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Novum Alpha - Daily Analysis 11 February 2021 (10-Minute Read)

Inflation? What inflation? U.S. inflation data put a dampener on stocks and other risk assets yesterday as it revealed that inflation and the economic recovery that that would typically signal, was lacking.  Investors in Asia are headed for a break as the region celebrates the Lunar New Year, which is likely to see muted celebrations thanks to continued coronavirus restrictions. 

A terrific Thursday to you on this the eve of the Lunar New Year! 
In brief (TL:DR)
  • U.S. stocks were a mixed bag on Wednesday with the S&P 500 (-0.03%) and tech-centric Nasdaq Composite (-0.25%) down slightly and blue-chip Dow Jones Industrial Average (+0.20%) up marginally as initial concerns over inflation proved to be unfounded, undermining the so-called "reflation trade." 
  • Asian stocks were mixed as well on the eve of the Lunar New Year on lower trading volumes. 
  • The benchmark U.S. 10-year Treasury yield slipped further to 1.130% (yields fall when bond prices rise) as a lack of direction in the markets saw investors headed into bonds.  
  • The dollar continued its slide in the wake of an inflation report that put a damper on bullish sentiment of an economic recovery. 
  • Oil slipped with March 2021 contracts for WTI Crude Oil (Nymex) (-0.83%) at US$58.19 despite an earlier rally as traders took note of a lower-than-expected inflation report. 
  • Gold slipped with April 2021 contracts for Gold (Comex) (-0.20%) at US$1,839.10 as U.S. inflation data missed estimates.   
  • Bitcoin (-1.40%) slipped to US$44,200 as the "inflation trade" narrative was undermined by tepid inflation data out of the U.S. and on some degree of profit taking with inflows into exchanges leading outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 
In today's issue...
  1. Tech is Turning Tables on Wall Street, Can it Last?
  2. Oil is Staging a Convincing Comeback
  3. Bitcoin Takes a Breather from Tesla Rally for Now 
Market Overview
Inflation? What inflation? 
U.S. inflation data put a dampener on stocks and other risk assets yesterday as it revealed that inflation and the economic recovery that that would typically signal, was lacking. 
Investors in Asia are headed for a break as the region celebrates the Lunar New Year, which is likely to see muted celebrations thanks to continued coronavirus restrictions. 
American markets are likely to continue to drift sideways in the absence of any further progress on stimulus and with economic data a mixed bag. 
Over in Asia, the last trading day before the Lunar New Year holiday saw relatively muted volumes with Tokyo and Seoul closed for the holidays and Hong Kong's Hang Seng Index (-0.44%) and Sydney’s ASX 200 (-0.10%) down slightly in the morning trading session.  


1. Tech is Turning Tables on Wall Street, Can it Last?
  • Technology is upending the balance of power on Wall Street, with democratized access to information flows and data streams, as well as swarm trading making retail investors far more powerful 
  • Shifts in the balance of power in markets is likely to prove durable, but new power centers will emerge particularly those investors with access to intuition or artificial intelligence 
For a traditional investor, the past few months have been nothing short of bewildering.
Tomes of business school textbooks and conventional wisdom have been abandoned for what appear to be rampant speculation on assets that would (under normal circumstances) have no value.
To get an insight into just how strange things have become, Netflix (+0.81%) is said to be planning a show to immortalize the events of the past few months in the market, but then again the video streaming company has also been known to greenlight plenty of dicey projects.
One narrative is that an anti-establishment grassroots movement is the core cause of chaos in high finance, the same way as it had been for politics.
But another take is how volatile shares, strutting online traders and (suddenly) cash-strapped brokerages, are all symbolic of a market that is headed for a crash.
Yet both explanations gloss over how technology is being used to make trading free, reimagine information flows and catalyze new business flows.
Whereas in the past, a “hot stock tip” was more likely to be shared on the 7th hole at Westchester Country Club, these days that tip could just as easily be found on a Twitter (+13.16%) feed or Reddit forum.
r/WallStreetBets, with over 8 million followers on Reddit, has invented a new form of financial adventurism – swarm trading – bidding up the prices of obscure firms in late January, they’ve since gone on to silver and cryptocurrencies.
But it’s not just r/WallStreetBets that has been reshaping markets, the real Wall Street has as well – with almost 300 SPACs (Special Purpose Acquisition Companies) listed on stock exchanges last year, raising an eye-watering US$80 billion.
SPACs allow firms to be listed on public markets without the hassle of an initial public offering with their burdensome disclosure and regulatory requirements, and some don’t even have an acquisition target, despite having raised hundreds of millions of dollars.
In the meantime, Tesla (-5.26%) has become the fifth most valuable firm in the U.S. and the most valuable vehicle maker globally by market cap, despite its vehicle production amounting to no more than a rounding error compared to the likes of Volkswagen (-1.21%) or Toyota (+1.70%).
And as pandemic conditions and lockdown restrictions continue to persist globally, a captive audience has sent trading volumes for shares to their highest level in a decade, while those for derivatives have set new records.
The pandemic has made day traders of us all, because when interest rates are so low, any asset can look relatively attractive by comparison.
Compared with the yield on a 5-year U.S. Treasury Bill, stocks are still somehow cheaper than even before the dotcom crash of 2000.
A bigger question is whether the shifting balance of power from institutional to retail investors will be durable, and the Magic Eight Ball seems to suggest that it just might.
For starters, information flows, the lifeblood of markets and the determinants of sentiment are being disaggregated.
Whereas in the past, news about firms and the economy used to come from reports and meetings governed by strict insider-trading and market manipulation laws, now, a vast pool of data is scraped from websites, industrial tracking sensors and social media chatter, almost instantly.
And the barriers to obtaining that information have been dramatically lowered.
What has changed however is how investors parse that data and make sense of it.
Far from a passing fad, markets will be even more intensely disrupted as powerful algorithms aggregate baskets of illiquid assets and price similar but non-identical assets to expand options in the asset trading universe.
And in the coming market scape, it will be those investors who can sift the wheat from the chaff when it comes to data, whether that is done by intuition or artificial intelligence, who will reign in this new age, and it won't matter much if they're retail or institutional investors.



2. Oil is Staging a Convincing Comeback
  • Oil prices have rebounded sharply over the past year from their lows in March
  • Rebound is due primarily to supply curbs and improved consumption numbers out of China, but longer term acceleration in price growth will still depend on a reopening of borders and that could take a while 
With cars sitting idle in driveways and garages, and the bulk of the world’s passenger aircraft fleet rotting on aprons, it should come as no surprise that the demand for oil is tepid.
Yet just one year after the post-apocalyptic scenes of emptied out Chinese cities and grounded planes filled our news feeds, oil is staging a dramatic rebound.
The oil industry endured one of its worst crises in history in the wake of the coronavirus pandemic that saw demand fall by a fifth, with prices falling below zero at one stage.
Producers fought viciously over customers and almost overnight, a billion surplus barrels of what was once considered “black gold” sat languishing in storage tanks around the world.
But as Chinese oil consumption has roared back to pre-pandemic levels and the rollout of a vaccine has restored confidence, the OPEC cartel of oil producers and its allies are keeping a tight leash on supply to make up for the year of lost dollars.
To be sure, western economies are still being pounded by the pandemic, with high death tolls and lockdowns leading to muted demand for transport fuels, particularly for aviation.
Yet ironically, petroleum products that cater to a society working and consuming at home, especially plastics for the electronics industry, has seen a surge in demand.
And that demand for oil’s other uses has seen a sudden reversal in the fortunes of what were once titans of the stock market, including supermajors like Exxon Mobil (+0.99%) and BP (-0.23%), offering a glimmer of hope for their investors in what can only be described as a grueling year.
As demand for oil has rebounded from its pandemic lows, oil-based economies of the OPEC countries have taken the opportunity to institute reductions in supply.
Last March, Saudi Arabia and Russia entered into a bitter disagreement about supply cuts, waging a brutal price war that helped neither side, and when the toll on demand became clear, they kissed and made up, slashing production by an unprecedented 10% of global supplies a day.
That reconciliation has now resulted in a recovering price for oil.
Yet oil bulls will still need to keep their optimism in check – although oil is starting to rise, part of that rise is also due to asset inflation, against the back of a declining dollar, and not necessarily indicative of a global economy that is on the get up and go, yet.
Until the world is vaccinated in sufficiently large numbers to open borders again and you can pack that travel bag (it’s in the back of the closet somewhere), supply cuts alone won’t be sufficient to fuel a relentless rally in oil – perhaps Redditors could do something about that though. 


3. Bitcoin Takes a Breather from Tesla Rally for Now
  • Bitcoin pulls back after sharp rise on announcements that Tesla had invested as much as US$1.5 billion in the cryptocurrency 
  • Central banks are paying more attention to Bitcoin now that it poses an increasing existential threat to the power and influence of fiat-based central bank currencies  
Bitcoin gave up some of the heady gains that it made following the revelation that Tesla had poured some US$1.5 billion into the bellwether cryptocurrency as part of its balance sheet.
Euphoria over the world’s most valuable vehicle maker by market cap betting big on Bitcoin sent the cryptocurrency soaring past US$48,000 at one stage before giving up those gains. 
Now that the initial rally has receded, Bitcoin has slid to US$44,000 in Asian trading on Thursday and while Bitcoin is gaining traction among high profile investors – Elon Musk is just the latest – volatility in the cryptocurrency is par for the course.
Criticizing the recent spike in Bitcoin and cryptocurrency prices as “speculative mania,” a top Bank of Canada official noted that such assets don’t have the qualities to become the money of the future.
In a virtual speech at the Institute for Data Valorisation, Deputy Governor of the Bank of Canada, Timothy Lane, noted that costly verification methods and unstable purchasing power make cryptocurrencies a “flawed” method of payment.
And in a thinly-veiled reference to Musk’s backing of Dogecoin, Lane said,
"The recent spike in their (cryptocurrency) prices looks less like a trend and more like a speculative mania – an atmosphere in which one high-profile tweet is enough to trigger a sudden jump in price.”
Lane’s recent comments underscore the seriousness with which policymakers are now scrutinizing cryptocurrencies as speculative fever sweeps these largely unregulated markets.
Last month, even Christine Lagarde, President of the European Central Bank, who has for the most part been open to cryptocurrencies, took aim at Bitcoin’s role in allegedly facilitating criminal activity, saying the cryptocurrency has been enabling “funny business.”
When cryptocurrencies were well below US$1 trillion in market cap, they were relatively easy to ignore and top policy brass could bring them up at banquets and conferences for a chuckle or two.
But as an increasing number of high-profile investors and companies are putting a portion of their portfolios into Bitcoin and cryptocurrencies, as a potential hedge against inflation, the narrative shifts from pure speculation to a somewhat more existential threat to central bank fiat currencies and their monopoly on the monetary system. 
It’s one thing if a small “fringe element” of tech-savvy investors bet on Bitcoin, over concerns that central bank debasement of fiat currencies could lead to inflation, but quite another when high-profile investors take up the torch and lead others to follow into this nascent asset class.
That concern over existential threat was hinted at when the Bank of Canada’s Lane revealed,
“Only a central bank can guarantee complete safety and universal access, and with public interest – not profits – as the top priority."
Maybe for now at least, but the future appears increasingly less certain. 
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Feb 11, 2021

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