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Novum Alpha - Weekend Edition 7-8 August 2021 (10-Minute Read)

U.S. payroll data beat economist expectations by posting better-than-expected results pushing equities higher, concerns over U.S. Federal Reserve policy ensured that those gains were measured. 

A wonderful weekend to you as stocks head higher into the weekend after U.S. payroll data provided the Goldilocks number needed. 
In brief (TL:DR)
  • U.S. stocks were mostly higher on Friday with the Dow Jones Industrial Average (+0.41%) and S&P 500 (+0.17%) both up as better-than-expected payroll data fed into the economic recovery story while the tech-centric Nasdaq Composite (-0.40%) was lower on concerns that the U.S. Federal Reserve would taper its asset purchases sooner than expected. 
  • Asian stocks were a mixed bag as concerns over the delta variant and the continuing Chinese crackdown on the tech sector weighed on sentiment.
  • Benchmark U.S. 10-year Treasuries rose to 1.303% (yields rise when bond prices fall) on robust jobs data. 
  • The dollar strengthened in line with more bullish expectations for the U.S. economy. 
  • Oil dipped sharply with September 2021 contracts for WTI Crude Oil (Nymex) (-1.17%) at US$68.28 on demand concerns. 
  • Gold fell with December 2021 contracts for Gold (Comex) (-2.53%) at US$1,763.10 as inflation concerns waned on expectations that the Fed would taper support. 
  • Bitcoin (+2.02%) rose sharply in line with risk sentiment to US$42,827 (0100 GMT, Saturday) with inflows lagging outflows and as Bitcoin looks set for a pullback on Monday, riding higher over the weekend on thinner volumes (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. Retail Flows to China Where Institutional Investors Fear to Tread
  2. Investors Should Keep an Eye on the Copper
  3. De-Fi-ing the SEC? Think Again

Market Overview

U.S. payroll data beat economist expectations by posting better-than-expected results pushing equities higher, concerns over U.S. Federal Reserve policy ensured that those gains were measured. 
Bearing in mind that payroll data is a lagging indicator, even though there were some concerns the Fed would pull back support, a virulent delta coronavirus variant provides at least some justification for central bank intervention and that was sufficient to keep a competing narrative in the markets.  
Asian stocks were a mixed bag headed into the weekend with Tokyo's Nikkei 225 (+0.33%) and Sydney’s ASX 200 (+0.36%) up, while Hong Kong's Hang Seng (-0.10%) and Seoul's Kospi Index (-0.18%) were down slightly. 

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1. Retail Flows to China Where Institutional Investors Fear to Tread

  • Retail investors buy the dip on Chinese stocks with record inflows into ETFs tracking Chinese equities 
  • Recent purge is unlikely to be over yet, but economically more sensitive sectors like real estate may be granted clemency by Beijing 
Call it "meme stock courage" if you will, but retail investors are proving yet again that they boldly go where institutional money managers fear to tread.
Despite a crippling crackdown by Beijing on Chinese tech giants and its once burgeoning afterschool education industry, retail investors are hunting for bargains in ETFs that track Chinese stocks.
CFRA data has revealed the US$5.3 billion KraneShares CSI China Internet ETF has garnered record daily inflows from retail traders, despite institutional investors steering clear of Chinese companies amidst an unprecedented crackdown by Beijing.
And the iShares China large cap ETF, has attracted inflows of US$467 million in recent days, according to
The strong inflows are in line with the retail investing mantra of “buying the dip,” but also come against a backdrop of Chinese authorities reassuring investors both at home and abroad that the recent putsch is directed at specific sectors and companies, and not part of a broader move to destroy the stock of listed Chinese companies.
To be sure, shares of some of the most storied Chinese companies, including Tencent (+0.36%), maker of the ubiquitous app WeChat, and e-commerce powerhouse Alibaba Group Holdings (-1.68%) are trading at near-bargain basement prices, and some investors at least, are betting that the recent crackdown by Beijing is just a speed bump in the overall Chinese growth story.
A benchmark tracking Chinese internet stocks listed internationally is trading at its lowest price-to-earnings ratio in over five years, and investors would do well to recall that significant selloffs in the past have been closely followed by periods of outperformance.
The recent surge could also be a function of market structure, with a surge in bullish call options on Chinese equities forcing market makers to pick up these stocks to hedge their positions, and record flows into Chinese stock ETFs requiring issuers to pick up the underlying assets.
As with so many things in China, it’s impossible to say if the worst of the recent rout is over, with some analysts speculating that China’s lucrative and leveraged property sector is likely to be the next shoe to fall.
That may not necessarily be a sure thing though.
Beijing has shown exceeding patience with state-owned China Huarong Asset Management (-1.92%), despite repeated delays in issuing its financial results from last year.
And Chinese Communist Party apparatchiks have also shown remarkable restraint with embattled property developer China Evergrande (-4.59%).
As with so many things in China, who you know is often far more important than what you do.
And as the political winds shift in the Middle Kingdom, the sectors which are likely to be the safest from Beijing’s iron fist are those that promote the social and economic policies of the Chinese Communist Party.  

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



2. Investors Should Keep an Eye on the Copper

  • Copper price points to worrying weakness in the global economy
  • Key technical support levels for copper being tested and if breached, could spell a worsening outlook 
While stocks wavered in the wake of robust payroll data out of the U.S., on concerns that the U.S. Federal Reserve would pullback support sooner than expected, most investors missed the more significant decline in copper prices. 
Most investors monitor gold prices, but fewer observe copper, a barometer of economic circumstances and a key metal, more than ever before, for industrial activity.
Copper goes into everything from smart phones to vehicles and at the rate that prices have been falling, could be a harbinger of a worsening economic outlook.
Copper futures have dropped by around 9% from their high in May and while prices are still up some 20% this year alone, it’s just a hair’s breadth from shedding 10% off its most recent high, a level considered by most technical analysts to indicate correction.
For astute copper watchers, a key level of support would be US$4.20, a level that has been touched four times since April, but been followed with a swift rebound thereafter.
Should copper test US$4.20 again and breach it, it could be a worrying sign that all is not well with the global economy, regardless of what equity markets may seem to suggest.
Weakness in the price of copper is also coming at a time when some economists are expecting global GDP growth to slow.
Economists at Citigroup (+2.09%) expect that global GDP growth will start to taper from 6% in 2021, to 4% in 2022, at a time when the U.S. Federal Reserve is mulling interest rate hikes and to that extent, weakness in the price of copper does not bode well.
Whereas Chinese manufacturing activity had placed substantial demand for copper, helping rally the price of the industrial metal to fresh highs, signs that recovery in China is slowing, and a diminished desire to stockpile copper have since seen prices of the industrial metal steadily decline.
Overall, there’s a sense that if the world’s second largest economy doesn’t want the raw material to make stuff, then all may not be as good as it seems for the global recovery story. 


3. De-Fi-ing the SEC? Think Again

  • U.S. Securities and Exchange Commission brings landmark lawsuit against the decentralized finance or DeFi space 
  • More proactive SEC likely to continue with enforcement actions, but as long as the vast majorit of these cases never make it to trial, should provide some comfort to existing cryptocurrency industry stakeholders 
In what will likely become a seminal case for digital asset defense attorneys, the U.S. Securities and Exchange Commission has brought its first lawsuit against a decentralized finance or DeFi project, Blockchain Credit Partners and its top executives. 
The SEC is suing the Cayman Islands-registered Blockchain Credit Partners and two of its top executives, alleging that they illicitly offered securities through their DeFi Money Market platform from February 2020 to February 2021, according to a statement issued yesterday.
According to the SEC’s lawsuit, Blockchain Credit Partners sold some US$30 million worth of digital tokens that were considered securities and ought to have been registered with the SEC.
In the SEC statement, Enforcement Director Gurbir Grewal noted,
“Full and honest disclosure remains the cornerstone of our securities laws -- no matter what technologies are used to offer and sell those securities.”
The DeFi market has exploded since last July, with billions of dollars in digital tokens transacted through a variety of financial services that rely on smart contracts that do away with the need for a centralized or trusted intermediary.
While the Ethereum blockchain has proved to be the most popular for DeFi applications, Binance Smart Chain and Solana have also been making inroads into the space.
The recent release of EIP – 1559, the Ethereum Improvement Proposal that should see transactions on the Ethereum blockchain reduced substantially, should facilitate DeFi transactions even more thanks to an anticipated reduction in transaction fees.
But one of the concerns that regulators have had for DeFi for some time, is that counterparties can transact anonymously, without ever having to perform standard know-your-customer or anti-money laundering obligations.
Borrowing, lending, investing, insuring and trading are just some of the many transactions supported by DeFi, and all of which can be done without ever knowing who the counterparty to the other side of the transaction is, or needing a trusted third party to mediate.
Unlike his predecessor Jay Clayton, current U.S. SEC Chairman Gary Gensler, who previously taught a course on cryptocurrency and blockchain at the Sloan School of Management at the Massachusetts Institute of Technology, has shown far more appetite for enforcement action and greater regulation of the cryptocurrency space.
The action brought by the SEC against a DeFi platform is the first of its kind and Blockchain Credit Partners and its two executives elected to pay the SEC a settlement without admission of wrongdoing.
The Blockchain Credit Partners settlement mirrors a similar settlement with the New York Attorney General’s Office, by Tether, a dollar-backed stablecoin that has been a magnet of controversy.  
As the cryptocurrency industry continues to expand, the SEC’s growing assertiveness will likely see more such enforcement actions taken, as well as an expansion of rules and regulations intended to provide greater investor protection in the space. 

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Aug 07, 2021

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