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Novum Alpha - Daily Analysis 20 April 2021 (10-Minute Read)

Asian shares climbed and U.S. equity futures pared a drop Monday as the global economic recovery and corporate earnings prospects bolstered sentiment despite rising Covid-19 infections to fresh records and against a backdrop of vaccinations.

 
A terrific Tuesday to you!  
 

In brief (TL:DR)

 
  • U.S. stocks pared back gains with the S&P 500 (-0.53%), tech-centric Nasdaq Composite (-0.98%) and blue-chip Dow Jones Industrial Average (-0.36%) all lower, as investors weighed rising infections against corporate earnings. 
  • Asian stocks fell in early trade Tuesday after weakness in the technology sector pulled U.S. indexes from all-time peaks. 
  • The U.S. 10-year Treasury yield was steady at 1.60%, coming off recent highs (yields fall when bond prices rise). 
  • The dollar dipped. 
  • Oil rose with May 2021 contracts for WTI Crude Oil (Nymex) (+0.27%) at US$63.55. 
  • Gold was little changed with Jun 2021 contracts for Gold (Comex) (-0.02%) at US$1,770.20.
  • Bitcoin (-3.79%) fell to US$54,753 with inflows to exchanges leading outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).
 

In today's issue...

 
  1. A Savings Glut Could Save the Economy  
  2. Shorting for the Brave
  3. Dissecting the Weekend Bitcoin Crash
 

Market Overview

 
Asian shares climbed and U.S. equity futures pared a drop Monday as the global economic recovery and corporate earnings prospects bolstered sentiment despite rising Covid-19 infections to fresh records and against a backdrop of vaccinations.
 
Over in Asia, markets were mainly down with Tokyo's Nikkei 225 (-1.81%), Sydney’s ASX 200 (-0.42%) and Hong Kong's Hang Seng Index (-0.03%) all lower and Seoul's Kospi Index (+0.39%) the only standout as concerns over chipmaking in Taiwan fueled defensive plays at South Korean chipmakers.  
 
Did you miss us at the World Family Office Forum? Watch it here...
 
1. A Savings Glut Could Save the Economy
 
  • Massive savings pile in developed countries could be unleashed in the consumer economy as the world reopens and vaccinations rollout 
  • Companies that produce durable consumer goods as well as upper scale retailers stand to benefit as level of savings has been uneven, with a bias towards more wealthy households favoring a boost in discretionary spending 
 
Consumers around the world have stockpiled an extra US$5.4 trillion in savings since the coronavirus pandemic began and are becoming increasingly confident about the economic outlook, paving the way for a strong rebound in spending as businesses reopen.
 
Households around the globe accumulated additional savings compared with 2019’s spending pattern, equating to more than 6% of global gross domestic product by the end of the first quarter of this year, according to estimates by credit rating agency Moody’s.
 
And booming global consumer confidence suggests shoppers will be willing to spend again as soon as shops, bars and restaurants reopen when restrictions to control the spread of the virus are eased.
 
In the first quarter of this year the Conference Board global consumer confidence index hit its highest level since records began in 2005, with significant uplifts in all regions of the world.
 
Mark Zandi, chief economist at Moody’s Analytics, said:
 
“The combination of an unleashing of significant pent-up demand and overflowing excess saving will drive a surge in consumer spending across the globe as countries approach herd immunity and open up.”
 
If consumers spend about a third of their excess savings they would boost global output by just over 2% both this year and next, Moody’s estimated.
 
In 2020, household saving rates in many advanced economies reached their highest levels this century, according to OECD data, and bank deposits increased rapidly in many countries.
 
The excess saving was highest in developed economies, in particular North America and Europe where lockdowns have been widely implemented and government spending has been high.
 
However, the impact of the pandemic has been highly unequal and savings have been largely accumulated by richer households in all regions.
 
The Morning Consult consumer confidence index showed overall steady improvements between January and April across 15 large economies, but a larger share of lower income households reported their financial conditions had worsened compared with a year ago.
 
More than one-third of richer households in many countries, including China, Australia, Italy, Russia and the US, said now was a good time to make big purchases, but that was not the case for poorer households, data from Morning Consult showed.
 
The data suggests that companies poised to do particularly well as the global economy reopens include value retailers like Target (+0.05%) and Walmart (-0.64%), as well as automakers like Ford (-0.98%), General Motors (-1.41%) and Tesla (-3.40%).  
 
Did you miss us at the World Family Office Forum? Watch it here...
 
2. Shorting for the Brave
 
  • Hedge funds avoid highly public shorts on equities for fear of raising the ire of the Reddit brigade, which punished short sellers in GameStop (+6.26%) 
  • Asian regulators and exchange operators may take advantage of the opportunity to adopt a more liberal approach to SPACs to entice capital across the Pacific 
 
After the beating that hedge funds suffered in the aftermath of GameStop (+0.23%), it would be a brave manager looking to take highly publicized shorts and antagonize the Reddit bull.
 
Even with stocks at record valuations near two-decade highs, Wall Street’s bears have become an endangered species.
 
Median short interest of component stocks of the S&P 500 is just 1.6% of market value, near a 17-year low, according to data from Goldman Sachs.
 
And in Europe. A short-covering frenzy has sent bearish bets collapsing, according to Morgan Stanley (+1.83%).
 
Instead, hedge fund’s long positions are at the highest relative levels in years at JPMorgan Chase’s (-0.42%) prime brokerage.
 
The so-called smart money may be betting against the market ideologically, but it’s not being revealed in the markets, with bullish mania propelling global equities to fresh records this month, thanks to economies re-opening and larger policy stimulus.
 
Easing lockdowns and vaccine rollout data have fueled a risk-on rotation into what were once the least popular sectors of the stock market – low quality stocks and value shares.
 
As hedge funds from both sides of the Atlantic raced to cover their shorts, little appetite to put on fresh short positions was seen.
 
But bearish bets aren’t just risky, they can be punishing, with a Goldman Sachs basket of the most shorted stocks surging three times faster than the broader U.S. market in 2021, partly because of a horde of Robinhood traders stampeding into short targets.
 
Instead, hedge funds and other professional money managers are seeking short protection in the options market – with bearish contracts on the S&P 500 increasing relative to bullish ones in the past month. 
 
3. Dissecting the Weekend Bitcoin Crash
 
  • Bitcoin's crash over the weekend now attributed to inaccurate rumors of crackdown on cryptocurrency usage for money laundering by U.S. authorities 
  • More likely that Bitcoin's crash was due to sudden hash rate fall as a coal-fired power station in Xinjiang that plunged a key cryptocurrency mining region into a blackout 
 
Bitcoin plunged as much as 15% on Sunday in its biggest slide for almost two months, just days after reaching a record of $64,869, but has recovered somewhat, trading just over US$55,000 at the time of writing but well off it’s all-time-high.  
 
Ether, the second-biggest token, dropped as much as 18% to below $2,000 before also paring losses and now trades a hair over US$2,100.
 
The volatility buffeted Binance Coin, XRP and Cardano too, which had all seen steep rallies in the previous weeks.
 
Some analysts attributed the plunge to speculation that the U.S. Treasury may crack down on money laundering carried out through digital assets.
 
But the Treasury Department declined to comment, and its Financial Crimes Enforcement Network’s (FinCEN) emailed response on Sunday that it “does not comment on potential investigations, including on whether or not one exists” seems to suggest that no such enforcement action is in the works.
 
More likely though is the reason suggested by CoinMarketCap, a cryptocurrency data website, which suggested that a blackout in China’s Xinjiang region, which reportedly powers a large chunk of Bitcoin mining, as the cause for the selloff.
 
A coal-fired power station exploded in China’s Xinjiang reason over the weekend, causing a massive blackout and a sharp decline in the hash rate.
 
Many algorithmic trading bots which monitor hash rate to determine whether demand for Bitcoin is increasing (higher hash rate and harder mathematical puzzle to solve) or decreasing (lower hash rate and easier mathematical puzzle to solve.
 
Because so much of the Bitcoin network suddenly went offline, the sharp drop in hash rate looked as if cryptocurrency miners had suddenly soured on mining Bitcoin – leading to sharp declines in Bitcoin’s price.
 
Other alternative reasons for Bitcoin’s precipitous fall could also have been Coinbase’s lackluster listing, with insiders dumping stocks to cash out.
 
While interest in cryptocurrencies is on the rise again after companies from PayPal to Square started enabling transactions in Bitcoin on their systems, and Wall Street firms like Morgan Stanley moved toward providing access to the tokens to some of the wealthiest clients, regulatory oversight is also causing discomfort in some quarters.
 
Governments globally are inspecting risks around the cryptocurrency sector more closely as the investor base widens.
 
Last week, U.S. Federal Reserve Chairman Jerome Powell said Bitcoin “is a little bit like gold” in that it’s more a vehicle for speculation than making payments, but that recognition was a cue for investors to head into the cryptocurrency markets.
 
And earlier in January, European Central Bank President Christine Lagarde took aim at Bitcoin’s role in facilitating criminal activity, saying the cryptocurrency has been enabling “funny business”.
 
Turkey’s central bank outright banned the use of cryptocurrencies as a form of payment from the end of this month, saying the level of anonymity behind the digital tokens brings the risk of “non-recoverable” losses.
 
And India is expected to propose a law that bans cryptocurrencies and fines anyone trading or holding such assets.
 
Bitcoin’s most ardent proponents regard it as a modern-day store of value and inflation hedge, while others fear a speculative bubble is building.
 

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Apr 20, 2021

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