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

Inflation is everywhere and nowhere. The signs are everywhere - surging commodity prices are putting upwards pressure on prices and manufactured goods, but at the same time, central banks are printing so much money that at some stage, prices were bound to trend higher.

A terrific Tuesday to you as markets tank on the prospect of inflation. 

In brief (TL:DR)

  • U.S. stocks hit Monday tanking with the S&P 500 (-1.04%), blue-chip Dow Jones Industrial Average (-0.10%) and tech-centric Nasdaq Composite (-2.55%) all lower as early data suggests that inflation is likely to be higher and betting that central banks will be forced to act. 
  • Asian stocks slid Tuesday after a technology-led tumble on Wall Street and surging commodity prices stoked concern about inflation.
  • The U.S. 10-year Treasury yield dipped about one basis point to 1.59% (yields generally fall when bond prices rise), in a volatile trading session that saw yields surge on concerns over inflation. 
  • The dollar pared a decline.
  • Oil fell with June 2021 contracts for WTI Crude Oil (Nymex) (-0.51%) at US$64.59 as traders monitored the worsening fallout from the closure of the largest U.S. oil-products pipeline.
  • Gold was little changed with June 2021 contracts for Gold (Comex) (+0.01%) at US$1,837.70 even as the dollar declined. 
  • Bitcoin (-5.44%) fell to US$55,578 on the back of a selloff in tech stocks and with inflows into exchanges in Asian trading putting a downwards pressure on price (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 


In today's issue...

  1. The Prospect of Inflation is Deflating Risk Assets 
  2. Roblox is Making Real Bucks
  3. Rise of Ether Spikes Concerns of a Bubble

Market Overview

Inflation is everywhere and nowhere. 
The signs are everywhere - surging commodity prices are putting upwards pressure on prices and manufactured goods, but at the same time, central banks are printing so much money that at some stage, prices were bound to trend higher. 
Free money won't stop, so investors concerned about inflation and the inability for wages to keep up should also note that wage increases are evident as well. 
The music only really stops when the U.S. Federal Reserve stops printing money and stops buying up assets. 
Is inflation a concern? Only if the central bank stops printing. 
In Asia, the Monday morning trading session saw a uniform and sharp fall across all indices with Tokyo's Nikkei 225 (-2.64%), Seoul's Kospi Index (-1.58%), Sydney’s ASX 200 (-1.06%) and Hong Kong's Hang Seng Index (-2.22%) all sharply lower on concerns over inflation and a tumble in tech on Wall Street. 

Did you miss us at the World Family Office Forum? Watch it here...


1. The Prospect of Inflation is Deflating Risk Assets

  • Investors are getting jittery over inflation, even though the U.S. Federal Reserve has pledged to hold rates down for longer
  • Lower-than-expected job growth numbers out of the U.S. last Friday provide more than enough grounds for the Fed to keep rates lower for longer, in line with broader employment grounds 
The jury is still out on inflation, but investors are already voting with their feet.
Ahead of Tuesday’s Chinese factory gate prices, an early indicator of price pressures for western importers, and Wednesday’s U.S. headline price data, investors are bracing for growing signs of inflation.
Expectations for Chinse factory gate prices are a rise of 6% while U.S. headline price data is expected to come in at 3.6%, with many investors speculating that the U.S. Federal Reserve will need to act, either through constricting monetary policy or easing off asset purchases.
Why investors are jittery is less clear though, with the Fed having pledged to remain relaxed about its 2% inflation target until the U.S. reaches full employment.
The Fed has also indicated that it has no plans to reduce its US$120 billion monthly bond purchases that have kept a lid on U.S. Treasury yields, which influence borrowing costs worldwide.
Yet somehow investors have decided to focus on the prospect of inflation, instead of the reality that poorer job data last Friday has provided precisely the justification for the Fed to maintain the status quo for longer.
If nothing else, several months of strong inflation data hitting bond prices and pushing yields higher, may even spur the Fed to ratchet up purchases.
Rising bond yields depress valuations of stocks, particularly long-term growth stocks such as tech firms, which do not pay generous dividends.
Some analysts suggest that tech stocks, which were the darlings of the pandemic, may find it hard to sustain their current levels of earnings growth as lockdowns ease and tax reform in the U.S. may see these companies exposed to higher levels of exposure.
But these views also assume that the pandemic is more or less over, even though it’s not.
While the U.S. is recording its lowest level of infections in 11 months, over in India, the coronavirus is sweeping across the country like a wildfire, with the potential for mutations to defeat existing vaccines high.
In other countries where the pandemic had been presumed to have been defeated, fresh outbreaks are erupting, straining healthcare infrastructure once again.
And last Friday, only 266,000 new jobs were created in the U.S., well below forecasts and a sign that the Fed’s key metrics for withdrawing support are nowhere close to being met.
That in and of itself should provide some food for thought for skittish investors dumping tech stocks and pricing in tighter conditions. 

Did you miss us at the World Family Office Forum? Watch it here...


2. Roblox is Making Real Bucks

  • Video game platform doubles first quarter revenue, even as losses widen 
  • Gamers spending real money to buy virtual dollars is a durable trend, as is gaming as an entertainment option 
What better video game to play than one that you’ve made yourself.
As the pandemic fueled demand for at-home entertainment, video game publishers cashed in and nowhere was this more apparent than for videogame company Roblox (-5.74%), which saw first quarter revenue more than double.
Growth came as users spent more money on Robux, the virtual currency used in Roblox, used to buy in-game items like pets and costumes for players’ avatars.
But those Robux haven’t yet translated into real dollars, with Roblox posting a nearly 82% wider loss over the same period last year, its first quarterly report since it started trading publicly in March, on higher costs to support growth and for expenses tied to its direct listing.
Roblox is no newcomer to the video gaming industry, having started in 2004, it provides a free online platform on consoles, computers and mobile devices that features millions of games made by its users.
Providing game-creation tools, Roblox shares revenue with its developers from sales of the platform’s virtual currency and players buy Robux with real bucks to acquire perks.
Roblox’s business model has proved to be extremely sticky for its user base, the majority of whom are under 13, and daily user growth is up 79% from the same period last year.
Video game companies have had a stellar quarter, with Activision Blizzard (-1.72%), maker of the popular Battle Royale game Warzone and Zynga (-6.01%), posting strong results for the March-ended quarter.
But while the last quarter has been encouraging, most video game companies are warning of more modest growth ahead as economies reopen in many parts of the world.
A contrarian view would suggest that given the highly addictive nature of video games, user growth is likely to increase as opposed to decrease.
While many new gamers were brought in by a lack of non-digital entertainment options because of pandemic lockdowns, this new user base, which has already invested in gaming equipment, is likely to continue gaming, as part of evolving entertainment habits. 

3. Rise of Ether Spikes Concerns of a Bubble

  • Bitcoin's dominance wanes, leading some analysts to speculate that a bubble is being inflated in more speculative cryptocurrencies 
  • Use cases for other cryptocurrencies far greater than for Bitcoin and the industry is too much in its infancy to draw premature conclusions  
Critics of cryptocurrencies slam their lack of use cases, yet when it comes to Ethereum, the world’s most heavily used blockchain, they slam its rally as signs of a bubble.
Some are suggesting that parabolic jumps in cryptocurrencies such as Ether, Dogecoin and Binance Coin, which have all outshone Bitcoin, as signs that the entire cryptocurrency sector is ripe for a reckoning.
But naysayers are missing the point entirely.
Each of these cryptocurrencies listed has a role.
Ether supports the smart contract ecosystem and decentralized finance or DeFi. Those NFTs you’ve been hearing about? Built on Ethereum.
And Binance Coin has long been held by crypto-natives to generate yield as well as to reduce transaction fees for trading on the world’s largest cryptocurrency exchange by volume.
So what about Dogecoin then?
Well, it’s a joke. Nothing more, nothing less.
The same way that someone would pay to attend a comedy club, they’d pay to hold some Dogecoin and laugh it up.
Are they all forms of speculation? Absolutely.
Make no mistake about it, whether you’re holding cash or cryptocurrencies you’re speculating.
If you’re holding cash, you’re speculating that your central bank won’t debase the face value of your currency and if you’re holding cryptocurrencies, you’re speculating that the value of cash will decline relative to this nascent asset.
Every minute a speculation is being made, it’s just whether or not you’re aware of it.
But a note last Friday from JPMorgan Chase (-0.02%) suggests that Bitcoin’s waning dominance carries echoes of “froth” to the extent that it’s being fueled “by a rally in other cryptocurrencies driven more by retail demand.”
Make no mistake about it, the arrival of professional investors into cryptocurrencies in larger numbers is a relatively recent affair.
For the longest time, the cryptocurrency space had been about retail and is likely to tend retail-heavy for awhile, short of comprehensive regulations being rolled out by lawmakers.
What’s troubling for traditional investment analysts is that each time they’ve pointed to stimulus-fueled rallies in cryptocurrencies precipitating a sharp fall, they’ve only rallied harder.
And Bitcoin’s waning dominance may be more a function of investors getting more comfortable with a wider range of digital assets, than a sure sign of a bubble.
Since when did Bitcoin become the “mature asset” of the cryptocurrency industry?
That’s like saying that buying any stock outside of General Electric (+0.38%) is signs of a bubble – see how far that gets your investment dollar. 

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May 11, 2021

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