Novum Alpha - Daily Analysis 2 July 2021 (10-Minute Read)
U.S. payroll data is out later today and investors must prepare themselves that figures are likely to end up being at the higher end of analyst estimates, which may trigger fresh fears that the U.S. Federal Reserve may consider bringing forward the timetable for rate hikes and paring back stimulus.
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A fantastic Friday to you as stocks appear to be headed towards even higher records.
In brief (TL:DR)
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In today's issue...
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Market OverviewU.S. payroll data is out later today and investors must prepare themselves that figures are likely to end up being at the higher end of analyst estimates, which may trigger fresh fears that the U.S. Federal Reserve may consider bringing forward the timetable for rate hikes and paring back stimulus.
The U.S. Federal Reserve continues to soak up some US$120 billion in Treasuries and mortgage-backed securities every month, which have helped fuel a boom in housing prices amidst already short supply.
To be fair, Americans are also looking for bigger houses as the shift to work from home may yet prove durable and months of lockdown are reminding them of the need for bigger premises which can cater for home offices as well.
Over in Asia, most markets were up with Tokyo's Nikkei 225 (+0.35%), Seoul's Kospi Index (+0.09%) and Sydney’s ASX 200 (+0.26%) all in the green slightly, while Hong Kong's Hang Seng (-1.10%) was down sharply as Chinese equities slipped as some investors viewed the messaging from the Chinse Communist Party's centennial celebrations ratcheting up geopolitical and market risks.
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1. What does JPMorgan know about Chinese Tech Stocks that you don't?
As the Chinse Communist Party blows out the candles on its centenary celebration, President Xi Jinping stands atop a political party that is more pervasive than at any other point in China’s history.
Not since Chairman Mao Zedong has a Chinese leader commanded such influence and power.
Since taking the reigns in 2013, Xi has reshaped China in his own vision, with his ideology codified in China’s constitution and his thoughts quoted, studied and entering the lexicon of the Chinese psyche.
And while Chinese tech giants may have thought that they were above party politics, even the effervescent Jack Ma, founder of tech giant Alibaba (-2.17%) was brought to heel, with the scuttled IPO of Alibaba’s fintech giant Ant Financial Group, serving as a reminder that even in cyberspace, the Chinese Communist Party reigns supreme.
Over the past few weeks and months, just like how members of Congress summon the leaders of Big Tech to appear before them for a grilling, Beijing’s leaders brought the heads of the largest Chinese internet companies into Beijing to remind them who’s really in-charge.
For years, Chinese tech firms were the darlings of foreign investors.
Listed on U.S. exchanges, Chinese tech firms represented an unparalleled opportunity for investors to gain access to the massive Chinese market, with uber apps like WeChat and Alibaba reigning supreme, making massive amounts of money in the process and enriching their shareholders.
But the October purge of Ant Financial Group and the glaring “disappearance” of Jack Ma from the public eye has turned many investors sour on Chinese tech stocks, fearful over which would be the next shoe to drop.
Investors, including BlackRock, have turned bearish on the prospects for China’s tech giants, paring down holdings as regulatory scrutiny casts a pall over the sector.
Except perhaps for the US$1.48 billion JPMorgan Pacific Technology Fund, which has been quietly increasing exposure to some of China’s biggest tech companies, whose valuations have suffered because of an antitrust crackdown in China, including large wagers on Meituan (-4.12%) and Tencent Holdings (-0.72%).
Yet far from destroying China’s tech sector, Beijing is just reminding them who’s truly in-charge.
According to one Hong Kong-based asset manager, Jack Ma was simply too “high profile” for Beijing’s comfort.
And that makes absolute sense.
If the Chinese Communist Party’s centenary celebration was anything to go by, it was a reminder to the world at large that the Party is strident, confident and all-encompassing, and that goes for China’s tech firms as well, who serve at the pleasure of the party.
Tucked safely behind the Great Firewall of China, a host of Chinese copycats of U.S. tech firms, from ride-sharing to social media, video streaming to online shopping, China’s tech giants have grown to such size (and made their founders wealthy beyond the dreams of avarice) because Beijing has let them.
Beijing is not about to go busting up its massive tech monopolies the way Lina Khan rails against Amazon (-0.21%) as if it’s the antichrist.
China is about keeping people and in this case tech companies in check, and in line.
Whereas Khan and her compatriots at the U.S. Federal Trade Commission, the country’s top antitrust enforcer, are about creating fair playing fields for competition and to encourage innovation, Beijing’s primary concern has always been and is likely to always be, control.
Which makes Chinese tech firms, especially given their recently battered valuations, fair game.
With U.S. tech giants posting ever higher valuations and on the back of a strengthening dollar, Chinese tech companies are going for a song in comparison.
Sure, Beijing will crack some skulls and maybe even imprison the odd executive, but make no mistake about it, these Chinese tech firms won’t just re-emerge stronger, but in all likelihood more profitable, provided that their leaders follow the unwritten rule – to play the Chinese cult of commerce, it is often better to avoid the cult of personality.
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2. Gold Loses its Luster
With inflation concerns now relegated to the back burner, the value proposition for an asset which “doesn’t do anything but sit there and look at you,” in the infamous words of legendary value investor Warren Buffett, is less apparent.
Gold has suffered its biggest monthly drop in over four and a half years, with the U.S. Federal Reserve surprising investors with its willingness to reign in inflationary pressures and even going so far as to consider bringing forward the schedule for interest rate hikes.
While gold is still within its range so far this year, the worst monthly drop since November 2016 is starting to rattle the bullish case for bullion.
Towards the end of last year, Goldman Sachs (-1.20%) and Citigroup (+0.37%) economists had suggested that the precious metal could push as high as US$2,300 this year, on inflationary concerns.
But with bond yields creeping up, and even the benchmark U.S. 10-year Treasury providing around 1.5%, the investment case for gold is less clear, especially since it generates no yield.
Earlier this year, when concerns over inflation were high, gold funds and ETFs saw record inflows, coinciding with a period when investors looking for inflation hedges moved out of Bitcoin and into the precious metal.
But a stronger dollar, a resurgent U.S. economy and optimism that America will lead the world out of the pandemic have seen downward pressure on gold’s price, taking down shares of gold miners as well.
Analysts at Citigroup have since revised their forecast for gold, expecting it to continue declining over the summer, but not crash, with prices now a far more conservative US$1,760 per ounce by next year.
With economists divided on how, or even if, inflation will become a nagging issue, the bear case for gold appears stronger.
One of the biggest challenges facing gold of course is that it now faces a digital challenger – Bitcoin.
And unlike gold, Bitcoin can also move easily between other cryptocurrencies, and subscribes to other narratives outside of the “inflation hedge” giving it a level of versatility that can see it become a hedge against inflation one minute, or a medium of exchange the next.
Yet if investors are old on gold, they’re not voting with their feet yet, with holdings in gold-backed ETFs only seeing an outflow of about 0.2% for the week ended June 25, according to the World Gold Council.
As a store of value, gold has held the human imagination for the last 5,000 years, the problem is the average investor’s lifespan almost never falls within the time periods necessary for gold to be a genuinely useful hedge against inflation.
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3. Mega Cryptocurrency Exchange Binance Comes Under Regulatory Pressure
If nothing else, Changpeng Zhao, or “CZ” as he’s known, the founder of one of the world’s largest cryptocurrency exchanges Binance, walks the decentralized talk.
CZ doesn’t own any real estate, having sold his apartment many years ago to buy Bitcoin, nor, in the Lambo obsessed cryptocurrency sphere, does he drive a car, preferring to use ride-hailing apps and has said on many occasions that he would rather have all his holdings in crypto.
Despite having hundreds of employees scattered across the world, Binance has no corporate headquarters to speak of, or any visible hierarchy, with even CZ himself fairly approachable, despite the well-meaning attempts of a cadre of gatekeepers around him who seek to restrict access.
Yet CZ has also been a pragmatist, recognizing that at some point, like it or not, Binance would reach a critical size that it could no longer continue to navigate the netherworld, with one foot in the cryptosphere and the other foot in the financial industry.
And throughout this time, CZ has been quietly pouring a substantial amount of money to beef up his legal and compliance team, even going so far as to enlist the assistance of former U.S. Democratic Senator and one-time ambassador to China, Max Baucus, as a policy and government-relations adviser.
Whilst Binance.com exists seemingly everywhere and nowhere, CZ also made investments to setup Binance “lite” entities that were regulated in various jurisdictions, including Binance.sg and Binance.us
But after the fiasco in the United Kingdom, where regulatory heavy-handedness saw the U.K.’s Financial Conduct Authority move to ban Binance Markets Limited, the U.K. entity which was set to be regulated, the Monetary Authority of Singapore (“MAS”) is now giving closer scrutiny to the Binance Asia Services Pte. Ltd. (“BAS”), the Singapore-regulated branch of Binance.
BAS operates under what’s known as a “regulatory sandbox,” where Singapore’s regulators provided a grace period for the company to operate while MAS reviews its digital payment token services license.
From Beijing to Brussels, Binance is coming under increasing pressure as the cryptocurrency sector faces greater regulatory scrutiny.
With regulators deeply concerned that cryptocurrencies could be used to facilitate money laundering and fraud, even Binance, which has at least made some attempt at being regulated, is getting caught in the dragnet.
The move is unfortunate because for all intents and purposes, there is very little to stop Binance from carrying on with its business as usual.
That the world’s biggest cryptocurrency exchange by volume is willing to at least engage with regulators ought to have been an opportunity to gain unique insight into the space and perhaps find feasible means to regulate it, if so desired.
Binance itself is being probed by several regulatory agencies, but regulators may struggle to determine where the company is even legally domiciled – while early suggestions were that Binance was registered and regulated in Malta, a quick search of the company register there yielded no results.
Singapore issues digital payment token service licenses under its Payment Services Act, which was intended to be a means of regulating the nascent cryptocurrency industry, whilst still providing plenty of regulatory breathing space for fintech innovation.
Binance is said to be seeking a license under Singapore’s Payment Services Act, that would help legitimize its operations in Singapore, which has emerged as the cryptocurrency capital of Asia.
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Jul 02, 2021