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Novum Alpha - Daily Analysis 30 July 2021 (10-Minute Read)

Tech companies may be losing steam at the same time that the U.S. economic recovery is showing signs of fatigue from the recovery, with U.S. GDP growth undershooting expectations and slowing.

A fabulous Friday to you as the U.S. rocks good but not great economic growth. 

In brief (TL:DR)

  • U.S. stocks ticked higher on Thursday, with the Dow Jones Industrial Average (+0.44%), S&P 500 (+0.42%) and tech-centric Nasdaq Composite (+0.11%) all higher as signs that the U.S. economy continues to grow. 
  • Asian stocks dipped Friday as traders weighed signs of a slowdown ahead for megacap technology companies and risks from China’s regulatory crackdown.
  • Benchmark U.S. 10-year Treasuries dipped two basis points to 1.250% (yields fall when bond prices rise) as investors continue to worry about the pace of the economic recovery amidst a resurgent delta coronavirus variant. 
  • The dollar snapped a four-day retreat but is still on course for its biggest weekly drop since May.
  • Oil mostly held recent gains with September 2021 contracts for WTI Crude Oil (Nymex) (-0.58%) at US$73.19 on expectations that demand from economic reopening will weather delta-strain Covid-19 flareups.
  • Gold edged higher with December 2021 contracts for Gold (Comex) (+0.10%) at US$1,830.00. 
  • Bitcoin (+0.96%) maintained its recent rebound at US$40,108 as investors continue to expect that Bitcoin will tend higher with outflows leading inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. U.S. Economic Growth Misses Target & That’s a Good Thing
  2. Facebook is Offering You the Metaverse
  3. Ethereum's Hard Fork a Boon for Prices?

Market Overview

Tech companies may be losing steam at the same time that the U.S. economic recovery is showing signs of fatigue from the recovery, with U.S. GDP growth undershooting expectations and slowing. 
Stocks as a whole are rounding off a volatile week in which Beijing's visible hand intervened in the market with predictable consequences. 
The sharp selloff in Hong Kong and China has spilled over into wider risk aversion, and the damage caused by the arbitrary and sudden move to destroy a profit-generating business sector almost seemingly overnight, will weigh heavily on investors for years to come. 
It's entirely possible that Beijing assumed the rout would only affect the for-profit education sector, as evinced by Chinese state media rushing to walk back the wider implications of the move. 
Asian markets were understandably frigid Friday morning despite a sweltering summer with Sydney’s ASX 200 (+0.07%) up slightly, while Tokyo's Nikkei 225 (-1.71%), Hong Kong's Hang Seng (-1.13%) and Seoul's Kospi Index (-0.89%) were all down sharply.

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1. U.S. Economic Growth Misses Target & That's a Good Thing

  • U.S. GDP growth misses economist estimates 
  • Lackluster second quarter GDP growth provides the perfect cover for the U.S. Federal Reserve to maintain its presence in the market 
If investors haven’t figured out by now, a major reason why asset markets can’t seem to go anywhere else but up is because of the constant presence of central bank intervention.
But that intervention requires justification, especially when the U.S. Federal Reserve is absorbing some US$120 billion a month in asset purchases and the U.S. economy may have just delivered it.
There are signs that the U.S. economic growth story is weakening, with GDP advancing just 6.5% on an annualized basis, as strong consumption was offset by lagging private investment and well below economist estimates of 8.5%.
Growth was also just slightly higher than the 6.3% clocked in the first quarter, and while U.S. output is above pre-pandemic levels, the resurgence of the delta variant in parts of the country has raised concerns about U.S. economic prospects in the coming weeks and months.
Personal consumption growth is also slowing, which is particularly worrying because it is also the strongest component of U.S. GDP data, with spending increasing at an annualized rate of 11.8%, up barely 0.4% from the previous quarter despite what most analysts expected would be a robust summer spending season.
Private domestic investment declined 3.5%, dragged down by a drop in residential investments and business spending on structures – a sure sign that business owners are less sanguine about the economic recovery than other data would suggest.
Making matters worse are signs of rising inflation, with the PCE price index increase 6.4% versus a 3.8% increase in the first quarter.
The mixed data is a can of worms for the U.S. Federal Reserve – disappointing in aggregate, it provides sufficient justification for the central bank to preserve the status quo, and that should keep investors happy for awhile.
But step back a bit and the prospect of stagflation is a bit of a worry – a danger if growth slows against a backdrop of rising inflation and with central bank stimulus no longer capable of fixing the problem.

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



2. Facebook is Offering You the Metaverse

  • Facebook is taking a big bet on the parallel universe of the metaverse  
  • Stiffer regulation especially on ads as well as dependence on other platform providers to deliver its product mean that Facebook may have little choice but to diversify into new areas
In the year 2045, the physical world continues to diminish and has transformed into a dystopian landscape ravaged by climate change, wars and pollution, leading humanity to find solace in an immersive, virtual plane.
The plot line for a myriad number of post-apocalyptic movies, now the world’s largest social media company wants to make it a reality – enter the metaverse and like the Hotel California, you can check out anytime you like, but you can’t ever leave.
With billions of people around the world already logging in daily to Facebook’s web of products, founder and CEO Mark Zuckerberg now wants everyone to live, work and even exercise in his universe – the metaverse.
Advancements in technology, in particular augmented reality and virtual reality, and Facebook’s timely acquisition of Oculus, a maker of VR equipment, means that Zuck’s vision of the future could potentially come to fruition.
An immersive virtual world where people can spend time together, much like they do today, but with virtual reality, and on a scale that seems almost Tron-esque.
And while the concept is far from new – there is no shortage of sci-fi movies touting a similar vision against a backdrop of various stages of dystopia – it’s something that Facebook has actually been building towards for years, with investments in both AR and VR.
On Monday, Facebook (-4.01%) announced a standalone product group internally tasked with building out this vision and the company’s vision of the metaverse became a central topic of discussion on Wednesday’s earnings call.
Building Avatar in real life?
Wall Street was understandably skeptical.
With James Cameron’s seminal movie Avatar the most expensive film to ever be produced, with an estimated production budget of US$425 million, imagine how expensive it would cost to build Avatar in real life.
“Billions” was the answer.
But the threats to Facebook’s bottom lines are far more real than augmented, with the social media giant warning of advertising and regulatory headwinds that saw its shares experience their biggest intraday slide since May.
And even if Facebook’s metaverse does take off, unlike in the movies, there is no restriction on the number of metaverses that can exist in parallel, with companies from Microsoft (+0.098%) to Nvidia (+0.82%), Roblox (-2.89%) to Epic Games all laying out plans for their own versions.
Nonetheless, Facebook may not have much choice in innovation.
While the social media giant built a nearly unstoppable advertising and messaging business, it did so atop operating systems and devices that it doesn’t own, meaning that the firm has had to kowtow to policy changes and constraints leveled on it by device makers or operating software providers.
With the metaverse, Facebook has an opportunity to remake the future in its own guise, however dystopian that may end up becoming.
For investors however, that building process may be expensive.

3. Ethereum's London Upgrade a Boon for Prices?

  • Ethereum's upcoming London upgrade could see a major shift in how its cryptocurrency Ether is valued 
  • Reduced fees, improved speeds and a diminishing amount of Ether available could all help the cryptocurrency surge higher 
With Ethereum still well off its all-time-high, investors may be looking forward to its upcoming upgrade, also known as “London” to see prices head higher.
The world’s second largest cryptocurrency by market cap and home to the bulk of applications in the cryptocurrency space, from non-fungible tokens to decentralized finance, the upcoming upgrade could trim the pace at which the supply of Ether grows.
Unlike Bitcoin, Ether does not have a deflationary emission curve, with the total number of new Ethers minted deliberately kept ambiguous, to facilitate two competing demands – to ensure usage as well as adoption.
The upcoming Ethereum upgrade, EIP-1559 (EIP stands for Ethereum Improvement Proposal) will split up the approximately 13,000 new Ethers issued every day for miner payment or “gas fees” into three parts, one of these, the minimum fee that users pay to process transactions, will now be removed from circulation in a process known as burning.
That “burning” will increase the scarcity of Ether, and has led some traders to speculate could push its price higher.
Burning essentially sends the Ether to a “dead” wallet where the private key has been destroyed and the Ether that sits inside there becomes inaccessible, hence “burned” and should taper Ether’s current supply increase of approximately 4% per year.
But that’s just the first step in Ether’s ambitious plans to grow its substantial blockchain, because come next year, Ethereum will try to shift towards a proof-of-stake mechanism to verify transactions, which would allow Ether holders to secure the Ethereum blockchain by staking Ether instead of mining it.
The London upgrade is set to take place within the next week, largely dependent on when the Ethereum blockchain reaches the point where the update is scheduled and will also benefit Ethereum users by making fees more predictable and reduce delays in processing most transactions.
Miners who had been constantly selling Ether after having mined it however, may feel somewhat short changed, especially given the initial revenue hit.
Ether is currently trading at about half of it’s all-time-high in May, despite a recent recovery in Bitcoin. 

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Jul 30, 2021

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