Novum Alpha - Daily Analysis 11 June 2021 (10-Minute Read)
A fabulous Friday to you as inflation concerns take a backseat and U.S. stocks power ahead to fresh all-time-highs.
In brief (TL:DR)
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In today's issue...
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Market OverviewNobody wants the party to end, so it's convenient to ignore inflation data for now and keep the liquidity taps flowing.
And that's what markets seem to be saying as investors pushed U.S. stocks to fresh records, taking a bet that any bouts of inflation are likely to be transitory and leaving the scope for central bank support open.
Now that the markets have hardly reacted after the second consecutive month of inflation data hitting their highest level in decades, investors may be comforted that the talk of inflation fears are behind us, and focus on the one thing that matters - pumping markets to fresh records.
The CPI increase in May was driven largely by categories associated with a broader reopening of the U.S. economy, as vaccinations continue to bring the pandemic under control.
And fears of a rise in longer term borrowing costs also ebbed, even as Treasury yields spiked initially, they very quickly pulled back to their lowest level in weeks.
Asian markets saw a great Friday morning start with Tokyo's Nikkei 225 (+0.30%), Seoul's Kospi Index (+0.49%), Hong Kong's Hang Seng Index (+0.65%) and Sydney’s ASX 200 (+0.18%) all up.
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1. U.S. Inflation Sends Stocks Soaring
In what has come to be a recurring theme of the past few months, U.S. consumer prices have risen by 0.6%, higher than economist estimates and the second-largest advance in over a decade.
But who’s counting?
Rising by over 5% from a year ago, the CPI report showed steady growth in the cost of used vehicles, household furnishings, airfares and apparel, all categories to be expected as the U.S. emerges from the worst of the pandemic.
Far from shaking sentiment, markets mostly shrugged off the price increases, buying into the U.S. Federal Reserve’s narrative that price rises ought to be expected at least temporarily.
Shipping bottlenecks, including a resurgence of the pandemic in Southern China’s key export hubs, higher input costs from soaring commodity prices, and rising wages are putting pressure on companies looking to protect profit margins.
But far from roiling investors, the benchmark U.S. 10-year Treasury yield blipped momentarily before slipping below 1.5% as the CPI data was digested – yields fall when bond prices rise.
The dollar was flat and stocks rose to advance the S&P 500 to a fresh record, in signs that inflation isn't really a concern (until it is).
Earlier this year, inflation concerns saw both Treasuries and tech stocks pummeled, because inflation reduces the current value of the future stream of earnings for high-growth tech firms.
Yet if there were any such concerns with inflation, they were clearly put on the backburner as tech stalwarts like Amazon (+2.09%), Google (+1.13%) and Facebook (+0.67%) helped power the S&P 500 to an all-time-high.
Key to the continued rise in tech stocks has been an assumption that the U.S. Federal Reserve will continue to maintain its ultra-accommodative policies.
The nuanced nature of the CPI data – which all seem to point to seasonal rather than persistent inflation – support the Fed’s narrative that inflation data is coming off a low base and transient factors won’t lead to runaway inflation.
And that's good for tech.
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2. Gaming without Consoles?
Looking to score a PlayStation 5 or the Xbox Series X? No problem if you’re willing to pay as much as ten times the retail price.
With pandemic-induced demand outstripping supply and when much of the world was in lockdown, scalpers hoarded PS 5s and Xboxes, holding gamers to ransom globally.
A global chip shortage isn’t helping matters either.
Microsoft may have a solution, with its Xbox gaming unit working on deals with TV makers that will let consumers play games and experience the Xbox in its full 4k glory without ever needing to stand in line to snag an actual XBox in person.
After all, we stream music, videos and content, why don’t we stream video games as well?
Part of the issue of course is (as any gamer will tell you) frames win games – the refresh rate or framerate of a video game could make the difference between a shot landing and you winning a Battle Royale, or you getting shot instead and there's only so much that can be processed through the internet.
Key to keeping those frames up is powerful hardware and a strong internet connection, which affects the ping or lag of a game.
Microsoft’s proposed solution is to embed the Xbox experience directly into an internet-connected TV with nothing needed apart from a video game controller.
Xbox is also working on streaming devices that would enable cloud gaming services on “dumb” TVs or any monitor as well.
Cloud-based gaming could both boost and smooth revenue at Microsoft, by getting more customers to buy-in to video game subscriptions, the company could unlock an entirely new segment of the market – casual gamers who aren’t willing to shell out the hundreds of dollars to invest in a new console.
And just like how companies make more money by selling you the razer blades than the razer itself, Microsoft revealed that subscribers of its Xbox Game Pass service are already buying far more content beyond their monthly subscription, spending up to 50% more on extra games and downloadable content.
The shift towards subscription-based gaming could provide a huge bump for companies like Nvidia as well, whose graphics processing units are now incredibly elusive due to a global chip shortage and possibly even out revenues for the chipmaker in the long run as well.
Nvidia is working on cloud-based GPUs, that could one day level the playing field for gamers who may not have thousands of dollars to shell out for high-end silicon and could support an entirely new industry - where investors pay for GPUs sitting in the cloud to provide gaming services to gamers everywhere.
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3. Bitcoin Busts the Banks
“You have to spend money to make money” and when it’s come to banks dealing in Bitcoin, that adage might be more literal than figurative.
As global regulators tighten the noose around Bitcoin, yesterday, the Basel Committee on Banking Supervision (think of it as Eurovision for banks) proposed a 1,250% risk weight be applied to any bank’s exposure to Bitcoin and certain other cryptocurrencies.
In practice, that means that a bank may need to hold a dollar in capital for each dollar worth of Bitcoin (DeFi anyone?), based on an 8% minimum capital requirement.
If enforced, banks holding cryptocurrencies would be akin to the overcollateralized lending pools that are characteristic of decentralized finance.
In the report by the Basel Committee, which includes key central banks like the Federal Reserve and the European Central Bank, the proposal noted,
“The growth of cryptoassets and related services has the potential to raise financial stability concerns and increase risks faced by banks.”
“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss.”
By implication the Basel Committee contemplates a situation when cryptoassets devalue to zero, which is why the capital requirements for banks holding cryptocurrencies is so high.
The proposal is open to public comment before it takes effect and the Basel Committee has stated that it is likely to change several times as the market evolves.
While no timeline was specified in the report for the proposed rules to take effect, the process for agreeing and implementing Basel rules typically takes years.
Nonetheless, that the Basel Committee would propose banking regulations on cryptocurrency holdings demonstrates just how far cryptocurrencies have come of late.
Although the nascent asset class has more than a decade of history, cryptocurrencies really came to the fore over the past pandemic year, and the Basel Committee proposal, actually legitimizes their existence.
While many banks have been cautious about diving deep into cryptocurrency trading, the surge in retail interest has driven financial firms, including Interactive Brokers and Robinhood Markets to expand access to the market.
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Jun 11, 2021