Novum Alpha - Daily Analysis 15 March 2021 (10-Minute Read)
Stocks are set to kick off the week weighed down by a spike in bond yields ahead of a key Federal Reserve meeting. Surging bond yields continue to preoccupy investors concerned about the prospect of excessive inflation amid a wave of stimulus and vaccine rollouts. The focus now turns to the Fed's forecasts for the coming quarters.
Marvelous Monday to you and I hope you're off to a great start to the week!
In brief (TL:DR)
In today's issue...
Stocks are set to kick off the week weighed down by a spike in bond yields ahead of a key Federal Reserve meeting.
Surging bond yields continue to preoccupy investors concerned about the prospect of excessive inflation amid a wave of stimulus and vaccine rollouts. The focus now turns to the Fed's forecasts for the coming quarters.
On the virus front, more countries have suspended the use of AstraZeneca Plc’s vaccine after some concerns around side effects.
And for those betting on an Italian summer, most of Italy will return to lockdown on Monday amid a resurgence in infections. Mama mia!
On the virus front, more countries have suspended the use of AstraZeneca Plc’s vaccine after some concerns around side effects.
Over in Asia, investors were presented with a mixed bag to start the week with Tokyo's Nikkei 225 (+0.41%) and Hong Kong's Hang Seng Index (+0.64%), both higher, while Seoul's Kospi Index (-0.20%) and Sydney’s ASX 200 (-0.08%) were slightly in the red at the open.
1. Central Bank Conclave on Rates Reminds Us Only the Fed Matters
From London to Ankara, Jakarta to Washington, this week is a big week for central banks as their officials look to set rates against a backdrop of investors increasingly betting on a return of inflation.
For many central bankers, the frenzy of meetings will be an opportunity to act, ever since tantrums in the U.S. Treasury market took hold in February, fueled by bets that prices will rise after the pandemic subsides.
But not all central banks are equal, and focus will be squarely on the U.S. Federal Reserve which last week all but affirmed its loose stance that stopped short of the heightened activism of the European Central Bank, which had pledged to frontload bond purchases.
The Federal Open Market Committee will be holding only its second meeting of the year this week and while it’s almost certain to keep interest rates near zero, and pledge to continue asset purchases at the current pace, investors will be looking to its forecast for clues as to markets.
What will matter more will be the Fed’s quarterly forecasts and crucially, whether the central bank will include an initial rate hike in the 2023 projections, around the time when the Fed has pledged to keep interest rates low until, and in response to a pickup in economic growth.
The odds are it won’t – what’s been made clear so far, including from U.S. President Joe Biden’s Treasury Department is that much will depend on the U.S. achieving its broader economic goals beyond growth – including more inclusive employment and growth.
In all likelihood, U.S. Federal Reserve Chairman Jerome Powell is likely to keep investors guessing for now on the exact timing of any rate hike, which would otherwise roil markets in the short term.
Instead, Powell will probably couch the Fed’s views on rates beyond 2023 in language that is more likely to focus concern on the economy, especially on American employment, which while improving, is nowhere close to the Fed’s targets, even as inflation has remained more or less flat.
Concerns that interest rates will rise sooner than expected might help to put a cap on recent spikes in U.S. Treasury yields, but will also spook investors in risk assets, especially stocks which despite the pandemic have repeatedly set fresh records.
Central banks may be looking to stem some of the volatility caused by U.S. Treasury yields, but ultimately it'll be the U.S. which sets the tone for the rest of the world.
And for now, it looks like there's little to stop this rally.
2. Beijing Curbs China's Cash Appetite
It ends where it started.
As the epicenter of the devastating coronavirus pandemic, China was also one of the first countries to bring it to heel, and now looks set to be the first economy to also unwind its economic stimulus efforts.
Beijing has expressed concern about an overheating housing market and wants to prevent bigger imbalances, just as the Chinese stock market saw several setbacks in the past few weeks before intervention by Beijing helped with some recovery.
China’s debt load has ballooned since the 2008 financial crisis and Beijing is anxious to whittle down borrowing, both in public and private markets.
But the Chinese economy might suffer withdrawal symptoms, especially from any sudden pullback in stimulus.
If mishandled, China’s tightening could impair its recovery, which would crimp the global economy, even as the U.S. looks set to inhale imports as it wakes from its pandemic slumber.
China’s plans could also create wider problems if more debt defaults or a sharper correction in stock markets are triggered, at a time when global investors are already jittery with recent spikes in U.S. Treasury yields.
For those reasons, economists say, China is likely to move slowly, gradually tightening credit in certain parts of the economy while avoiding more brutish moves like raising interest rates.
China signaled its intentions during annual parliamentary meetings held earlier this month, setting its target for 2021 gross domestic product growth at “above 6%,” a relatively low rate given the economy’s momentum and a sign that Beijing wants flexibility to withdraw stimulus in the coming months.
The International Monetary Fund projects China’s economy will expand by around 8% this year.
China lowered its fiscal deficit target—the gap between government spending and revenue—to 3.2% of GDP this year, from 3.6% in 2020 – a smaller deficit suggests a more restrictive fiscal policy.
The government also cut the quota for local government special bonds, a type of off-budget financing to fund local investments like infrastructure, to approximately US$560 billion, down from US$576 billion last year.
Beijing didn’t announce further issuance of special central government bonds this year, after selling approximately US$154 billion of such bonds in 2020.
Beijing’s emergency measures last year included cutting taxes to help small businesses and ordering banks to extend more loans and while impressive, still amounted to far less a share of GDP compared to the U.S. and many other developed economies.
At the end of 2020, China’s total fiscal spending on pandemic stimulus was about 6% of its GDP, versus 19% for the U.S., according to IMF calculations.
Many economists expect China’s central bank, the People’s Bank of China, to tame the pace of new credit issuance rather than raise key interest rates, which would risk attracting speculative money inflows that can fuel dangerous asset bubbles.
The central bank has pledged to keep its monetary policy prudent and flexible, while avoiding flood-like stimulus.
Tighter credit could potentially cause more defaults among state-owned enterprises, and even typically bulletproof stocks such as liquor maker Kweichow Moutai (-1.07%) have been whipsawed in recent weeks, as Chinese investors try to decipher Beijing’s moves.
Many state-owned enterprises are heavily indebted, and local governments, which have their own debt problems and, in many cases, own the bulk of that debt, are increasingly wary of bailing them out.
Beijing’s decision to pare back fiscal stimulus whilst not interfering so much with rates is perhaps the best compromise solution for the Chinese economy at this stage, and perhaps sets a precedent for how the rest of the world could ease their economies out of the pandemic panic stage.
3. Considering the Cryptocurrency Cardano?
As Bitcoin and Ether soar to new price highs (Ether is still off its all-time-high but may change by the time you read this), even the alleged crypto-savvy are turning to the “wisdom of the crowds” to find opportunities in other cryptocurrencies.
Last week, Galaxy Digital’s Mike Novogratz took to Twitter (-0.47%) to ask his followers to explain the use cases for Cardano and whether it’s worth considering.
Cardano, a privacy-focused cryptocurrency that crucially uses a “proof-of-stake” method to secure its blockchain has boomed in recent months.
"Proof-of-stake" has been touted as the way forward for cryptocurrencies because it allows blockchains to be secured without having to rely on the (allegedly wasteful) practice of mining cryptocurrencies using purpose-built computers that soak up a lot of electricity.
As more investors, especially institutional investors start wading into Bitcoin, software billionaire Bill Gates has pointed out how Bitcoin could be environmentally damaging, because of its massive electricity consumption to secure its blockchain, and could hurt the ESG (Environmental, Social and Corporate Governance) sensitivities of many institutional investors.
And supporters of Cardano have been using that as the basis for pushing it higher.
Cardano is up more than sixfold since last December, outpacing the rise of many other cryptocurrency rivals, yet it still lacks many functionalities available on its more established rivals.
But as demonstrated by GameStop shares this past year, that shouldn’t matter with Cardano attracting loyal fans on Reddit who have helped push the cryptocurrency to dizzying heights.
Despite an upgrade in March this year, Cardano, which has been around since 2015 (a lifetime by cryptocurrency standards), still can’t run many of the most popular applications such as decentralized finance or DeFi, that it’s older cousin Ethereum can.
And even smart contract functionality, which Ethereum has been running for some time now, is still a work in progress.
Cardano previously peaked in early 2018, at the height of the cryptocurrency boom and crashed spectacularly soon after.
Despite being billed as a “better Ethereum,” it’s an unfair and perhaps unwise comparison.
Ethereum is leaps and bounds ahead of Cardano, being the default blockchain for stablecoin usage and with innovations from DeFi to non-fungible tokens or NFTs, which has been making waves in the digital (and physical) art world.
But Ethereum has unfortunately also become the victim of its own success, with soaring transaction fees leading some developers to look at alternative networks, including Tron, Polkadot and of course Cardano.
The problem with alternatives though, is that Ethereum already enjoys huge network effects - everyone is on it.
And Ethereum’s core developers are also working towards creating a new fee system that will effectively put a cap on network fees which have long been the bugbear of Ethereum’s users and application developers.
Cardano’s recent rise is yet more evidence that the cryptocurrency craze has entered a new phase, but whether it becomes an Ethereum killer is perhaps more speculative.
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Mar 15, 2021
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