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Novum Alpha - Daily Analysis 6 July 2021 (10-Minute Read)

European stocks saw most of the action on Tuesday as Wall Street remained closed for the July 4th weekend with confidence that the Eurozone is out of the woods high, despite increased risks from the delta variant of the coronavirus.

 
A terrific Tuesday to you as stocks look set to continue soaring to fresh records. 
 

In brief (TL:DR)

 
  • U.S. stocks were closed Monday for the Independence Day holiday. 
  • Asian stocks were steady Tuesday as traders weighed a jump in crude oil amid an OPEC+ crisis that derailed a deal to boost output.
  • Benchmark U.S. 10-year Treasuries rose about two basis points to 1.44% (yields rise when bond prices fall).
  • The dollar was little changed. 
  • Oil rose with August 2021 contracts for WTI Crude Oil (Nymex) (+1.96%) at US$76.63 amid a worsening fight between Saudi Arabia and the United Arab Emirates blocked an oil-supply increase.
  • Gold rose with August 2021 contracts for Gold (Comex) (+0.68%) at US$1,795.50. 
  • Bitcoin (-2.27%) fell to US$33,833 and with outflows still leading inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. Betting on China's Enormous Market Not as Advertised 
  2. Retail Traders are Here to Stay 
  3. Dabbling in DeFi as Bitcoin got Boring
 

Market Overview

 
European stocks saw most of the action on Tuesday as Wall Street remained closed for the July 4th weekend with confidence that the Eurozone is out of the woods high, despite increased risks from the delta variant of the coronavirus. 
 
Lower trading volumes because of the U.S. holiday saw monies head into Europe as signs of economic activity picked up in the region, with purchasing managers' indices in Spain and Italy lifting the overall Eurozone services sector reading to its highest level since July 2007.
 
Over in Asia, markets were buoyant in the morning trading session with Sydney’s ASX 200 (+0.15%), Seoul's Kospi Index (+0.55%) and Tokyo's Nikkei 225 (+0.28%) in the green while Hong Kong's Hang Seng (-0.57%) was lower on concerns over heightened geopolitical tensions following remarks by Japan's deputy prime minister that the country should join the U.S. in defending Taiwan should it be attacked. 
 

Did you miss us at the Super Crypto Conference 2021? Watch it here...

 

1. Betting on China's Enormous Market Not as Advertised

 
  • Tesla (+0.14%) is the latest company to run into trouble in trying to crack the lucrative, but challenging Chinese market   
  • Companies looking to make a splash in China may be better off entering quietly rather than leaving quietly 
 
The fireworks have fizzled out and the parade squares have been cleared of their trademark red bunting and as the curtains close on the centenary celebration of the Chinese Communist Party, President Xi Jinping sits atop the food chain of a country that is increasingly confident, (somewhat) prosperous and ready to take its place in the world as an emerging superpower.
 
And which company wouldn’t want to partake of a market of 1.4 billion consumers, to bulk up profits? 
 
But the pathway to Chinese yuan is littered with the corpses of companies that have tried and failed to make a chip into the Great Wall of Prosperity.
 
From Google (+2.30%) to eBay (+0.40%), Home Depot (+0.35%) to Mattel (+1.08%), some of America’s biggest names have tried to establish a beachhead in the Middle Kingdom, only to be thrown back into the Pacific Ocean to nurse their wounds.
 
And Tesla appears to be the next in line for just that.
 
While the Chinese do love Teslas for their good looks, environmentally-friendly cache and the fact that it’s domestically built, “safety concerns” have plagued the electric vehicle.
 
Countless “safety issues” with Teslas can be found on Chinese social media from failing brakes to autopilot systems that suddenly come alive.
 
And while there’s scant evidence that any of these allegations are true, Tesla’s honeymoon with China is clearly over.
 
Despite Tesla receiving a warm welcome from China’s leaders when it first landed, even going so far as to allow the Palo Alto-headquartered electric vehicle maker to wholly own its Chinese subsidiary, it’s encountered a market that has been far more tricky to navigate and had to learn the hard way why doing business in China is fraught with traps and dangers.
 
Last month, Beijing ordered the recall of almost all of the cars Tesla has sold in China, to address a software flaw, while cameras that come standard on Teslas (to assist with the autopilot system) have mean that they’re banned on many government facilities on concerns they could send data back to the U.S. (something which Tesla vehemently denies).
 
Meanwhile local competition is making things even more challenging for Tesla, with Nio Inc (-0.98%), and Xpeng Inc. (+0.18%) winning over patriotic Chinese consumers with their stylish designs and Chinese provenance.
 
While none of these problems are unique to Tesla, Elon Musk’s star power may no longer be sufficient to shield the electric vehicle maker from the vagaries of the Chinese market and that should provide food for thought for investors.
 
China is the jewel in Tesla’s crown and its second largest market after the U.S. 
 
Tesla may have overestimated the warmth of its initial welcome and misjudged the strength of its ties to the country’s leadership, but it should also serve as a warning to other foreign companies heading into the Middle Kingdom.
 
If even incumbents like Alibaba (-1.86%) and Tencent (-0.76%) can be kept in line by Beijing, what more a foreign company?
 
As Sino-American relations deteriorate, perhaps the best way forward (if at all possible) for Tesla in China, is to be more Chinese and less American – to keep one’s head low and make money quietly.
 
Whilst a high-profile CEO may serve as an inspiration in the U.S., in China, that could be interpreted as arrogance, and a thorn in the side of the Chinese Communist Party, for whom all adulation and admiration should be directed to.
 
Perhaps Tesla should operate in China as quietly as its cars do. 
 

Did you miss us at the Super Crypto Conference 2021? Watch it here...

 

2. Retail Traders are Here to Stay

 
  • Retail investors mark June with a record inflow of funds, despite predictions that they would be a force on the wane as the U.S. economy reopens  
  • Durable presence of retail investors in U.S. markets whilst adding to volatility, may also act as a counterbalance to institutional investors during periods of stress 
 
On an unseasonably warm San Francisco evening at American-Italian favorite The Sausage Factory in the Castro, between tables of steaming-hot spaghetti and meatballs and chicken parmigiana, patrons are surfing their phones while waiting for their orders.
 
But The Sausage Factory’s clientele, mostly twenty and thirty-somethings working in the tech sector, are not catching up on the latest social media or trying to decipher which startup got acquired by who and for how much, they’re teeing up their Robinhood aps to put in tomorrow’s trades.
 
Across much of America, the pandemic has made traders of us all.
 
And even as restaurants like The Sausage Factory reopen their doors for in-person dining, and theme parks, bars, clubs and theaters all do a brisk business over the summer, retail investors haven’t abandoned the market.
 
While many analysts had predicted that the U.S. reopening would see a fall-off in retail trading flows, with both meme stocks and cryptocurrencies languishing, the reverse has happened – the retail mob is more into investing than ever.
 
Last month, data from Vanda Research’s VandaTrack showed that retail investors bought nearly US$28 billion of stocks and ETFs on a net basis, the highest monthly amount deployed since at least 2014 and far more than was allocated during January’s meme stock craze.
 
Whether in restaurants or at 2-hour lines at Disneyland, retail traders are demonstrating that they may have abandoned the confines of their homes, but not their presence in the markets, underscoring their durable influence.
 
Unlike markets in Asia, where retail traders can consist up to 80% of trade flows (e.g. South Korea), it’s institutional traders who form the bulk of trading activity in U.S. markets.
 
And unlike professional investors on Wall Street, who have grown increasingly concerned that markets may be overvalued, retail investors remain sanguine about any potential market pullback, employing a “buy the dip” strategy, that has so far, worked out.
 
And where retail investors head, so too do the U.S. markets.
 
While retail investors poured into electric vehicle makers and meme stocks in late 2020 and early this year, they’ve since fanned out into the reflation trade, betting travel stocks, materials, financial and industrial companies as the U.S. recovers. 
 
Whereas herd-like behavior may have marked earlier retail flows, it appears that retail investors may have become somewhat more professional in their stock picking.
 
One thing that hasn’t changed though is that retail investors are still betting big on volatility, chasing up the shares of obscure companies like software firms Alfi Inc (+1.36%), and Marin Software (+34.55%), as well as imaging technologies firm IKONICS (+2.94%), which have seen intraday rallies of as much as 100%!
 
And geopolitical tensions between China and the U.S. haven’t dampened appetite for Chinese shares either, with China-based Pop Culture Group (-10.85%), which develops and hosts hip-hop events seeing a jump of 790% from its IPO price.
 
But investors trying to divine the method in the madness may come off disappointed and for many retail traders, markets are nothing more than a giant casino, but just like a casino, there’ll always be a fresh set of gamblers sitting at the tables and adding to the volatility and the opportunity. 
 
 

3. Dabbling in DeFi as Bitcoin got Boring

 
  • Rangebound trading in Bitcoin has seen cryptocurrency traders shift into decentralized finance or DeFi to generate yield 
  • DeFi is not without risks and high or low yields are not indicative of relative risk, investors need to recognize that their pledged cryptocurrency to generate yield is still exposed to high levels of risk 
 
With Bitcoin saddled within a (relatively) tight trading band, traders betting on volatility for returns have had to look elsewhere and increasingly been drawn to the high stakes game of decentralized finance or DeFi.
 
With annual interest rates from anywhere as high as 12% for stablecoins (cryptocurrencies tied to fiat currencies like the dollar), investors are being lured by the potential for outsized returns in what appears on the surface to be a relatively risk-free way to generate above market yields.
 
“Yield farming,” involves staking or depositing cryptocurrencies, including dollar-based stablecoins in “liquidity pools” that often pay out yields in the DeFi platform’s native token.
 
Many of these DeFi liquidity pools can offer as high as four to five-digit annual interest rates to draw in depositors before the yields inevitably come crashing down.
 
But the complex yield-generating strategies may make many of these DeFi yield-generating strategies unsuited to retail investors, even as more of them enter the market to look for opportunities outside of Bitcoin and even Ether.
 
For some retail investors, the relatively lower returns compared to the rest of the cryptocurrency space, like 12% annual yields, are high enough to entice them in, but low enough that they appear safer.
 
But without a proper understanding of the mechanics of how these yields are generated or paid out, the function of the smart contract into which the deposits are made, or the safety and security of their operation, many investors could expose themselves to what’s been called a “rug pull” where seemingly legitimate-looking DeFi websites are setup to deprive investors of their cryptocurrencies.
 
And because much of those yields are tied to shaky DeFi token issuances that are often the subject of pump-and-dump schemes, the actual realizable yields after catering for swaps back to fiat currencies may be much more muted. 
 
But low yield doesn’t mean low risk either, and just because a liquidity pool promises what appears to be reasonable returns, doesn’t mean that it’s free from poorly designed smart contracts or dubious DeFi tokens susceptible to volatility.
 
To be sure, DeFi strategies are not new and have been around for years, but have gained in popularity recently because of rangebound markets, which can leave intraday traders vulnerable to the dreaded death by a thousand pinpricks as stops keep getting hit all day long.
 
Rangebound markets are risky because all it takes is intraday volatility outside of tightly positioned stops to make everyday a losing day, which is why some professional traders have decided to just sit out and earn interest instead of trying to play the market.
 
And while it may be tempting to allocate some funds into Gemini Earn, the 7.4%-yielding program of regulated cryptocurrency exchange Gemini, which has some US$2 billion in assets, swapping cryptocurrency back to fiat currency entails fees which could whittle away some of those returns especially when investors consider that even junk bonds yield as high as 6.4%. 
 
Yet for those investors who know what they’re doing, they could do worse than DeFi.
 
Whereas in the past, traders waiting for opportunities could do little outside of holding their reserves in non-yielding stablecoins, they now have an opportunity to generate not insubstantial returns on their deposits.
 
And for those who are accustomed to the risks in cryptocurrencies, the arrival of liquidity pools has been somewhat of a godsend. 
 

What can Digital Assets do for you?

 
While markets are expected to continue to be volatile, Novum Alpha's quantitative digital asset trading strategies have done well and proved resilient.
 
Using our proprietary deep learning and machine learning tools that actively filter out signal noise, our market agnostic approach provides one of the most sensible ways to participate in the nascent digital asset sector. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  
 
 
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Jul 06, 2021

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