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Novum Alpha - Weekend Edition 29-30 May 2021 (10-Minute Read)

While some investors are assuming that the pandemic is all but licked and inflation in all price-hitting glory is just around the corner, more than a handful are betting that accommodative central bank policy will keep the party in risk assets on for just one more session. 


A wistful weekend to you as the U.S. heads into the long weekend for Memorial Day.  
 

In brief (TL:DR)

 
  • U.S. stocks finished in form heading into the long weekend, with the blue-chip Dow Jones Industrial Average (+0.19%), benchmark S&P 500 (+0.08%) and tech-centric Nasdaq Composite (+0.09%) all up, as Americans celebrate Memorial Day outside barbecuing and at parties. 
  • Asian stocks finished higher on Friday as prospects for a sustained economic rebound in the U.S. outweighed inflation fears. 
  • The U.S. 10-year Treasury yield slipped to 1.584% as bond yields started to spread and demand for government debt returned (yields generally fall when bond prices rise). 
  • The dollar inched up on the back of economic optimism. 
  • Oil slipped with July 2021 contracts for WTI Crude Oil (Nymex) (-0.79%) at US$66.32 ahead of an OPEC meeting where producers are expected to push for increasing supplies as the global economy recovers. 
  • Gold rose with August 2021 contracts for Gold (Comex) (+0.36%) at US$1,905.30, with flows into gold-backed ETFs and other gold products surging. 
  • Bitcoin (-3.63%) fell into the weekend to US$36,594 as traders succumbed to the slew of criticisms against Bitcoin from central bankers and on increased fears that China would continue in its crusade against cryptocurrency miners even as outflows from exchanges outpaced inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

 

In today's issue...

 
  1. Reflation Trade? What's That? 
  2. Retail Investors Come to the Rescue in Asia
  3. Central Bankers are Blasting Bitcoin & That's A Great Thing! 

 

 

Market Overview

 
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
 
- Winston Churchill 
 
While some investors are assuming that the pandemic is all but licked and inflation in all price-hitting glory is just around the corner, more than a handful are betting that accommodative central bank policy will keep the party in risk assets on for just one more session. 
 
But neither narrative is gripping the markets, with just as many bets on growth stocks as there are on value stocks on signs that the U.S. economy is recovering. 
 
The Nasdaq 100, a benchmark indicator for tech's fortunes has outperformed the more venerable Dow Jones Industrial Average by the highest level in over seven weeks. 
 
And even as the economies of the west reopen, Asian countries are facing renewed lockdowns as the slow pace of vaccinations has facilitated fresh flare-ups in many key markets. 
 
Nonetheless, the export-oriented economies of Asia all saw a boost from the fortunes of the U.S. heading into the weekend, with Tokyo's Nikkei 225 (+2.10%), Hong Kong's Hang Seng Index (+0.04%), Seoul's Kospi Index (+0.73%) and Sydney’s ASX 200 (+1.19%) all up. 
 

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

 

 

1. Reflation Trade? What's That?

 
  • Investors sour on the so-called reflation trade in economically sensitive stocks and resume consumption of tech stocks and Treasuries 
  • Markets are likely to remain volatile in the absence of any clear economic data on recovery, employment and with the constant guessing game of when the U.S. Federal Reserve will turn hawkish 
 
When the U.S. economy started picking up steam again and with as many as half of all Americans having received at least one vaccine does, there was a view in some investment circles that it was finally time to put on the big boy pants.
 
Forget about meme stocks and cryptocurrency, experts in valuation and price-to-earnings ratios were once again holding court.
 
But it appears that their time in the sun was brief, as the so-called reflation trade has started to ebb in influence.
 
Judging by a slew of cross asset signals and where billions in investment flows are headed, exposure to more “sensible” value stocks and economically more sensitive equities has waned while volatility has returned to both meme stocks and cryptocurrencies, with the Nasdaq 100 outperforming the blue-chip heavy Dow Jones Industrial Average by the most in over seven weeks.
 
While the S&P 500 remained largely flat and debt gauges of inflation retreated from their most recent highs, suggesting that investors are more concerned about growth than they are about inflation. 
 
That’s not to say that the reflation trade is completely dead.
 
Investors are just now consuming economic data and taking pause, reverting to familiar themes that served them well during the pandemic, assured that the U.S. Federal Reserve has their backs.
 
Against this backdrop, some fixed income investors are betting against higher levels of inflation, with government debt and corporate securities still finding no shortage of buyers and feeding into the Fed’s narrative that any inflationary episodes are likely to be fleeting.
 
Much will depend on the sustained economic data following the U.S. reopening and whether prices are rising quickly enough for the Fed to bring forward considerations of tapering asset purchases, or maintain the status quo.
 
Until the next Fed meeting at least, and without any unequivocal economic data, markets can expected to continue being volatile, with some investors betting on inflation bringing forward tightening, while others betting on the status quo.  
 

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

 

 

2. Retail Investors Come to the Rescue in Asia

 
  • Retail flows now make up the heavy bulk of trading volumes in key manufacturing hubs in Asia
  • Shift is likely to prove durable as the gamification of trading and investing likely to be more sticky smartphone obsessed Asia 
 
While there have been no stimulus checks in the mail, Asian retail investors are providing a shot in the arm for markets in Asia, where many investors still remain without shots in the arm (vaccine of course) and underscoring the growing influence of retail traders globally.
 
And nowhere has the power of retail investors been more apparent than in Vietnam, the unwitting beneficiary of a disastrous trade war between China and the United States.
 
As the Trump administration raised tariffs against China, multinational firms scrambled to find nearby manufacturing hubs to relocate their businesses, many of them making the relocation long term as Vietnam was seen as being a less risky bet should a full blown trade war erupt between Washington and Beijing.
 
And that has seen an increase in the number of retail investors in Vietnam flush with cash lift their local markets.
 
Retail investors now account for about 90% of turnover in Vietnam while the VN Index has surged by a fifth this year alone.
 
But Vietnam is hardly alone in making it big with small investors.
 
Other Asian manufacturing giants like South Korea and Taiwan that prospered from Sino-American trade tensions have seen an influx of retail investors drive markets there 10% higher this year alone and with individuals responsible for over 70% of turnover.
 
And these rallies have come even as foreign investors remain net sellers in Vietnam, South Korea and Taiwan, demonstrating that the retail investor boom started in the U.S. is hardly peculiar to that country alone.
 
Amid fresh outbreaks and renewed lockdowns in Asia, more retail investors who had gorged themselves on a steady diet of South Korean soap operas have been pouring into the stock markets for entertainment, against a backdrop of paltry interest rates from savings accounts.
 
And the proliferation of zero or low-fee trading apps in Asia, similar to the revolution witnessed in the U.S. is just taking grip in Asia, where mobile devices are prolific.
 
As these retail investors pick up knowledge and skill in trading and investing, some analysts expect them to add to the heightened levels of volatility that marked episodes in the U.S. markets.
 
Case in point, earlier this month the benchmark Taiwanese stock index plunged to its worst weekly drop since March 2020, as a fresh surge of coronavirus infections rocked the island, only to see those losses reverse over the next two weeks.
 
And with vaccinations in most Asian countries far slower than in the U.S. and Europe, the likelihood of repeated coronavirus flareups remains extremely high, with their ensuing lockdowns a constant risk, ensuring a captive audience for local markets.
 
In Asia, Singapore leads in terms of vaccinations, with at least a third of its citizens already having received at least one dose, whereas China’s vaccination program is at 10%, and the rest of Asia is far behind.
 
But whether the frenetic pace of trading in Asia’s manufacturing hubs is sustainable is anyone’s guess.
 
In Taiwan, volumes were as high as six times what was witnessed just half a decade ago.
 
Yet analysts ruling out the durability of retail influence in stock markets may be discounting the substantial stickiness of smartphone app usage.
 
Just as how checking social media has developed into a habit, checking one’s stock portfolio through smartphone trading apps could be as well.
 
The gamification of investing is a relatively recent phenomenon and could have substantial influence on markets for years to come -  that local investors in Asian markets have stepped in to fill the gaps left behind by their more skittish global counterparts should be welcome.
 
During the 1997 Asian Financial Crisis, retail investors in Asia were not yet at the stage of prosperity to meaningfully cover the gaps left in the wake of huge outflows of funds from the region.
 
Retail presence to pick up the slack of late should give investors in these more locally-centric markets some comfort that they could potentially act as ballast in the event that larger institutional flows should leave. 
 
 

3. Central Bankers are Blasting Bitcoin & That's A Great Thing!

 
  • Bitcoin comes of age as a growing chorus of central bankers flame it 
  • Ray Dalio's warning that Bitcoin's greatest threat is its own success rings true, as more investors become comfortable with cryptocurrencies, there is a danger that authorities will no longer adopt such a relaxed stance towards the nascent asset class 
 
Do you know when you’ve made it on Twitter (-0.14%)? When somebody famous takes issue with a comment you made.
 
The tried and tested art of trolling is one of the more pedestrian methods to achieve social media acclaim, so how should Bitcoin maximalists react to the fact that more central bankers are trolling their favorite cryptocurrency?
 
With celebration of course.
 
The worst thing you can do to someone is to ignore them, but criticize them and you’ve gained an audience.
 
And nothing quite says "validation" like a central banker’s criticism.
 
In the past week, the Danish central bank has trolled Bitcoin by calling it a “fad” while the Bank of Japan’s Governor Haruhiko Kuroda has flamed the cryptocurrency as well, revealing in an interview on Thursday,
 
“Most of the trading is speculative and volatility is extraordinarily high. It’s barely used as a means of settlement.”
 
Big words from a central bank that’s responsible for negative interest rates on Japanese government bonds.
 
A growing chorus of central bank voices are sh*tting on Bitcoin just as its popularity is reaching a nadir.
 
Bank of England Governor Andrew Bailey warned earlier this month that cryptocurrencies have no intrinsic value and that people should only buy them if they’re prepared to lose their money, which is ironic given that the same criticism could also be leveled at fiat currencies.
 
From the U.S. Federal Reserve’s Jerome Powell dismissing cryptocurrencies as simply vehicles for speculation in April, to European Central Bank Vice President Luis de Guindos arguing that tokens shouldn’t be seen as real investments, there’s no shortage of central bankers who are critical of cryptocurrencies.
 
Yet investors don’t immediately appear to be heeding central bankers’ calls to dismiss Bitcoin and if nothing else, may even be spurred on to invest in the nascent asset class.
 
While Bitcoin plunged some 18% last Sunday, it recovered just as quickly on Monday, rallying by some 16% and continues to be volatile.
 
If Bitcoin wasn’t at all significant, why would central bankers even deem it necessary to dismiss it?
 
Let’s not forget that throughout most of 2017 as Bitcoin rallied, it was hardly on the agenda at Davos let alone on the tip of central bankers' tongues.
 
If nothing else, the attitude of most central bankers at the time, including then-IMF chief Christine Lagarde, was one of curious dismissiveness.
 
And that’s why billionaire hedge fund investor Ray Dalio’s warning that Bitcoin’s biggest threat could be its own success is prescient.
 
While Bitcoin was nothing more than a curiosity on the tech fringe, central bankers found it easy to ignore, that they’ve taken to trolling it should be seen as both validation and disconcerting. 
 

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May 29, 2021

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