Novum Alpha - Daily Analysis 20 July 2021 (10-Minute Read)
A terrific Tuesday to you as markets take a turn for the worst amidst mounting concerns over coronavirus variants threatening to overwhelm moribund healthcare systems.
In brief (TL:DR)
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In today's issue...
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Market Overview2024. Mark that year in your calendars.
It's the date when things can be expected to more closely resemble normal, while managing the Scylla of over-optimism and the Charybdis of excessive despair.
If the world emerges from the pandemic before 2024, that's a bonus, but if it hasn't by then, the good news is that we'd all have learned to cope with it by then.
And while the development of effective coronavirus vaccines is nothing short of a miracle, embarking on a global inoculation program was always going to be challenging at best.
So it's no surprise then that investors are understandably worried as coronavirus case numbers are starting to spike towards the tail end of the summer of serenity.
After weeks of falling case numbers, a combination of hubris and complacency and a dash of misinformation with a copious helping of mutation have all conspired to create the perfect storm - a coronavirus variant that is more resistant to existing vaccines emerging at a time when people have abandoned pandemic precautions and are tired of them.
How the global economy charts a path out of this latest speed bump is less clear and that is contributing significantly to bearish sentiment.
With central banks and governments already pulling out all the stops, it's not a given that any additional monetary or fiscal stimulus will have the desired effect or worse, any effect.
In Asia, markets opened lower on Tuesday with Sydney’s ASX 200 (-0.11%), Hong Kong's Hang Seng (-0.73%), Seoul's Kospi Index (-0.33%) and Tokyo's Nikkei 225 (-0.51%) all down and taking their cue from Wall Street.
Uncertainty is not an investor's friend.
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1. Delta is Gonna Get You
“Delta is gonna get you, delta is gonna get you, delta is gonna get you…tonight.”
– Adapted from the lyrics of Rhythm is Gonna Get You by Gloria Estefan and the Miami Sound Machine off the album Let It Loose, Copyright 1987
Delta Monday saw global stocks kick off their worst week in recent times, with the benchmark Dow Jones Industrial Average down 2.09% and European stocks posting their worst session this year as concerns over the delta coronavirus variant grip investors.
Instead of runaway inflation, investors are having to contend with a resurgent delta variant of the coronavirus that threatens to reverse months of progress on lifting pandemic restrictions and undoing a broad reopening in the U.S. and Europe.
After months of the so-called reflation trade, where stocks of sectors standing to benefit the most from the reopening saw steady gains, uncertainty has replaced optimism and investors are scratching their heads over what happens next.
The delta variant could not have come at a worst time.
For starters, equities have reached eye watering valuations, but the assumption had been that earnings would eventually catch up and justify these prices.
Yet the revival of the coronavirus is causing uncertainty about economic progress ahead and it’s uncertain if central banks or government have any more room left to act.
When the coronavirus was first encountered, the recovery was relatively sharp because both central banks and government acted in concert, simultaneously loosening monetary conditions whilst also doling out substantial fiscal stimulus to keep households and businesses afloat.
But now that the delta variant threatens to shutter economies again, the lack of novelty of the crisis makes it less clear if central banks can cut rates any further (in many cases they’re already at zero) and keep monetary policy any looser, especially if no one wants to borrow.
Making matters worse is the specter of inflation.
When the pandemic first hit, prices took a drop, but with prices increasing, it’s less clear if monetary or fiscal stimulus will have the effect necessary to shore up the economy.
Last month, U.S. consumer prices rose 5.4% year-on-year, the highest rate since 2008 and inflation in the United Kingdom has also exceeded the Bank of England’s target.
The worst case scenario for the global economy would be stagflation - low growth and high inflation.
But we're not there yet and hopefully vaccine makers have more than a few tricks up their sleeves so that vaccines can get up ours as well.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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2. Robinhood is Cashing in on Market it Helped Make Hot
Retail investors have left their mark on markets more significantly this past year than at any time before the pandemic.
From meme stocks to Tesla and Apple, cryptocurrencies to commodities, retail investors are estimated to make up for as much as 25% of all equity flows according to Vanda Research and their presence in the options market is growing as well.
And at the core of their trading activity has been a handful of online brokerages, led primarily by Robinhood, which is now seeking its own public debut with a valuation of up to US$35 billion.
Robinhood is seeking to raise about US$2 billion in what is likely to be the most hotly anticipated public offering this year.
And unlike other tech IPOs where profits lay “in the future,” Robinhood made some US$7 million on revenue of US$959 million, compared with a net loss of US$107 million in 2019, according to its U.S. Securities and Exchange Commission filing.
Robinhood may have revolutionized investing, with its easy-to-use interface and no commission fee structure, and has drawn a previously antipathetic demographic of young investors into the markets.
The median age of Robinhood users is 31, and more than half of its customers are first-time investors.
But whether Robinhood’s user growth will be durable is less clear, and it also faces challenges to its business model.
Offering equities, derivatives and cryptocurrency trading, Robinhood has come under greater regulatory scrutiny as its popularity has grown, and its business model of “payment for order flow” where market makers pay Robinhood to route its orders through them, has been criticized.
Last month, the U.S. Financial Industry Regulatory Authority levied a US$70 million penalty against Robinhood for what was described as “widespread and significant harm” to customers.
Nonetheless, as AMC Entertainment (-0.97%) and GameStop (+2.63%) have both learned, whatever challenges that Robinhood may have, they have a friend in retail investors.
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3. No Cash? You can Still Card with Cryptocurrency Exchange Binance
What do Visa and Mastercard know about Binance that scores of smaller payment companies and some banks don’t?
Despite rising regulatory scrutiny surrounding the world’s biggest cryptocurrency exchange by volume, Visa (-3.11%) and Mastercard (-5.60%), the world’s two largest credit card payment providers have left their gateways to Binance open.
So while the likes of Barclays (-3.69%) and Santander (-3.41%), two of the United Kingdom’s biggest banks have in recent weeks stopped their customers sending funds to Binance through their payment cards, access through Visa and Mastercard has meant that customers, regardless of where they’re domiciled, can still move fiat currencies to Binance, a testimony to the resilience of the exchange.
Payments partners such as Clear Junction, an important European service provider that had provided Binance access to Sepa, a European payments network which facilitates euro transfers with over 36 countries, has ceased offering services to Binance.
Binance also offers a Visa-branded debit card to its customers that allows them to use funds from their cryptocurrency wallets with the exchange at everyday retailers, and earns fees by converting digital assets into fiat currencies that can be spent.
Issued by Contis, a company that partners with Visa and provides payment services in the European Union through an e-money license from Lithuania’s central bank, the Binance card is available in many European countries, including Germany, France, Italy and Spain.
Binance’s ethos however may be at odds with regulators, who have criticized the exchange for failing to prevent potential money laundering, terrorism financing and scams which use its platform.
Yet in terms of liquidity and market depth, there are few (if any) cryptocurrency exchanges which can rival Binance.
And while payment services providers dropping off may prove a momentary inconvenience for Binance, as long as Visa and Mastercard continue to provide access to Binance, the global regulatory crackdown on the cryptocurrency exchange will have plenty of bark, but perhaps very little bite.
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Jul 20, 2021