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Novum Alpha - Daily Analysis 21 June 2021 (10-Minute Read)

The party may not be completely over, but some partygoers are filing out already as investors turned sour on the Fed's hawkishness.

 
A magnificent Monday to you as we kick off the last bits of June! 
 

In brief (TL:DR)

 
  • U.S. stocks entered the weekend lower, and look set for further declines this week ending last week in the red with the blue-chip Dow Jones Industrial Average (-1.58%) and S&P 500 (-1.31%) and tech-centric Nasdaq Composite (-1.63%) all sharply down as the U.S. Federal Reserve's potential hawkishness rattled sentiment. 
  • Asian stocks fell as Fed's hawkish pivot saw a sapped reflation bets. 
  • Benchmark U.S. 10-year Treasuries entered the weekend at 1.438% and may continue to see downward pressure as bond investors come back in full force on the prospect that the Fed will do what it takes to reign in inflation (yields fall when bond prices rise). 
  • The dollar remained steady in Asian trading. 
  • Oil was higher with July 2021 contracts for WTI Crude Oil (Nymex) (+0.82%) at US$72.23 as talks between major producer Iran and other world powers dragged on following the election of a new Iranian hardline president. 
  • Gold regained some ground with August 2021 contracts for Gold (Comex) (+0.82%) at US$1,772.80 as the dollar remained flat. 
  • Bitcoin (-0.63%) entered the week flat, at US$35,305 (0130 GMT) and inflows into exchanges evened against outflows which suggests that selling activity may be slowing (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 
 

In today's issue...

 
  1. For the Daring Forex Trader, an Opportunity Awaits 
  2. Damned Delta Variant Threatens Nascent European Recovery 
  3. Beijing Blasts Bitcoin Miners & That May be the Best Thing for Bitcoin

 

Market Overview

 
The party may not be completely over, but some partygoers are filing out already as investors turned sour on the Fed's hawkishness. 
 
Asian equities were hammered in the morning trading session in a week where investors will be pouring over comments made by U.S. Federal Reserve officials for clues as to the context and complexion of the Fed's pullbacks. 
 
The Fed's accelerated timetable for rate increases and discussion about paring back asset purchases has seen investors leaving the more speculative corners of the market in droves, but falls were also experienced across the board. 
 
Whilst central bank largesse may have fueled a relentless rally in equities, prospective rate hikes may rattle nerves and expose shares to a decent correction, and those which have reached eye-watering valuations may be the most vulnerable. 
 
To be fair, rate hikes in developed country central banks are still a ways away, but just the prospect of having to deal with the reality of central bank hawkisness is having a bearish effect on investor sentiment. 
 
Asian markets were bathed in blood on Monday with Tokyo's Nikkei 225 (-3.03%), Hong Kong's Hang Seng (-1.16%), Sydney’s ASX 200 (-1.84%) and Seoul's Kospi Index (-0.89%), all tumbling in the morning trading session. 
 

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

 

1. For the Daring Forex Trader, an Opportunity Awaits

 
  • Emerging market central banks raising rates ahead of their developed country counterparts provides an opportunity to borrow in dollars, while investing in emerging market currencies
  • Relative value trade will require some homework because not all emerging markets are raising rates to reign in inflation pressures from renewed economic activity 
 
A potentially hawkish U.S. Federal Reserve that has intimated earlier-than-expected interest rate hikes in 2023 may be just what some forex traders are looking for.
 
Brazil, Russia, the Czech Republic, South Africa and Hungary, have already delivered multiple rate hikes, or are expected to do so soon, and many more emerging markets may join their ranks.
 
Expectations of central bank tightening are expected in countries which are experiencing a resurgence in economic activity and rising inflation pressures, especially Chile and South Africa, as these countries emerge from the pandemic-driven slump.
 
This creates an interesting opportunity for forex traders because the Fed has signaled that it’s likely to only lift interest rates in 2023, but the rate hikes for emerging market central banks are here and now.
 
With the prospect of being able to borrow in dollars and U.S. conditions still near the loosest on record, according to the Goldman Sachs (-3.52%) U.S. Financial Conditions Index, investors could borrow in dollars to bet on emerging market stocks and currencies which have recently pulled back from all-time-highs, and sell back for more dollars, having gained from both investments and stronger offshore currencies. 
 
And if emerging market central banks can rein in their inflation expectations in a meaningful way, demand for Russian, Czech Republic or Brazilian currencies may be robust. 
 
To be sure, some commodities took a hit after the Fed’s latest rate signal, especially copper and other industrial materials, many of which are economically important to emerging market economies.
 
But medium term, a rebound in the world’s largest economies stoking demand for industrial metals and energy, when supplies are constrained and supply chains extended, should bode well for energy and metal giants like Russia and Brazil.
 
Investors looking to buy a basket of emerging market currencies however should note that a rising tide isn’t lifting all boats.
 
Emerging markets in Asia, such as the Philippines and Thailand which are still trying to spur growth in their export and tourist-dependent economies look set to keep rates either stable or low. 
 

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

 

2. Damned Delta Variant Threatens Nascent European Recovery

 
  • Delta coronavirus variant is starting to become a problem in Europe just as pandemic restrictions are being lifted 
  • Vaccination rate is far below the levels needed to lift all restrictions in Europe and prospect of fresh waves of infections from the Delta variant threaten to derail Europe's recovery 
 
On a beach in Spain, sunbathers bask in the glory of the Mediterranean sun, maskless and carefree.
 
Across Europe, as lockdown restrictions are being eased, bars and restaurants are filled to the brim and beaches are covered with holidaymakers - one would be forgiven for thinking that the pandemic is over.
 
But it’s not.
 
Take Spain for instance, where most pandemic restrictions have been lifted but just under a third of the population is fully vaccinated.
 
And while Europe is looking for a return to normalcy, the highly virulent Delta coronavirus variant that swept across the United Kingdom is now fast sweeping across Portugal, Germany, France and Spain.
 
While still only a fraction of the total coronavirus cases in Europe, the Delta variant is gaining ground and has a higher R number, meaning that it spreads more easily, and small clusters of infections can very quickly escalate to fresh outbreaks.
 
Key to stemming the tide of the Delta variant’s spread will depend on how many people get fully vaccinated, and how Europeans respond to the lifting of restrictions – a worst-case scenario would be slowing vaccinations combined with lowered personal hygiene precautions being taken.
 
Although the United Kingdom leads with about 46% of its population fully immunized, the vaccination rates in most countries in Europe more closely resembles Spain, at between 20% and 30%. 
 
 

3. Beijing Blasts Bitcoin Miners & That May be the Best Thing for Bitcoin

 
  • China cracks down hard on its cryptocurrency mining sector, with more provinces feeling pressure from Beijing to take action against the industry 
  • Longer term the Chinese crackdown will ultimately be a good thing for Bitcoin, with mining activity overconcentrated in China and the shift to renewable energy better for its longevity 
 
It may come as a surprise as to how many Bitcoin investors haven’t ever read the Bitcoin whitepaper or how the blockchain works – they should, it’s not too long and can be found here.
 
At just 8 pages long (9 if you count the references), any would-be or current Bitcoin investor can gain at least a rudimentary understanding of how the cryptocurrency works.
 
And having gained that knowledge, perhaps develop a more informed opinion as to the wave of Chinese crackdowns on cryptocurrency miners in the Middle Kingdom.
 
In a nutshell, the Bitcoin blockchain is supported by decentralized nodes or “miners” who secure the Bitcoin blockchain and its transactions by solving complex mathematical puzzles, in exchange for the block reward – in this case Bitcoin.
 
As more miners get into the game, the puzzle becomes more difficult to reflect the increased competition, but when there are less miners, the puzzle becomes easier – the point of this is to ensure a consistent rate at which Bitcoin is created, roughly once every ten minutes.
 
The other thing to note is that Bitcoin miners and all cryptocurrency miners in general, are net sellers, putting downward pressure on prices.
 
While some larger cryptocurrency mining outfits have their own trading divisions with sophisticated strategies to hedge their exposure, the vast majority will be selling Bitcoin to pay for their utility and other current operating expenses.
 
And that’s why the latest crackdown on China’s largest cryptocurrency mining provinces, whilst disconcerting, will have limited effect on the creation and mining of fresh cryptocurrency.
 
Since May, when Beijing reiterated its ban on cryptocurrency transactions and warned of the risks of using them for payment, Bitcoin has slipped from its all-time-high of around US$64,000.
 
But unlike cryptocurrency trading, which is harder to crackdown on, given that exchanges generally don’t have physical offices in China, cryptocurrency miners are a more obvious and visible target.
 
Sichuan, a southwestern province in China which is rich in hydroelectric power, has ordered the 26 largest local cryptocurrency mines to stop operating pending investigations, according to Chinese media.
 
The probe by Sichuan’s local Development and Reform Commission’s Energy bureau, and which will last till June 25, has been seen as a shot across the bow for Chinese cryptocurrency miners to pack up and head out of China.
 
Sichuan’s abundance of clean and renewable energy thanks to its many waterfalls and extensive dam network, provided a brief sanctuary for cryptocurrency miners leaving provinces that relied on more pollutive coal-fired power stations.
 
And unlike a traditional mine which is tied to geography, the processing units that cryptocurrency miners rely on can be made mobile if needed, using anything from shipping containers to mobile rigs.
 
But that might ultimately prove to be a good thing for Bitcoin.
 
With some estimates putting China’s share of global Bitcoin mining as high as 75%, the risk of potential 51% attacks on the Bitcoin blockchain because of that high level of concentration was ever present.
 
Because the Bitcoin blockchain relies on a consensus mechanism, a malicious actor who was able to control over 51% of the Bitcoin mining capability could jeopardize the network by confirming fraudulent transactions or double spending.
 
While that would undermine the value of Bitcoin, and so would be unlikely to be perpetrated by a miner looking for economic benefit, it would be in the interest of a government looking to destroy Bitcoin to do so.
 
Now that China’s Bitcoin miners are headed offshore, the Bitcoin blockchain has a better shot at decentralization and its longevity.
 
And with Chinese Bitcoin miners reducing their reliance on pollutive coal-fired power, there’s even the prospect that most Bitcoin would be mined using renewable or clean sources of energy, bringing closer the day when Tesla (+1.09%) will accept Bitcoin again for its electric vehicles.
 
Last week, Telsa CEO Elon Musk tweeted that the electric vehicle maker would consider accepting Bitcoin again when over 50% of its mining activity was from renewable sources. 
 

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Jun 21, 2021

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