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Novum Alpha - Daily Analysis 8 July 2021 (10-Minute Read)

With markets hanging on every word out of the U.S. Federal Reserve meeting minutes, investors are perhaps just as clueless on the economy as the world's premier central bank

 
A terrific Thursday to you as U.S. markets rebound on risk appetite. 
 

In brief (TL:DR)

 
  • U.S. stocks rebounded Wednesday with the blue-chip Dow Jones Industrial Average (+0.30%), S&P 500 (+0.34%) and the tech-centric Nasdaq Composite (+0.01%) saw indices rebound, led primarily by shares of Apple (+1.80%)
  • Asian stocks mostly slipped Thursday following gains for U.S. shares and Treasuries.
  • Benchmark U.S. 10-year Treasuries dipped one basis point to 1.31% amid the Federal Reserve minutes showing that policy makers are awaiting more evidence of a robust economic recovery to set a timeline for trimming bond purchases (yields fall when bond prices rise).
  • The dollar held gains against a basket of major currencies. 
  • Oil slid with August 2021 contracts for WTI Crude Oil (Nymex) (-0.71%) at US$71.69 as investors await further signals from the OPEC+ alliance on production plans after a breakdown in talks.
  • Gold was down with August 2021 contracts for Gold (Comex) (-0.15%) at US$1,799.40.
  • Bitcoin (-2.37%) fell to US$33,381 as investors soured on cryptocurrencies and moved back into Treasuries and equities and with inflows leading outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

 

In today's issue...

 
  1. China’s Tech Stock Purge May be Ending
  2. An Apple a Day Keeps the Bear Markets Away
  3. Singapore Becomes Crypto’s Island Paradise

 

Market Overview

 
With markets hanging on every word out of the U.S. Federal Reserve meeting minutes, investors are perhaps just as clueless on the economy as the world's premier central bank. 
 
Minutes of the most recently concluded U.S. Federal Reserve meeting have revealed that policymakers remain divided on the strength of the U.S. economic recovery and when and how to taper asset purchases. 
 
Muddying the waters, last week's U.S. jobs data left everyone unsatisfied. 
 
On the one hand, markets cheered sufficient grounds for the Fed to maintain the status quo in terms of intervention, but on the other hand, more serious questions remain on where the U.S. economy is headed to next.  
 
Over in Asia, markets were roughed up in the morning trading session with Sydney’s ASX 200 (+0.38%) up slightly, while Seoul's Kospi Index (-0.44%),Tokyo's Nikkei 225 (-0.44%) and Hong Kong's Hang Seng (-1.19%) were sharply lower on concerns that China's economic rebound may be plateauing. 
 

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

 

1. China's Tech Stocks Purge May Be Ending

 
  • Chinese tech giants avoid the worst of Beijing's purge and are let off with a fine
  • Investors may be overreacting to Beijing's backlash against its own tech giants, as long as they're not broken up, their coveted positions atop the Chinese technological food chain appears unassailable 
 
In ancient China, a cruel and unusual form of torture was known as 五马分尸 (wǔ mǎ fēn shī) where the hapless victim's five extremities (head and four limbs) were tied to five different horses that were then set off to run in five different directions, with the expected outcome.
 
And for China’s tech giants, there could be no more cruel torture than the threat of break-up into component business units.
 
But unlike U.S. tech companies, only a handful of Chinese internet giants actually have very clear, segregated business units with distinct product services that can be divided up.
 
Take Didi Chuxing, which is listed as Didi Global (-5.40%) in the U.S. for instance – while it does do food delivery and have other “side hustles,” it is still primarily a ride-hailing app and whose ancillary businesses are complementary to its core business, rather than standalone.
 
Alibaba Group (-1.70%)  on the other hand, although its primary business is e-commerce, covers a broad range of other activities including fintech (through Ant Financial Group), insurance, cloud services and even artificial intelligence.
 
While an antitrust action which could include a breakup would badly affect Alibaba, it wouldn’t be quite as applicable to a ride-hailing app such as Didi Chuxing.
 
Which is why imposing a fine on Chinese internet giants was the best outcome that investors in China’s internet companies could have hoped for.
 
Yesterday, as part of a broader effort by Beijing to step up supervision of Chinese companies listed offshore, fines were issued to internet companies including Didi Chuxing, Tencent Holdings (-3.74%) (owner of the ubiquitous WeChat) and Alibaba Group, for failing to report earlier merger and acquisition deals for approval.
 
In the mid-1990s, when Microsoft (+0.82%) was being censured on antitrust grounds as well, after famously bundling Internet Explorer free with Windows and ending the short life of Netscape (a browser that users had to pay for), Microsoft became far more cautious about its acquisitions soon after, paving the way for greater competition and the rise of companies like Facebook (-0.65%) and Google (+0.23%).
 
But China is not the U.S. and key to understanding what is happening right now is recognizing that Beijing isn’t looking to create an open playing field to nurture and foster more innovation and competition, rather it’s just keeping its tech companies in line and reminding them that in China, you have to ask before you act.
 
Ultimately, the fine isn’t likely to change anything in terms of creating a potential competitor to either Alibaba or Tencent, whose respective platforms have since become indispensable.
 
If nothing else, the prospective issuance of China’s digital yuan would entrench Alibaba’s Alipay and Tencent’s WeChat Pay even more.
 
That having been said, while giants such as Alibaba and Tencent are starting to look tempting, given their recently battered share prices, investors must be prepared to ride out the volatility coming from these stocks in the immediate term until the dust settles on their faceoff with Beijing. 
 

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

 

2. An Apple a Day Keeps the Bear Markets Away

 
  • Apple shares soar on recognition that the company has not enjoyed the bulk of recent tech stock gains 
  • Prospects for Apple look good regardless of how the pandemic plays out, with its products poised to capture both a re-opening and resurgence of infections  
 
While iPhone sales disappointed during the pandemic, as economic uncertainty and a lack of social interaction saw consumers hold on to existing iPhone models for longer, Apple’s Mac division buoyed the fortunes of the firm to keep it aloft during much of the coronavirus lockdowns.
 
And now that Apple has unveiled its far more economical M1 chip on its Macs, making them a lot more affordable and establishing them firmly within the work-from-home environment, Apple looks set to make a comeback with its iPhones.
 
Rallying to a fresh high yesterday on optimism of its corporate growth outlook in the second half, Apple has now seen its market cap propelled to a lofty US$2.4 trillion and within a hair’s breadth of its all-time-high.
 
Apple has been the laggard among Big Tech firms this year, having advanced some 9% versus double digit gains in the others as investors sat on the sidelines to wait for more on its growth plans to be revealed.
 
Even the S&P 500, which Apple is a major component stock of, gained at a faster pace than Apple.
 
Given how Apple’s pace of growth has not been as rapid as the rest of the tech sector in general, it represents a good opportunity to hedge a bet on Big Tech both ways.
 
If the delta variant of the coronarvirus proves to be an issue and force a fresh wave of lockdowns across the U.S., Apple’s Mac division, especially with its far more attractively priced computers, might see a new set of customers who could have delayed swapping out their existing computers for a brand new one, on expectations of returning to the office.
 
Companies that might have also wanted to renew their employee laptops might also make those investments if it looks like the pandemic could be prolonged.
 
On the other hand, as vaccinations get underway in both the U.S. and Europe, it’s entirely possible that these economies return to normalcy more quickly than the rest of the world and what better way to show off to your friends (that you can now meet!) than with a brand-new iPhone?
 
With the iPhone 13 anticipated to be launched in September, expectations are high that demand for Apple’s flagship product will provide a windfall for investors.
 
The so-called reflation trade has also lost steam, with industrials, financials and energy stocks starting to show sighs of weakness, as Big Tech has once again reminded investors who sits atop the markets.
 
Investors are finding that stocks in more economically-sensitive sectors were cheap for a reason and those who had gone in looking for bargains are now finding that they’ve become victims of the “value trap.”
 
 

3. Singapore Becomes Crypto's Island Paradise

 
  • Singapore's pragmatic approach to cryptocurrencies puts it in pole position as the nascent asset class gains wider recognition and acceptance 
  • Recent spate of regulatory crackdowns bodes well for Singapore which is uniquely positioned to provide safe harbor for the innovative companies and talent in the cryptocurrency space
 
Singapore is famous for many things – from its ban on chewing gum to its spotlessly clean streets, its delicious hawker food and its ease of doing business.
 
But the prosperous island nation just added another feature it can be proud of – sanctuary for the legions of crypto-oppressed who are wandering the dystopian decentralized landscape and looking for a place to call home.
 
Even as regulators globally are cracking down on cryptocurrency groups (companies would be too exacting a term to use on them), Singapore’s friendly regulatory environment is luring some of the biggest names in the cryptocurrency business to lay down roots on the sunny island, providing good jobs and fresh sources of tax revenue.
 
From Changpeng Zhao, or “CZ” as he prefers to be known, founder of cryptocurrency exchange Binance, to Vitalik Buterin, the co-creator of Ethereum, the world’s second-most valuable blockchain, there is no shortage of cryptocurrency’s glitterati that call Singapore home.
 
And it looks like their numbers are only set to grow in the wake of crackdowns on the cryptocurrency space as regulators from China to Europe, U.S. to Japan, start bringing down the hammer on innovators who sit at the nexus of finance and technology. 
 
Gemini, a U.S.-regulated cryptocurrency exchanged founded by the Winkelvoss twins of “The Social Network” and Facebook fame, is said to be increasing its headcount in Singapore.
 
So far however, Singapore’s regulators have yet to issue any licenses to cryptocurrency companies under its new Payment Services Act which makes provision for dealing in and with digital tokens.
 
And the only “regulated” and government-sanctioned cryptocurrency exchange tied to a major financial institution is the one operated by state-owned bank DBS (-1.53%), which trades in only four cryptocurrencies (hardly the stuff of dreams).
 
Instead of cracking down on cryptocurrency firms, Singapore has adopted a far more pragmatic approach, providing many firms fleeing other jurisdictions with a “regulatory sandbox” which grant exemptions to some of the industry’s biggest players, allowing them to serve local retail and institutional investors.
 
Similar to Singapore’s two shiny casinos, the city state is pragmatic in recognizing the potential job opportunities and tax revenues that cryptocurrency companies could bring, but also wants to insulate its local population from the vagaries, risks and speculative pain that it also comes with.
 
Singapore citizens and permanent residents for instance have to pay a US$110 fee to enter any of the country’s two casinos for a period of 24 hours, whereas foreigners enter for free.
 
Similarly, a Singapore citizen or permanent resident can only deal in up to S$30,000 in cryptocurrencies (US$22,183) in a year, with limits enforced by how many Singapore dollars can be transferred by local banks or credit cards to cryptocurrency exchanges or other platforms.
 
Singapore’s sovereign wealth fund GIC, and state-owned investment company Temasek, have spent hundreds of millions of dollars rolling out the red carpet for the cryptocurrency sector. 
 
Even the Singapore Exchange has rolled out two cryptocurrency indices.
 
In a country with almost no natural resources, Singapore’s pragmatic view towards embracing new and innovative asset classes, of which cryptocurrencies are just one of them, already appears to be paying off.
 
Binance, the world’s largest cryptocurrency exchange by transacted volume is advertising over 200 jobs in Singapore, according to a search on LinkedIn, while Hong Kong-based OSL, another exchange, is said to be planning to double its headcount by the end of this year.
 
U.S. cryptocurrency exchange Gemini is expecting to increase its team in Singapore to 50 as by the end of 2021.
 
With over 200 family offices calling Singapore home and its rock-solid reputation as a major Asian and international financial hub, Singapore looks set to ride the cryptocurrency wave wherever that may take it.
 
But with more institutional investors looking at cryptocurrencies as an asset class, and Hong Kong recently moving to only allow trading of digital assets for accredited or institutional investors, Singapore is in a unique position to truly cash in on crypto.
 

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 08, 2021

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