Novum Alpha - Daily Analysis 7 July 2021 (10-Minute Read)
A wonderful Wednesday to you as pandemic themes resurfaced with investors digesting last week's U.S. jobs data.
In brief (TL:DR)
In today's issue...
U.S. markets had the July 4th weekend to mull over last Friday's jobs numbers and while the slowing pace of job growth portends well for tech stocks as it ensures sufficient cover to justify central bank stimulus, it also blurs the prospects for more economically-sensitive sectors.
Industrials, financials and energy shares took a beating yesterday, with investors moving into tech companies and treasuries, with the peak summer hiring season entering its last few innings.
Concern is growing that the pace and scope of the recovery may have been overstated and job growth is slowing, leading to concerns that the U.S. economy may be losing steam, even as consumption has increased.
Over in Asia, markets were roughed up in the morning trading session with Sydney’s ASX 200 (+0.71%) up slightly, whil
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1. Benchmark U.S. 10-Year Treasury Yields Slip & What That Says About Stocks
During the Second World War, then-U.S. President Franklin Roosevelt promoted the sale of war bonds to help fund the allied initiative against the axis powers, under the banner that it was the patriotic duty of every American to buy bonds.
And while investors snapping up U.S. government debt may not necessarily be patriots (or even American), their appetite for U.S. Treasuries has pushed the yield on the 10-year T-bill down to its lowest level in four months.
Bond yields move inversely to price and when the fear of inflation was at its highest (which hurts bond holders), yields for U.S. government debt soared.
But now that the U.S. Federal Reserve has made clear it is able and willing to act to reign in inflation, yields have plummeted against a backdrop of slowing job growth.
Supporting low borrowing costs for the U.S. government has been the Fed which soaks up some US$120 billion a month in U.S. Treasuries and mortgage-backed securities.
But last Friday’s jobs data which showed that while hiring in the U.S. economy had accelerated, it was not at the pace which would be sufficient to prompt a policy shift by the Fed and that uncertainty on the pace of the economic recovery is resulting in a flight to “safety.”
With data from Israel suggesting that the Pfizer (-1.11%) vaccine is less effective against the delta variant of the coronavirus, but without additional research to fully understand the implications of that lowered efficacy, there are concerns a fresh wave of infections could set back the U.S. recovery.
And data from the Institute for Supply Management, which tracks activity in the U.S. services sector, showed a rush into government debt, which tends to perform well during times of heightened uncertainty.
Weaker employment numbers in the service industry in June compared to May is adding to concern that the typically stronger summer hiring season may fail to deliver more jobs and that job numbers will get weaker towards the end of the year.
To be fair, much of the challenge for employers right now stems from the fact that the labor-intensive food, retail and hospitality industries can’t find enough workers.
While unemployment benefits are dissuading some from working at these typically lower-paid jobs, others are also concerned about exposure to the coronavirus, especially those who have not been vaccinated.
And employers who are not in the service industry are also slowing down on hiring because the outlook for the economy, while positive, is less clear than it was perhaps a month or two ago.
Uncertainty, the likelihood of continued central bank support and ambiguity over the outlook for employment in the U.S. is providing the perfect setup for the pandemic trade part deux – buy tech and treasuries.
Yesterday, the so-called reflation trade faltered with stocks of industrial, financial and energy companies sliding dramatically, while tech stayed resilient.
But until the economic outlook becomes clearer, investors could do worse than the pandemic trade, especially since the reflation trade looks to be premature.
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2. Chinese Shares on U.S. Exchanges Are Getting Hammered, Buy Now?
“Buying the dip” is an oft-heard phrase in the investing community and more often than not in forums talking up meme stocks and cryptocurrencies.
But what about when it comes to the embattled shares of Chinese companies listed on U.S. exchanges?
After the hammering that Didi Global (-19.58%) took yesterday in the wake of China’s cyberspace regulator ordering on Sunday that the ride-hailing app be taken off all of the country’s app stores, investors are understandably concerned over what that could mean for other high-profile Chinese tech giants listed on American exchanges.
To be sure, there is no substitute for America’s capital markets which remain the deepest and most liquid in the world.
And for Chinese entrepreneurs, there is perhaps no greater feeling than ringing the bell at the New York Stock Exchange or virtually with Nasdaq.
But the global fame and prominence of some of China’s biggest tech firms has raised the ire of mandarins at China’s Communist Party, which remains the only “legal” political party in the country.
And as tensions between Washington and Beijing have heated up, Chinese companies listed in the U.S. have often become collateral damage or pawns in a larger geopolitical game.
The Trump administration threatened to delist some Chinese companies from U.S. exchanges owing to “national security concerns” while Beijing has shown that it won’t shy away from taking down its own homegrown tech giants, wherever they may be listed.
But perhaps the answer lies in a botched IPO – the estimated US$35 billion IPO of Ant Financial Group that was scuttled by Chinese regulators ostensibly on grounds that the firm was behaving as a quasi-bank without the necessary capital reserves, but in reality as a rebuke to its parent company’s founder Jack Ma, who had become perhaps a little too outspoken in his criticisms of the Chinese banking sector.
The reality however is that both China and the U.S. benefit from the blockbuster listings of Chinese companies on American exchanges, and while there will be disputes from time to time, for now at least, the benefits outweigh the risks.
Chinese exchanges are not fully open to foreign investors, and even as they have opened up, the very visible hand of Beijing has made it disconcerting for overseas money, especially with at-times sudden capital controls or ham-fisted regulatory crackdowns that reverberate significantly through Chinese markets.
The U.S. with its transparent and highly liquid markets were a natural magnet for some of China’s biggest firms when looking to raise public money.
Unless China dramatically reforms its capital markets (increasingly unlikely), the status quo is unlikely to change.
Instead, future Chinese listings are likely to render to Beijing what belongs to Beijing and possibly run dual-IPOs, one onshore in a halfway house like Hong Kong and one offshore, on Wall Street.
In that vein, Chinese tech companies that already run this model like Tencent (-3.45%) and Alibaba (-2.83%) seem like good bets, especially as Alibaba’s founder Jack Ma has atoned for his sins against the Chinese Communist Party and even helped bail out ailing Chinese retailer Sunning.com (+5.69%).
Alibaba’s penance should be sufficient to ensure it comes out the other end smelling like fresh pork buns and given that U.S. tech stocks are getting more and more expensive, might provide investors with an opportunity for diversification with a side of growth.
While U.S. President Joe Biden is not likely the sort to yank Chinese companies off of U.S. exchanges, it’s still important to note that Beijing doesn’t shy away from such dramatic actions – in which case picking which Chinese tech firms to bet on is as much a matter of politics as it is profits.
3. Too much Cryptocurrency? Buy a Diamond
Diamonds are forever, and so it seems, are cryptocurrencies.
While non-fungible tokens or NFTs have been making headlines, with art (both digital or otherwise) selling for record amounts in cryptocurrencies, auction house Sotheby’s looks set to make history in Hong Kong this Friday as it puts a 101.38-carat diamond on the block.
The pear-shaped flawless gem has been estimated to likely fetch as much as US$15 million at auction, with Sotheby’s accepting payment in Bitcoin or Ether if the buyer so chooses.
If a buyer does elect to use cryptocurrencies to pay for the gem, it would mark the most expensive physical object ever publicly offered for sale using cryptocurrencies, according to Sotheby’s.
In 2017, a Dubai developer made headlines for claiming to accept Bitcoin as payment for luxury apartments, but no transactions were recorded for the sale.
Since 2020 however, cryptocurrencies such as NFTs have set new records at auction, with Christie’s US$69.3 million sale of Beeple’s “The First 5000 Days,” a digital artwork, sparking a trend by auction houses to accept cryptocurrencies both for payment and for sale as NFTs.
Diamonds weighing more than 100 carats are exceedingly rare, with Sotheby’s estimating that less than 10 such diamonds ever coming up for auction and only two of them being pear-shaped.
Last month, auction house Phillips offered a piece from street artist Banksy for sale, which could be paid for using Bitcoin or Ether as well.
The recent interest to pay for collectibles using cryptocurrencies shouldn’t come entirely as a surprise.
For many cryptocurrency holders (or “hodlers” if you will), there are still very few avenues to spend their bags of digital assets and certainly not in a splashy, headline-grabbing manner.
While Lamborghinis are the meme-inspired carriage of choice for the crypto-rich, it’s still not possible to pay for the raging bull using cryptocurrencies.
Many cryptocurrency “whales” have held on to their digital assets for years, but with limited places to spend them outside of speculating on other cryptocurrencies or at auctions such as this one, it may not come as a surprise that auction houses are keen to capitalize on the opportunity.
Because many cryptocurrency “whales” may have generated much of their digital wealth relatively easily, having bought tokens when they were very cheap, items such as the diamond being offered by Christie’s could attract far more at a crypto-accepting auction rather than if it were to be purely auctioned off using fiat currencies like the dollar.
And while cryptocurrency prices are volatile, it’s not the auction houses that are on the hook for that volatility, instead it’s the seller of the pieces who assume the most risk.
Given that Bitcoin and Ether have been relatively stable of late by cryptocurrency standards and because even if the diamond offered by Christie’s gets a “volatility premium” for cryptocurrency of 30%, the amount would still be in excess of a straight up dollar auction.
Diamonds may be a woman’s best friends, but for auction houses, cryptocurrencies may be a newfound one.
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Jul 07, 2021
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