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Novum Alpha - Daily Analysis 3 August 2021 (10-Minute Read)

Growth in China is slowing, as is the U.S. recovery and the delta variant of the coronavirus is rippling across the world and threatening to derail the situation.

A terrific Tuesday to you as markets continue to tread water against a backdrop of conflicting macro signals. 

In brief (TL:DR)

  • U.S. stocks were weaker heading into Monday with the Dow Jones Industrial Average (-0.28%) and S&P 500 (-0.18%) taking slight dips while the tech-centric Nasdaq Composite (+0.06%) was higher, but look set to recover as Chinese stocks rebound on investors buying the dip. 
  • Asian stocks fell Tuesday amid concerns the economic recovery from the pandemic is losing momentum.
  • Benchmark U.S. 10-year Treasuries fell sharply to 1.18% after sliding five basis points (yields fall when bond prices rise) on concerns that the macroeconomic landscape is starting to turn sour. 
  • The dollar was steady.
  • Oil held a plunge with September 2021 contracts for WTI Crude Oil (Nymex) (+0.38%) at US$71.53 as the virus and indications of a slower Chinese economic rebound dented the outlook for consumption.
  • Gold slipped with December 2021 contracts for Gold (Comex) (-0.44%) at US$1,814.20.
  • Bitcoin (-1.70%) fell to US$38,947 with inflows leading outflows confirming the bear trap that was spotted over the weekend (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Saudi Arabia Wants to Sell You Some Stock
  2. World's Biggest Pension Fund Cools on Treasuries, Should You?
  3. Malaysia Takes Aim at Cryptocurrency Exchange Binance

Market Overview

Things don't look good. 
There was always the prospect that mutations of the coronavirus could put a damper on the recovery party and increasingly a confluence of factors is making things look uncertain.
Growth in China is slowing, as is the U.S. recovery and the delta variant of the coronavirus is rippling across the world and threatening to derail the situation. 
Global stocks slipped and investors are pouring into Treasuries to find safe harbor. 
Some investors may be tempted to go in and buy the dip and there is some logic to that view because so long as the recovery appears weak, central banks and governments have every excuse to remain engaged in the economy and keep the liquidity taps flowing. 
At some stage, investors will still have to come around and take a punt on something and that something would almost certainly be equities. 
Asian markets fell Tuesday with Sydney’s ASX 200 (-0.26%), Tokyo's Nikkei 225 (-0.88%), Seoul's Kospi Index (-0.06%) and Hong Kong's Hang Seng (-0.80%) all down in the morning trading session. 

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



1. Saudi Arabia Wants to Sell You Some Stock

  • Saudi Arabia stocks are at their highest since before the 2008 Financial Crisis 
  • Structural changes in the Saudi Arabian economy means that there are plenty of opportunities for global investors looking to diversify into other emerging markets 
The sands of the desert beckon.
Standing on the edge of the Rub’ al-Khali, you could be forgiven for thinking that you’re on the fictitious Star Wars planet of Tatooine as the sands stretch endlessly into the horizon.
In this harsh and inhospitable land, the city of Riyadh emerges on the edge of the desert, like a jewel glistening in the scorching sun.
Yesterday Saudi Arabian stocks closed at their highest level in over 13 years, the last time it was this high was prior to the 2008 Financial Crisis.
Soaring on the back of record earnings from financial institutions, Al Rajhi Bank (+3.36%), Saudi National Bank (+0.90%) and Saudi Basic Industries (+0.82%) helped propel the benchmark Tadawul All Share Index by 0.8% yesterday.
There are numerous factors that are seeing Saudi stocks soar, chief among which is global investors concerned over heady valuations for equities in the U.S. looking to other markets for opportunities.
Saudi Arabia’s growing mortgage market, an increasing number of listings and better liquidity on its stock exchange are also key contributors to the recent rally.
Under the leadership of Crown Prince Mohammed bin Salman, Saudi Arabia has been rapidly transforming its economy, to reduce its reliance on oil, and that has boded well for the Saudi stock exchange.
Saudi stocks have outperformed emerging-market peers throughout this year, but are still 46% down from record highs in 2006, when efforts by Riyadh to use capital markets to help redistribute oil wealth went some way to fueling a speculative bubble driven mostly by retail traders.
The secular rally in recent times may provide opportunities for investors willing to brave the shifting desert sands.

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


2. World's Biggest Pension Fund Cools on Treasuries, Should You?

  • World's largest pension fund swaps out U.S. Treasuries for other sovereign debt, in particular European debt with better yields such as French and Italian bonds 
  • Looming pension obligations and muted returns have meant that pensions and pension portfolios need to chase higher returns at a time when lifespans are getting longer 
As pensions go, every responsible investor knows to keep a mix of both stable fixed income and risky, but capital-growing equities.
The never-ending debate however has always been what proportion of stocks to bonds is best for maintaining retirement obligations.
With lifespans getting longer, the world’s largest pension fund thinks that it may have the answer.
Japan’s Government Pension Investment Fund, the world’s biggest pension fund, made a record cut to the weighting of U.S. Treasuries in its portfolio during the last fiscal year, against the backdrop of a global debt selloff.
The GPIF, cut U.S. government bonds and bills as a percentage of its foreign debt holdings, from 47% to 35% according to analysis from Bloomberg.
But the GPIF isn’t dropping debt altogether, shifting instead into investments into European sovereign debt with higher yields and reducing dependence on Japanese government bonds.
Key to the shift has been the negative real rates of return that the GPIF has had to contend with on safe haven bonds, especially for Japanese government debt.
The GPIF has also shifted focus towards higher returning equities at a time when its retirement obligations are set to soar.
Treasuries have underperformed for an extended period, and the GPIF may have been looking to deploy its US$1.7 trillion in other fixed income securities with better returns.
Under its new 5-year investment plan that took effect in April last year, at the height of the pandemic, the GPIF looks set to split its portfolio evenly between stocks and bonds. 
And what the GPIF does, other pension funds, especially Japanese ones, will be looking to follow.
Current Treasury yields don’t sufficiently compensate investors to take foreign exchange risks and negative real yields mean that longer-dated U.S. government debt will act as a drag on retirement portfolios.

3. Malaysia Takes Aim at Cryptocurrency Exchange Binance

  • Malaysia targets cryptocurrency exchange Binance and its founder Changpeng Zhao
  • Targeted crackdown on Binance may however have limited real world impact as investors and traders in Malaysia have long grown accustomed to finding work arounds 
Mired in a coronavirus crisis which has seen the country go into a national lockdown, or “movement control order” repeatedly over the past year, Malaysia has still had the capacity to launch the most serious salvo yet against the world’s largest cryptocurrency exchange by volume, Binance.
Last week, scattered global efforts to crack down on the cryptocurrency exchange that exists everywhere but nowhere, crystalized in Malaysia as the country’s regulators censured CEO Changpeng Zhao for “illegal” operations, just as Binance announced plans to close its highly lucrative European derivatives business.
Malaysia’s financial watchdog, the Securities Commission Malaysia, said it was launching an “enforcement action” against Binance’s Cayman Islands-incorporated holding company and a slew of global affiliates, issuing an ultimatum to the embattled cryptocurrency exchange to disable within 14 days from July 26.
Enforcing these measures however will be far trickier.
Although registered in the Cayman Islands, doesn’t technically “exist” anywhere and while Malaysia authorities want the exchange to halt all media and marketing activities to local investors and bar access to its popular Telegram messaging channels, whether that’s even possible is a different story altogether.
Telegram allows for a degree of anonymity that makes it challenging for administrators of Binance’s Telegram channels to deny access to Malaysian users specifically.
And Malaysians have long used virtual private networks or VPNs to access overseas sites that would otherwise be blocked by authorities.
The Securities Commission Malaysia’s enforcement action comes on the back of a global regulatory crackdown on Binance which started with the United Kingdom’s Financial Conduct Authority issuing an alert against the cryptocurrency exchange for alleged unauthorized conduct of regulated activities.
And while other key markets such as Japan, Hong Kong and Italy have also issued warnings about Binance, this is the first time an authority has targeted the main exchange for closure.
Binance exists in multiple jurisdictions through local affiliates such as in the United States and Singapore.
Yet judging by Binance’s own cryptocurrency Binance Coin or BNB, traders don’t seem to be worried about the enforcement action, with BNB rising about 10% since Malaysia’s enforcement action was announced.

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Aug 03, 2021

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