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Novum Alpha - Daily Analysis 14 June 2021 (10-Minute Read)

The U.S. Federal Reserve is meeting again today and the bets are in on whether or not policymakers will respond to rising consumer prices.

A magnificent Monday to you as we head closer to the middle of the year! 

In brief (TL:DR)

  • U.S. stocks entered the weekend higher in a choppy trading session with the blue-chip Dow Jones Industrial Average (+0.04%), the S&P 500 (+0.19%) and tech-centric Nasdaq Composite (+0.35%) and stocks looking forward to a mixed bag this week as the U.S. Federal Reserve convenes for a meeting later in the week. 
  • Asian stocks were mixed Monday in holiday-thinned trading as investors prepared for a key U.S. Federal Reserve meeting later in the week.
  • Benchmark U.S. 10-year Treasuries finished at 1.47% after hitting three-month lows on Thursday and notching their biggest weekly slide since December last week (yields generally fall when bond prices rise).
  • The dollar was steady against Group-of-10 peers during early Asian trading in the wake of a Group-of-Seven leadership meeting that emphasized unity. 
  • Oil surged with July 2021 contracts for WTI Crude Oil (Nymex) (+0.47%) at US$71.24 on demand recovery and rising shipping demand for fuel oil. 
  • Gold slipped with August 2021 contracts for Gold (Comex) (-0.74%) at US$1,865.70 as lowered inflation concerns remain low and with traders betting that the Fed will not taper anytime soon. 
  • Bitcoin (+9.37%) recovered to US$39,197 as outflows from exchanges led inflows on the back of numerous positive factors including Tesla's softening stance on accepting Bitcoin for payment (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. Shipping Costs Loom Large on Imported Inflation
  2. Will the U.S. Federal Reserve Taper? 
  3. What's Behind the Latest Bitcoin Bump?

Market Overview

The U.S. Federal Reserve is meeting again today and the bets are in on whether or not policymakers will respond to rising consumer prices. 
Inflation data, albeit distorted by the effects of the pandemic, are likely to loom large over discussions at the Fed, as it considers and possible policy shifts. 
But the bigger clue as to the status quo being maintained may be in the unemployment numbers. 
While employment data in the U.S. is improving, it is still well short of expectations, affected by seasonal imbalances and may not provide the strongly persistent and consistent evidence that the Fed will require before making any shifts in policy both with respect to tapering asset purchases and certainly not interest rates. 
Over in Asia markets were mostly muted with many major exchanges closed for a holiday with Tokyo's Nikkei 225 (+0.38%), up slightly, while Seoul's Kospi Index (-0.07%), was down but not a meaningful amount, Hong Kong's Hang Seng and Sydney’s ASX are closed for holidays.

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


1. Shipping Costs Loom Large on Imported Inflation

  • Record increase in shipping rates threaten to increase prices for goods just ahead of restocking inventories for the year-end peak holiday buying season
  • Longer risk for inflation is that even as shipping rates normalize, producers continue to keep prices elevated by raised shipping costs at those higher levels 
One of the key weaknesses laid bare by the global pandemic has been highly optimized supply chains with limited levels of redundancy built in.
As the pandemic meandered its way across the planet, supply disruptions affected everything from chips to cars.
But even as many parts of Europe and the U.S. emerge from the pandemic, thanks to robust vaccination programs, a new threat to recovery is emerging – shipping costs.
Over 80% of all goods are transported by sea, but freight-cost surges are threatening to lift the prices of everything from toys to turntables, coffee to cars, furniture to flax and adding to concerns of a global economy already bracing for accelerated inflation.
The timing could not be worse.
Although the Northern Hemisphere is in the middle of summer, this is also the time when retailers typically stock up in preparation of the year-end holiday shopping season, but a confluence of factors are conspiring to raise prices.
Soaring demand, a shortage of containers and saturated ports with too few ships and dock workers have contributed to the squeeze on transportation capacity on every freight route.
Fresh outbreaks of the coronavirus are also affecting Asian manufacturing export ports like Shenzhen and Guangzhou.
The cost of shipping a 40-foot container from Shanghai to Rotterdam is now some 547% higher than the seasonal 5-year average, according to Drewry Shipping.
Shipping costs do not typically form a large portion of overall cost of goods, but when rates go up that much, they can.
HSBC (+0.49%) estimates that a 205% increase in container shipping costs over the past year alone could raise Eurozone producer prices by as much as 2%.
At the retail level, merchants are stuck with a handful of unfavorable choices, stop trading, absorb costs to pass them on later, or simply raise prices – many have opted to just raise prices.
But while increased shipping costs may hit discount retailers harder like Walmart (+0.62%), which relies on shipping bulky goods cheaply from China, it may provide an unexpected boost for firms which rely more heavily on locally-sourced products, like Whole Foods, which is owned by Amazon (-0.08%), because the higher prices from more expensive local products may no longer be as expensive when compared with imports. 
If central bankers are worried about rising shipping costs however, they don’t appear to be showing it, arguing that the consumer price rises because of supply chain disruptions will eventually iron themselves out.
To be sure, shipping costs typically only constitute a small fraction of the final price of a manufactured good and economists at Goldman Sachs (+1.10%) estimated in March this year that internationally they still make up less than 1% of final costs.
And companies don’t typically pay for freight on an ad-hoc basis, but have annual contracts with container shipping lines, with the headline-grabbing spike in shipping rates referring to current rates, which may be far higher than what firms are actually paying.
Some analysts suggest that the end of lockdowns will see a rise in demand for services, from goods, but there is a concern of course that producers become more willing to pass higher costs to consumers, and leave those price increases in place even when shipping rates soften. 

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


2. Will the U.S. Federal Reserve Taper?

  • Good chance that U.S. Federal Reserve will not make any major changes to its policies even though consumer prices rising at fastest rate in 13 years 
  • Key metric should be employment, which is encouraging, but not unequivocal and suggestive that the Fed will likely keep to its proposed schedule for tapering asset purchases and raising interest rates 
You taper if you want to, the Fed’s not for tapering.
When U.S. Federal Reserve officials convene on Tuesday for their latest 2-day monetary policy meeting, a booming U.S. economy and data backing higher levels of inflation will cloud discussion over whether the central bank should start dialing back its US$120 billion-a-month asset buying program.
Since the Fed last met in late April, several senior policymakers have hinted that the Fed is open for discussion about eventually winding down the pace of asset purchases, which include U.S. Treasuries and mortgage-backed securities, but the question for investors is when that tapering will occur.
U.S. Federal Reserve Chairman Jerome Powell will no doubt want to avoid the “taper tantrum” of 2013, where then-Fed Chairman Ben Bernanke’s announcement that the Fed would be scaling back purchases eventually, with little warning, was misinterpreted by markets and saw sharp corrections across all asset classes.
Mindful of the stakes and risks involved, Powell has been adamant about delivering clear and consistent messaging when it’s come to any prospect of tapering, and communicated such intentions by the central bank repeatedly.
Minutes from recent Fed meetings also suggest that while the Fed may not yet be at the stage where they are looking to taper, they are at least at the point of considering a discussion of the topic.
Consumer prices have been rising fast – last Thursday’s CPI report saw a 5% rise year-on-year, the steepest increase since 2008, but crucially, last month’s job numbers were still weaker than expected, even though they revealed an improving labor market.
The bulk of investors still expect the Fed to only start tapering in early 2022, with guidance on the exact approach likely to be unveiled in more detail this September at the latest.
Goldman Sachs is of the view that the Fed will only reveal its plans to taper asset purchases by December, with rates not likely to be raised until well into 2024 – which is more in line with the Fed’s guidance.
There are more than a few reasons to be sanguine about the prospects of tapering or rates – the Biden administration is still gunning for a massive fiscal spending policy, that will need to be funded from a combination of higher taxes or more debt, and the Fed will have an interest in keeping Washington’s borrowing costs low.
Powell has also made clear from the beginning that the Fed wouldn’t be looking to raise rates until 2023 at the earliest.
And finally, Powell and his colleagues at the Fed appear committed to their “new monetary policy” mechanism which can accept higher periods of inflation to make up for prolonged periods of low inflation.
While the Fed may be open to talking about tapering, that may not necessarily mean they’re likely to turn on tapering at the drop of a hat. 

3. What's Behind the Latest Bitcoin Bump?

  • Musk tweets to consider accepting Bitcoin for Tesla again if it becomes more environmentally-friendly in mining  
  • Major upgrade for Bitcoin looks likely to gain consensus, which will allow higher levels of privacy, open the prospect for multisig wallets and improve scaling developments
Over the weekend, Bitcoin jumped over US$39,000 after Elon Musk declared that Tesla (-0.04%) would accept the cryptocurrency again when Bitcoin mining was done with more clean energy.
In a tweet, the CEO of Tesla, Musk, said that the electric vehicle maker would allow Bitcoin transactions again “when there’s confirmation of reasonable (~50%) clean energy usage by miners with positive future trend.”
The latest tweet from Musk comes in response to allegations by Magda Wierzycka, Executive Chair of South African asset manager Sygnia, that Musk’s recent tweets on Bitcoin should have prompted an investigation by the U.S. Securities and Exchange Commission.
Musk has always been the “Bitcoin whale” that has been hiding in plain sight, and some of his tweets could potentially be seen as manipulating the price of Bitcoin.
The Tesla CEO has seemingly enjoyed his significant influence and appears to have delighted in whipsawing Bitcoin and other digital tokens like Dogecoin in the past few months.
In February, Tesla announced it had bought US$1.5 billion in Bitcoin and in March, Musk tweeted, “you can now buy a Tesla with Bitcoin,” fueling an incredible rally for Bitcoin which saw it top off around its all-time-high of about US$64,000.
During this period, Tesla sold around 10% of its Bitcoin stake, raking in a profit of over US$100 million.
But less than a month later, Musk sent Bitcoin plummeting, alleging that Tesla would no longer be accepting Bitcoin due to concerns about fossil-fuel usage for Bitcoin mining and transactions.
Musk’s relentless tweets have had considerable material impact on Bitcoin’s price, moves that had Bitcoin’s legal status been clearer, ought to have attracted if not an investigation, then at least an inquiry by the U.S. Securities and Exchange Commission, especially if it can be shown to have had material impact on Tesla’s share price.
And the latest tweet which appears to be embracing Bitcoin again (provided that it’s more environmentally friendly) could even be a pretext to boost Tesla’s Solar Roof business, which could apply that solar power to run Bitcoin mining facilities.
The bullish upturn for Bitcoin comes on the back of several developments over the weekend, including a crucial consensus on upgrades to the Bitcoin blockchain that could raise the stakes for Ethereum, currently the world’s second most valuable and arguably more versatile blockchain.
Bitcoin’s Taproot upgrade, the most anticipated since 2017, is said to now have sufficient support from Bitcoin miners to lock in activation.
Taproot will adjust Bitcoin’s core code that allows for possibly heightened levels of privacy, multi-signature wallets and security and improvements for scaling and speeding up the Bitcoin blockchain.
MicroStrategy last week boosted a junk-bond offering to buy more Bitcoin from US$400 million to US$500 million. 


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Jun 14, 2021

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