Novum Alpha - Daily Analysis 1 June 2021 (10-Minute Read)

Endemic. That's the word that more politicians are passing around as they convince hunkered down populations that their economies cannot afford to live in isolation indefinitely.

 
Top of the Tuesday to you and the start of a brand new month as stocks in Asia eked out gains in the morning session while the U.S. is still closed for the Memorial Day weekend.   
 

In brief (TL:DR)

 
  • U.S. stocks markets remained closed for the Memorial Day weekend. 
  • Asian stocks were steady early Tuesday as traders await gauges of manufacturing activity and key American jobs data later in the week to help assess the economic outlook.
  • The U.S. 10-year Treasury yield rose about one basis point to 1.61% (yields generally rise when bond prices fall). 
  • The dollar inched downward.
  • Oil climbed with July 2021 contracts for WTI Crude Oil (Nymex) (+1.55%) at US$67.35 as OPEC and its allies forecast that inventories will fall sharply this year if the group sticks to its current plan.
  • Gold had its biggest monthly advance since July with August 2021 contracts for Gold (Comex) (+0.38%) at US$1,912.50, as investors continued to bet on inflation risks and sought hedges.  
  • Bitcoin (+6.57%) recovered to US$37,736 and looks set to edge higher towards the end of the week 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. Hedge Funds Are Betting Against Commodity Price Inflation 
  2. IPO? Save It. 
  3. Bitcoin's Bridesmaid Ethereum Endures Selloff 

Did you miss "Women in Crypto #4: DeFi-ning DeFi"? Watch it here...

 

Market Overview

 
Endemic. That's the word that more politicians are passing around as they convince hunkered down populations that their economies cannot afford to live in isolation indefinitely. 
 
Trade and export-dependent manufacturing powerhouses in Asia can't afford to remain closed off indefinitely and Singapore is making the first move to aggressively vaccinate its population, while marking a path towards normalcy which acknowledges that the coronavirus is here to stay indefinitely.
 
Reports that Asian manufacturing rose despite Covid-19 flareups has provided the boost needed for markets on Tuesday morning with Tokyo's Nikkei 225 (+0.01%), Hong Kong's Hang Seng Index (+0.02%) and Seoul's Kospi Index (+0.78%) all higher, while Sydney’s ASX 200 (-0.52%) slipped as commodity prices weakened. 
 

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

 

1. Hedge Funds Are Betting Against Commodity Price Inflation

 
  • Net bullish calls on commodities by hedge funds have dipped to their lowest levels since last year 
  • Bumper harvests, mild weather and China paring down purchases are all undermining the case for a commodities supercycle
 
If the so-called “smart money” is any indicator, bets on a prolonged rally in commodity prices have peaked, with hedge funds pulling their money out of the markets for the third straight week.
 
Cutting bullish bets on everything from cotton to copper, nickel to natural gas, hedge fund holdings this week in 20 of the 23 commodities tracked in the Bloomberg Commodity Index fell by the most since last November, according to data from the U.S. Commodity Futures Trading Commission and Intercontinental Exchange.
 
Both milder weather and the prospect of bumper harvests across the U.S. are reducing demand for natural gas while oil markets are bracing for bigger supplies.
 
China, long relied on to hoover up excess in the commodities market, is now moving to contain high raw material prices and paring down purchases, which is putting in serious doubt the commodity supercycle that some producers may have been hoping for.
 
But what the pullback in hedge fund positions does suggest is that moving forward, commodity prices may be more a reflection of supply and demand, as opposed to speculation.
 
Plentiful rain in the U.S. crop belt are also expected to increase the yield prospects for corn and soybeans, replenishing previously depleted global stockpiles and providing the animal feed necessary to help pare down livestock prices.
 
Regulatory data has revealed that the net-bullish bets for Chicago corn fell for the sixth straight week in a row to their lowest level since December, while bullish bets on soybean meal were cut in half.
 
Mild weather conditions in the U.S. have also seen a drop off in demand for natural gas, and hedge funds have slashed net-long stakes by 7%, the lowest in six weeks.
 
Oil is coming under pressure as well as the market braces for a flood of supply from major oil producing countries, including Iran, where the Biden administration has shown an eagerness to enter a deal to return to pre-sanctions oil production.
 
But not all commodities are equal – funds are showing an appetite for arabica coffee, the type favored by Starbucks (+0.33%), with net bullish positions at their highest since November 2016 as drought continues to be a concern for Brazil, where the bulk of such coffee beans are produced.
 
And gold is not losing its shine either, with futures recently passing the US$1,900 mark and investors being lured back to the precious metal as an inflation hedge – net-long bets on gold hit their highest level in 20 weeks. 
 

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

 

2. IPO? Save It.

 
  • IPOs have progressively struggled in the second quarter of 2021, with fewer of them popping on the day of debut 
  • No sure thing when it comes to IPOs especially heading into the summer months when investors are enjoying a respite from lockdowns as the U.S. and Europe race to reopen 
 
Not so long ago, in a financial galaxy not so far away, getting some action on an upcoming U.S. IPO was a matter of who you knew, not what.
 
With the blockbuster IPOs of the past decade an almost guaranteed way for pre-IPO investors to make money, demand has cooled substantially since the red-hot first quarter of 2021.
 
New figures reveal that shares in recently floated companies have drifted lower and some high-profile debuts have flopped.
 
In January and February this year, data from Dealogic showed that on average, firms listing on the New York Stock Exchange or Nasdaq rose by 40% or more.
 
But by March and April, the average rise had dropped closer to 20% and in May it fell further to an average 18%.
 
While most companies still rise on their market debut, a number of firms have seen their shares tumble at the open, including Chinese insurance technology group Waterdrop (-2.47%), whose shares fell by 19% on debut, while biotech company Talaris Therapeutics (+6.28%) shed 4.4% at IPO.
 
Investors pre and post-IPO are becoming more discerning and markets have shifted from a “list-it and they will buy” mentality to one that actually assesses the quality of the listing.
 
And that has limited the ability of prospective IPOs to price their shares at the upper end of the range, with just one in four companies in the first quarter of 2021 pricing their IPOs above the expected range, according to data from Refinitiv.
 
But not all listings have flopped, hospital scrubs brand Figs (+13.76%), which joined the New York Stock Exchange last week and priced its IPO above the high point of its range added 36% in its first day of trading, rising another 14% on Friday.
 
And while some companies have decided to delay their listings, citing choppy equity markets in May, others like Coinbase Global (-4.27%), which opted for a direct listing, have seen their share prices trend in one direction only, downwards.
 
Moving forward, pre-IPO investors may have to more carefully discern the prospects and pricing of their target IPO investments, especially in sectors which either don’t stand out, or remain highly speculative. 
 
 

3. Bitcoin's Bridesmaid Ethereum Endures Selloff

 
  • Bitcoin pullsback more sharply in May compared with other cryptocurrencies, especially Ether
  • Ether may provide potentially greater upside as the range of applications and use cases for the Ethereum blockchain grows  
 
While the sharp correction in Bitcoin in May made headlines, away from the spotlight, Ether, the world’s second largest cryptocurrency by market cap remained remarkably resilient.
 
Ether’s resilience has now put into sharp focus whether it could one day usurp Bitcoin in market value.
 
As it stands, Bitcoin is currently twice as big in terms of market cap compared to Ether, a gap that narrowed to about US$350 billion in May, thanks to one of Bitcoin’s worst corrections but a far more measured pullback in Ether.
 
Ether proponents point to its use in a variety of applications, from decentralized finance to digital collectibles, as well as an ongoing upgrade to Ethereum that could see it move away from the energy-hungry proof-of-work mining practices that have dogged the cryptocurrency space, as factors which contributed to its resilience in the May selloff.
 
And that resilience has caused even Goldman Sachs (+0.51%) strategists as well as ARK Invest’s Cathie Woods to highlight Ether’s potential in recent times.
 
But Ether’s ascent may also be part of a secular trend as investors look beyond Bitcoin for pockets of value and potential in other cryptocurrencies.
 
According to data from CoinGecko, Bitcoin’s share of total cryptocurrency market value has declined to 43%, from over 70% heading into this year.
 
In a report last week, Goldman Sachs commodity strategists Mikhail Sprogis and Jeff Currie wrote that Bitcoin’s first-mover advantage appears “fragile,” adding there’s a high chance it will “eventually lose its crown as the dominant digital store of value to another cryptocurrency with greater practical use and technological agility.”
 
And while Bitcoin is down some 37% in May, Ether has fared relatively better, having shed only 11%.
 
Ether is also up more than 900% over the past year, compared with Bitcoin’s 275% rally. 
 

 

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Jun 01, 2021