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

Central banks globally have been instrumental in ensuring that markets have not crashed in the wake of the coronavirus crisis, but timing the withdrawal of their stimulus is a tricky business and nowhere is this more tricky than with the U.S. Federal Reserve.

A terrific Tuesday to you as stocks tread water heading out into the week. 

In brief (TL:DR)

  • U.S. stocks were a mixed bag on Monday with the Dow Jones Industrial Average (-0.30%) and S&P 500 (-0.09%) both down slightly, while the tech-centric Nasdaq Composite (+0.16%) as investors grew cautious over the delta variant is threatening a fresh pandemic wave. 
  • Asian stocks drifted Tuesday as investors weighed talk of stimulus withdrawal and a resurgence in the delta virus variant.
  • Benchmark U.S. 10-year Treasuries held at 1.32% (yields rise when bond prices fall). 
  • The dollar held an overnight gain.
  • Oil rose with September 2021 contracts for WTI Crude Oil (Nymex) (+0.39%) at US$66.74 after it touched the lowest in three weeks on concern the delta strain will hamper demand growth.
  • Gold edged higher with December 2021 contracts for Gold (Comex) (+0.53%) at US$1,735.60 with traders buying the dip, but bullion still below key support levels.  
  • Bitcoin (+6.09%) rose sharply to US$45,972 with outflows leading inflows and as Asian trading saw consolidation yesterday which is now looking to breakout above US$46,000 (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. China is Letting Its Chips Lie Where They Fall
  2. All That Glitters Is Not Gold, It Really Isn't
  3. Cryptocurrencies Catch-All Cruises Through Congress

Market Overview

Central banks globally have been instrumental in ensuring that markets have not crashed in the wake of the coronavirus crisis, but timing the withdrawal of their stimulus is a tricky business and nowhere is this more tricky than with the U.S. Federal Reserve. 
A resurgent delta variant of the coronavirus is coming at a time when early vaccination gains are starting to plateau. 
There are signs that while employment data looks positive, price increases are starting to ebb as well, helping to boost the argument for keeping stimulus measures in place may be prudent, especially on signs that the initial post-lockdown economic activity is starting to slow. 
Already that growth is slowing in the world's second largest economy, with export growth in China turning sluggish and global demand starting to tire as governments struggle to keep economies afloat. 
Asian stocks were mostly higher on Tuesday with Tokyo's Nikkei 225 (+0.96%), Sydney’s ASX 200 (+0.10%) and Hong Kong's Hang Seng (+0.19%) up, while Seoul's Kospi Index (-0.75%)  was down sharply in the morning trading session.  

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1. China is Letting Its Chips Lie Where They Fall

  • China is warning of intervention in its strategically important chipmaking industry
  • While China wants to build up capabilities and self-sufficiency in chipmaking, profiteering has been frowned upon amidst a global chip shortage 
In another sign that it is impossible to divine the brain of Beijing, China is now cracking down on its strategically important chipmaking industry.
Few, if any, would have guessed that Beijing would be cracking down on semiconductor manufacturing, especially when Chinese President Xi Jinping has long made the sector a priority, to reduce its reliance on the U.S. for chips essential to making a variety of goods.
Yet a warning in state media last Friday that regulators will show no tolerance in cracking down on speculators in the chip market sent related stocks lower on Monday.
China’s biggest chipmakers were hit hard on Monday, including Semiconductor Manufacturing International Corp., Hua Hong Semiconductor (+0.37%), Will Semiconductor (-7.10%) and Hubei Tech Semiconductors (+0.82%).
For global investors, what was seen by many as a “sacred cow” has reinforced the fact that in China, nothing can be taken for granted.
Despite a global semiconductor shortage that has seen Chinese chipmakers soar alongside their global counterparts, a wider regulatory crackdown of China’s biggest tech firms as well as its afterschool education service providers has created a chilling effect, with many investors preferring to sit on the sidelines until the dust settles.
According to state-owned media CCTV, some chip distributors had “maliciously” jacked up the prices of chips, amidst the global semiconductor shortage, and urged sellers to be disciplined and refrain from hoarding components.
Seen against that backdrop, Beijing’s reigning in of its chipmaking industry makes absolute sense.
As a strategically important sector of the Chinese economy, Beijing can’t afford to have Chinese chipmakers or distributors profiteering off a global shortage of semiconductors, especially when chips are essential components in all manner of manufactured goods, from toasters to Teslas.
Chinese automakers, for instance, import about 90% of the high-end chips that they require for their vehicles, a statistic that Beijing is eager to turnaround.
In that sense, the recent warning from Chinese state media must be seen in light of the greater importance of the chipmaking industry – it’s not likely that Chinese chipmakers will be broken up or shut down, but rather their days of supernormal profits may be over.
As Beijing interferes in its ostensibly capitalist economy more than ever before since market reforms first started being implemented, investors have been cautiously looking for signs as to what other sectors could next be targeted by China’s Communist Party.
And the latest warning to chipmakers suggests that the highly lucrative real estate companies may be the next shoe to drop.

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2. All That Glitters Is Not Gold, It Really Isn't

  • Gold falls below key levels of technical price support 
  • Muted inflation expectations and presumptions that the U.S. Federal Reserve will begin tapering its asset purchases and raise rates sooner than expected has weighed down gold's prospects 
Robust non-farm payrolls data saw inflation fears ebb and gold slide precariously below US$1,800 at the start of Asian trading yesterday, on concerns that the U.S. Federal Reserve would soon start paring back its massive US$120 billion-a-month asset purchases.
Technical chart watchers would also have noticed that bullion breached technical support levels, triggering a cascade of stop losses on a day when overall liquidity was lower because of holidays in Japan and Singapore, two key venues for gold trading.
Whilst gold’s role as a hedge against inflation has always been subject to wider debate, many economists, including from Goldman Sachs (+0.50%) and Citigroup (+0.63%) had predicted the precious metal would hit US$2,300 or higher this year on the back of rising prices.
If so, gold has some ways to travel, with the Fed’s unambiguous policy stance and apparent willingness to reign in inflationary pressures, helping to manage expectations of runaway prices.
Strong payroll data coupled with increasing evidence of inflation are causing at least some within the powerful Federal Open Market Committee to waver on earlier interest rate policy schedules and more than handful are in favor of bringing forward the Fed’s interest rate hikes.
Non-interest bearing gold has not been a beneficiary of a potentially more hawkish Fed, and remains under pressure with inflation-adjusted U.S. Treasury yields spiking on last Friday’s non-farm payroll data. 
Gold touched its lowest level momentarily since March, and came close to testing its lowest level in over a year, but was helped by bargain hunters convinced that gold was not yet in capitulation phase.
Attention will now turn to fresh economic data due later this week, to discern what the effect of the delta variant has been on the economy.
U.S. Consumer Price Index data is due out on Wednesday, and most analysts expect the gauge to show a smaller increase than the previous month, due in large part because last month’s figure was distorted by a summer surge in demand for used vehicles.
Supply chains are also slowly but surely re-opening, and will bolster the narrative at the Fed that the most recent bouts of inflation are transitory.
All of which do not bode well for gold’s prospects.

3. Cryptocurrencies Catch-All Cruises Through Congress

  • Cryptocurrency lobbyists fail in their attempt to alter cryptocurrency provisions in the US$550 billion infrastructure bill that is before the U.S. Senate 
  • Current language would not cater for amendments that could have left out miners and software developers from IRS oversight 
In a blow for the cryptocurrency industry, language which provided for broad oversight of the nascent asset class remained intact and embedded in the US$550 billion infrastructure bill that is making its way to the floor of the U.S. Senate.
Despite vigorous lobbying from the increasingly vocal and influential cryptocurrency and blockchain lobby in the U.S., and bipartisan support from a handful of Congress members, the amendment of language to cryptocurrency provisions in the infrastructure bill was stymied at the Senate.
Under the current bill language, there are concerns that cryptocurrency miners and blockchain software developers would need to reveal their transaction data to the Internal Revenue Service and potentially be taxed on those transactions.
To be fair, software developers who are testing their blockchain applications often use testnets, which don’t transact in actual cryptocurrencies, which are traded on exchanges or sold for fiat currencies.
Where it becomes an issue is when those blockchain applications go to the mainnet and then attract actual cryptocurrencies which have values that can be represented by fiat currencies.
For instance, if a blockchain protocol awards its developers the digital token for that blockchain, the current cryptocurrency provisions in the infrastructure bill could potentially make those awards declarable to the IRS and therefore taxed.
Cryptocurrency miners too, who sell their cryptocurrency from mining activities to fund operations, would now be obliged to declare transactions over US$10,000, increasing their potential tax burden.
In recent weeks, the U.S. cryptocurrency industry had pushed hard to reduce oversight to mainly traders and investors, as opposed to miners and software developers, and also to clarify the bill’s language.
The amendments however are not entirely dead on arrival as the infrastructure bill and the current cryptocurrency provisions are still some ways away from landing on President Biden’s Resolute Desk for signing, as it still needs to be taken up by the House, where changes could still be made.
Quirks of procedure in the Senate have meant that the proposed amendments must be agreed upon by every senator, leading some senators to horse-trade the change of cryptocurrency provisions in exchange for other conciliations.
The Senate is likely to vote on final passage of the infrastructure bill as it currently stands later today before it heads back down to the House and then on to the White House for signing into law. 

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Aug 10, 2021

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