "safe" - it's constantly a works in progress - but for now at least, Americans can heave a sigh of relief that the chaos and undermining of democratic institutions of the last four years may soon be coming to an end. 
 
In Asia, markets were mainly Tokyo's Nikkei 225 (+0.99%), Seoul’s KOSPI (+0.84%) and Sydney’s ASX 200 (+0.67%) up, while Hong Kong's Hang Seng Index (-0.76%) was down on Trump's last ditch sanctions on Chinese officials over the territory, just as he's about to leave office. 
 
1. Asia's Red-Hot Markets Are Getting Hotter
 
  • Asian assets are set to do better as investors pour into markets which have better handled the coronavirus pandemic 
  • Asian governments were also able to support their economies with lower levels of debt compared to their U.S. and European counterparts, making them better poised to support the economic recovery 
 
Every year the Chang family typically makes two trips overseas, one to the U.S. or Europe and the other to a nearby Asian country such as Japan or South Korea.
 
Despite the massive splendor of China, well-off Chinese are some of the most avid travelers in the world.
 
But thanks to the coronavirus pandemic, scores of Asians who would otherwise be found on the beaches of Bali or the airconditioned malls in Singapore are now finding themselves exploring their own local tourist attractions.
 
And while they’re at it, they might as well explore their own capital markets as well.
 
Because whether it’s stocks, bonds or almost any other asset class, foreign money has been pouring into Asia on bets that it will emerge from the coronavirus pandemic as the fastest growing region.
 
The MSCI Asia Pacific, a broad index of the biggest firms in the region, closed to a record high last week and the region’s currencies are climbing against the dollar, rising to their strongest since 2018.
 
Globally, investors have added the most money to emerging market ETFs since January, with inflows predominantly to Asia, according to data compiled by Bloomberg.
 
Of the money flows, Chinese, Hong Kong and South Korea funds saw the greatest demand.
 
And appetite for Asian debt has been growing as well with holdings of Chinese debt surging to a record US$274 billion.
 
Asia’s relatively adept handling of the coronavirus pandemic and the avoidance of the massive outbreaks experienced in Europe and the U.S. have emboldened investors to increase bets on the region, with analysts noting a strong bullish flow for call options on Asian stocks (a call option is a right to buy a stock at a predetermined price).
 
Chinese exports also saw a surprising surge in November, by the most since early 2018, pushing its trade surplus to a monthly record high.
 
Asian governments have also had to spend considerably less to prop up their economies than the U.S. or Europe, and some analysts are betting that their lower debt burdens will put them in pole position for growth in an economic recovery.
 
And while Asian tourists may lament their inability to visit the Trevi Fountain in Rome, take in the sights of Bavaria or stroll the boulevards of Rodeo Drive in Los Angeles, they may take some comfort in knowing that their investments aren’t going overseas either. 
 
 
2. A Coronavirus Vaccine Inoculates the Prospects of Some Firms
 
  • Rising and falling prospects of a coronavirus vaccine affect specific stocks and sectors in unexpected ways, with tech firms likely to lose out in an economic recovery 
  • Financial firms likely to do the best if the rollout of vaccines is speedy because many of the bad loans they had provisioned for would not be called on 
 
You’d think that stocks would rally at the news of a coronavirus vaccine that may help the world return to some degree of normality, but then you’d be wrong.
 
When Pfizer (+3.18%) and BioNTech (+1.92%) revealed in November that the coronavirus vaccine they had developed was over 90% effective, that day, the S&P 500, a broad measure of U.S. firms that has become increasingly overweight on tech firms, barely budged, rising by just 1.2%.
 
And while it’s entirely possible that markets may have already priced in the successful discovery of a coronavirus vaccine by year’s end (unlikely), the more likely explanation is that investors viewed the development of a vaccine as a mixed blessing – one that may not help companies that have benefited from the societal changes wrought by the pandemic.
 
Goldman Sachs (+0.16%) analyzed how shares in each industry had responded to shifts in the odds of an early-arriving vaccine and found that tech firms, whose products saw higher and quicker take up rates as a result of lockdowns, lag the broader market when vaccine prospects improved.
 
And that makes absolute sense.
 
As much of the world became confined within their homes as a result of pandemic-induced lockdowns, companies such as Zoom Video Communications (+1.02%) and Amazon (+0.61%) saw their sales, profits and share prices soar.
 
But now that an effective coronavirus vaccine may be just around the corner, there’s a distinct possibility that those Amazon Prime memberships and Netflix (-0.60%) subscriptions could suffer what’s known as “churn” – a failure to renew those paid services.
 
And it’s not just tech firms which faired worse on the prospect of widespread availability of vaccines, companies in the consumer-durables industry, including firms like Peloton (+1.39%), which makes exercise bicycles and makers of cleaning agents, all saw their fortunes fall on the prospect of vaccines.
 
Nowhere was the link between coronavirus vaccines and stock price stronger than for financial firms, whose fortunes tend to mirror the broader economy.
 
Banks, which had made big provisions for loan defaults would enjoy a massive windfall if the world opens up faster than expected and those loans don’t have to get written off.
 
And credit card issuers like Visa (+0.05%) and Mastercard (-0.05%) would gain on a resumption of international travel.
 
More surprising perhaps was that the share performance of retailers was more or less uncorrelated with vaccine news, with shares of discount department stores like Burlington Stores (+1.46%), Ross (-0.11%) and TJX (-0.70%) soaring on coronavirus vaccine progress.
 
Yet shares of Best Buy (+0.25%) and Target (-0.11%) were dropped because investors expected consumers to switch to different types of spending once people felt safe enough to start traveling and mingling again.
 
To be sure, it will still take some time to vaccinate large enough populations against the coronavirus before things even begin to resemble normal, but while everyone wins from a coronavirus vaccine, not all stocks will. 
 
3. SIX, SBI and Singapore Get Serious About Digital Assets
 
  • Swiss digital asset exchange SIX and SoftBank's SBI Digital Asset Holdings are betting big on a new regulated digital asset exchange to be based out of Singapore 
  • Move could put Singapore at the nexus of digital assets within a regulated environment 
 
Investors in Singapore are often heard lamenting about how the local stock exchange lacks depth, liquidity, and the sort of investment (and speculative) activity that its rival to the north Hong Kong, often enjoys.
 
And while the criticisms are not inaccurate, the comparison is not entirely fair, with Hong Kong’s vibrant equity markets fueled by a population almost 50% greater than Singapore and with access to the massive hinterland of China.
 
It’s no big surprise then that some of China’s largest and most prominent firms have all chosen to list in Hong Kong, alongside listings in Shanghai and New York.
 
In the lineup of global equity markets, Singapore’s exchange does not often feature large in the consideration of firms.
 
But that may be set to change as SIX Digital Exchange, a regulated Swiss digital asset exchange and SBI Digital Asset Holdings, a Japanese firm that is also the financial services subsidiary of Japan's SoftBank (+0.34%), are looking to launch their own digital asset exchange in Singapore.
 
Subject to regulatory approval by the Monetary Authority of Singapore, the SIX and SBI digital asset exchange will begin operations in 2022, according to a joint statement by the two firms, with connectivity to both Swiss and Japanese businesses, as well as other partnerships, to follow.
 
The joint venture’s issuance, exchange and other platforms are expected to be fully regulated under current Singapore law.
 
According to Tim Grant, head of SIX,
 
“The real play is global liquidity. That’s what the institutional market wants. It doesn’t want to trade 9 a.m. to 4 p.m. in its own market then go to the next and the next.”
 
Interest in digital assets has surged following the recent rally where Bitcoin hit a fresh all-time-high (it’s since come down) and as investors, especially institutional investors are becoming more familiar and comfortable with the nascent asset class.
 
But the digital asset environment is just as volatile as it was three years ago, when Bitcoin first hit its highest level, coming close to US$20,000.
 
Back in 2017, many grand and ambitious plans for tokenizing everything were mooted, but few came to fruition.
 
And while there has been an increase in regulatory interest in digital assets, globally, regulations still remain an inconsistent patchwork, ill-suited to deal with the cryptocurrencies.
 
That hasn’t deterred the SIX and SBI joint venture however and the pair have ambitions to offer both listed shares and private placements, as well as debt instruments, fund structures and structured products, in addition to cryptocurrencies and even real estate and art.
 
If successful, the blockchain technology that underpins cryptocurrencies such as Ethereum and Bitcoin will present new opportunities for investors to participate at smaller entry levels to a much wider range of investment products.
 
From private placements to art and real estate, many investment opportunities are often inaccessible by the masses because of their large ticket sizes.
 
Tokenization supports fractional ownership of assets, using blockchain technology to ensure that the marginal cost of issuing every additional asset-backed token is negligible and could potentially democratize the investment world.
 
Singapore remains one of the leaders in terms of progressive legislation when it comes to dealing with digital assets, with the Monetary Authority of Singapore being one of the first central banks to issue guidance on initial coin offerings and rolling out the comprehensive Payment Services Act this year.
 
The island nation is also home to some of the biggest names in the cryptocurrency world, including cryptocurrency exchange Binance, as well as a host of other cryptocurrencies which are headquartered here.
 
A stable political environment and ease of doing business as well as global connectivity have also aided the development of digital assets and blockchain businesses in Singapore, a fully-regulated digital asset exchange would be a celebration of how far the country has come. 
 

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. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  
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Dec 09, 2020

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