Novum Alpha - Daily Analysis 8 June 2021 (12-Minute Read)
A reversal, regardless of how momentary, has seen tech stocks rally even as cyclicals and so-called value stocks faltered as the U.S. headed into the trading week.
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A terrific Tuesday to you as trading in America got off to a bit of a choppy start.
In brief (TL:DR)
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In today's issue...
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Market OverviewGuess who's back? Back again? Tech is back, tell a friend. Guess who's back, guess who's back, guess who's back...
Not sure where inflation is headed? Bet on tech. Unclear about the economic recovery? Bet on tech. Uncertain unemployment data? Bet on tech.
A reversal, regardless of how momentary, has seen tech stocks rally even as cyclicals and so-called value stocks faltered as the U.S. headed into the trading week.
There are of course a variety of reasons for the shift, but chief among which are concerns that rising labor costs could affect those economically more exposed stocks which also hire the most number of people, including airlines, hospitality, retail and restaurants.
As the U.S. emerges from the pandemic, demand for frontline service staff has been so high that wages are picking up, but that's also led investors to question whether these already fragile companies that are just re-entering the economy can stomach compression of their margins without raising prices, and whether they even have the power to raise prices without hitting demand.
And that's seen a return to bets on tech stocks and that perennial favorite, U.S. Treasuries which have seen yields relatively stable despite favorable employment data and signs that prices may be increasing.
Over in Asia, weakness in the dollar saw bargain hunting for good returns with Tuesday's morning trading session seeing Tokyo's Nikkei 225 (+0.28%), Seoul's Kospi Index (+0.17%), Hong Kong's Hang Seng Index (+0.56%) and Sydney’s ASX 200 (+0.11%) all up.
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1. The Fed Unwinding May Not be as Messy as Thought
To be absolutely fair, the amount of the unwind wasn’t all that big, but the psychology behind the move was significant.
During the throes of the pandemic, the U.S. Federal Reserve moved with an emergency facility that scooped up bond ETFs as part of a comprehensive effort to keep credit flowing amid the coronavirus crash, which gave enough confidence for investors to follow its lead.
The Fed ended up buying just US$8.6 billion worth of bond ETFs, but the Fed’s entry into the credit market was seen as a stamp of approval for a structure that’s long been a subject of controversy.
Critics have long cautioned that fixed-income ETFs, which are more liquid and trade far more frequently than the underlying bonds they held, would exacerbate selling pressure during a downturn.
But the pandemic threw those critics a curve ball, with the Fed’s timely intervention on multiple fronts, slashing interest rates to near zero, and unleashing massive amounts of quantitative easing seeing yields plummet.
And in that yield-starved environment, the demand for debt (oftentimes regardless of quality) soared.
The spiritual presence of the Fed in these bond ETF markets was enough to shore up confidence that the central bank would do whatever it took, but in terms of actual magnitude, the recent decision to unwind positions are a but a drop relative to the broader credit ETF ocean.
Far from tanking, bond ETFs soaked up a record US$206 billion in 2020, shattering the previous record of US$154 billion with the bulk of those flows coming in the weeks and months after the Fed initially said it would begin buying credit funds last March.
Market demand for debt has been seemingly insatiable, and while bond ETF markets weren’t rattled by the Fed’s recent decision to unwind its positions, the bigger threat is inflation.
This year, flows into bond ETFs have been tepid as the U.S. emerges from the pandemic, stoking inflation fears and souring appetite for long-duration assets that may provide the perfect backdrop for a somewhat risky, but potentially profitable bond trade.
Because inflation data is a lagging indicator, depending on one’s outlook of whether this current bout of inflation is temporary or likely to set off a run of sharp and persistent run of price increases, one trade could be to wait until market expectations of inflation are high and snap up bonds on the cheap, in particular investment-grade bonds of some of the best companies in the business.
As U.S. Treasury Secretary Janet Yellen and her ex-colleagues at the U.S. Federal Reserve have reiterated, it only feels like inflation is an issue right now because of the way data is captured - prices are rising from a low pandemic-distorting base.
And if China, which has tightened liquidity and which emerged from the pandemic earlier, is any precedent to go by, a sharp uptick in prices hasn’t been the universal post-pandemic experience.
While pent-up demand saw some increase in prices during the early stages of recovery, resurgent coronavirus hotspots and general uncertainty over the path of the global economy has seen savings rates remain persistently high.
The current clutch of vaccines appears to be holding up well against coronavirus variants, but a global second wave, or prices not rising as quickly or as persistently as bond markets anticipate, may provide the perfect setup for a profitable bond trade.
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2. Apple Wants You To Stay Within Its Walled Garden Where It's Nice
Natasha Young watches her math class on her iPad, before accessing her lesson plan from her school on her Mac, and finally chats with her classmates on iMessage on her iPhone.
The pandemic and its lockdowns have provided a golden opportunity for the world’s most valuable tech company, Apple, to ensconce its users within its walled garden, which provide seamless transitions between devices and a level of intuitiveness that users, particularly young ones like Natasha appreciate.
As classrooms and boardrooms have increasingly gone digital, employers and students are having to navigate a smorgasbord of apps and devices to communicate – do we dial in on Microsoft (+1.20%) Teams (who does?) or use Zoom?
Should we use Slack (+0.36%) or Discord?
As a mind-numbingly plethora of communication tools becomes available, with each organization and individual having their own favorites, Apple is looking to close the last remaining gaps in its walled garden to end the discussion – just use Apple.
Previewing its next-generation iPhone, iPad, Mac, Apple TV and Watch operating systems, Apple is adding a slew of new privacy, health, smart home, messaging, maps and digital wallet features that it hopes will one day be the ecosystem to rule them all.
At its virtual Worldwide Developer Conference on Monday, the company focused heavily on how it has made its FaceTime a better experience, taking the fight to the pandemic video conferencing darling Zoom Video Communications.
And unlike Zoom, there is no 40-minute time limit on FaceTime, whilst adding stronger privacy controls, to reduce the odds of being “Zoom bombed.”
But what’s a walled garden if you don’t have a gate to let people in?
To that end, FaceTime doesn’t just get higher video and audio quality, but the ability to schedule calls (like Zoom) and for the first time, invite Android and Windows users to the chat.
But even more than that, FaceTime users will also be able to watch video, listen to music, access apps and share screens together, thanks to a fresh SharePlay feature, and far more than can be done using Zoom.
And as the shift to work from home is likely to be durable in a growing number of industries, Apple is integrating its Mac personal computer line to sync more seamlessly with its mobile devices, even using the Mac keyboard and trackpad to control an iPad and drag and drop files between multiple devices.
These shifts with the fresh iOS update are a big deal, because companies which are looking for holistic productivity solutions may see the value in investing in a completely Apple solution, save for one big caveat – productivity applications, which are overwhelmingly dominated by Microsoft’s Office suite of programs.
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3. Investors Betting on Inflation Could Do Worse Than Bitcoin
Gold has seen massive inflows, both for the precious metal itself and gold ETFs, at a time which coincided with sharp corrections in Bitcoin, leading some to suggest that investors are looking to beef up their inflation hedges with something perhaps a little less volatile.
But in case one should mistake correlation for causation, SkyBridge Capital, a US$7.5 billion hedge fund, says that investors seeking currency alternatives as global debt balloons, should look to Bitcoin and not just bullion.
As gold pushes northwards, Troy Gayeski, co-CIO and senior portfolio manager at SkyBridge Capital has said that both gold and Bitcoin are likely to rally, even as some investors see the two asset classes as mutually exclusive and recent flows perceived as cannibalizing demand between themselves.
Speaking with Bloomberg via a phone interview last week, Gayeski said,
“We’re going to stick to Bitcoin and crypto because we just think there’s more upside.”
While acknowledging far more volatility in the process, Gayeski also noted that “you’re going to capture a little bit more juice than you will in gold from that same phenomenon (inflation).”
SkyBridge Capital’s fledgling Bitcoin fund is up 51.2% since its inception last December through June.
Investors are continuing to track commentary by Fed officials as inflation data suggests that prices are rising fast and assessing when policymakers will start to pare back the huge asset purchases that propped up the U.S. economy during the depths of the pandemic.
Last week, the Fed announced that it would be exiting positions it had taken up in the bond ETF markets, but given the relatively small size of those holdings, hardly measured a blip in overall bond markets.
But the massive monetary support through US$120 billion-a-month asset purchases by the Fed has driven the central bank’s balance sheet to record levels while a fiscal spending avalanche, which only looks set to balloon in the wake of the Biden administration poses an eventual risk to the dollar’s value, burnishing the appeal of alternatives.
While Bitcoin volatility often makes headlines, bullion is no slouch either when it comes to turbulence, with both assets seeing substantial swings this year in what appears to be a battle for alleged inflation-protecting dominance.
Bitcoin came close to US$65,000 in April before plummeting to around US$36,000 where it currently trades while gold came close to entering a bear market in March before staging a dramatic turnaround the erased an entire year’s worth of losses.
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Jun 08, 2021