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Novum Alpha - Daily Analysis 13 August 2021 (10-Minute Read)

Sentiment on Wall Street appears to have decoupled from the problems raging in Asia.

A fantastic Friday to you as U.S. equities edge higher while Asian stocks drift lower on Friday morning. 

In brief (TL:DR)

  • U.S. stocks turned higher on Thursday with the Dow Jones Industrial Average (+0.04%) and S&P 500 (+0.30%) and tech-centric Nasdaq Composite (+0.35%) all higher after fresh labor market data provided insight on the pace of the economic recovery. 
  • Asian stocks slipped Friday as the spread of the delta Covid-19 variant and China’s regulatory curbs restrained sentiment despite another record close on Wall Street.
  • Benchmark U.S. 10-year Treasuries dipped about one basis point to 1.35% (yields rise when bond prices fall) but were otherwise flat. 
  • The dollar held an advance.
  • Oil dipped with September 2021 contracts for WTI Crude Oil (Nymex) (-0.65%) at US$68.64 as traders grappled with the impact of the delta variant on demand amidst rising stockpiles. 
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.24%) at US$1,756.00, but still weaker on many technical measures. 
  • Bitcoin (-2.63%) fell to US$44,813 with inflows outpacing outflows as a sustained technical push above US$46,000 appeared to falter  (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. Investors in China Should Brace for the Long Haul
  2. Have ETFs Gotten Too Big to Fail?
  3. Hackers Return Proceeds "Borrowed" from DeFi Hack

Market Overview

Sentiment on Wall Street appears to have decoupled from the problems raging in Asia. 
Robust jobs data and signs that the U.S. economy is on the mend took center stage as investors poured into equities, even as China rolled out a 5-year economic plan that looked somewhat out of place in what has ostensibly been run as a capitalist economy. 
Investors in Asia are growing increasingly jittery over China's 5-year plan, which could see weakness in regional economies that depend heavily on China as its major trading partner. 
Even China's lucrative real estate market has not been spared, with Beijing suspending private equity funds from raising money to invest in residential property development. 
That and other curbs by Beijing are acting as a drag on sentiment, and threatening to take Asian equities lower in Friday's morning session with Tokyo's Nikkei 225 (+0.04%) and Sydney’s ASX 200 (+0.47%) up while Seoul's Kospi Index (-1.61%) and Hong Kong's Hang Seng (-0.50%) were lower. 

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


1. Investors in China Should Brace for the Long Haul

  • Beijing unveils a 5-year plan that calls for greater regulation and oversight for a broad range of industries and sectors 
  • Profit-motive may take a backseat to social goals of the Chinese Communist Party and brings into question how much investors can and should take before they push off into other sectors or countries 
It’s been said that good things come to those who wait, but for investors waiting out an end to Beijing’s crackdown on the various aspects of China's economy, the wait could be a long, and unprofitable one.
A recently released 5-year blueprint for China’s economy has called for greater regulation over vast sectors and industries and provided a sweeping framework for the broader crackdown in hitherto “untouchable” industries that has sent global investors reeling.
Jointly issued late on Wednesday by the State Council and the Chinese Communist Party’s Central Committee, authorities are “actively” working on legislation in areas including national security, technology and monopolies.
Investors trying to make sense of the madness have already been caught flatfooted as the US$100 billion afterschool education sector was banned from making profits in recent weeks.
And anti-monopoly probes have ensnared Alibaba Group Holdings (-2.70%), while its eponymous founder Jack Ma has gone incognito.
Yet regulation in and of itself isn’t entirely a bad thing – not so long ago, Chinese infants perished when a profit-seeking Chinese milk powder company laced its products with the toxic chemical melamine in order to boost its protein readings.
And Chinese “entrepreneurs” have faked everything from eggs to chewing gum, in an exercise of pure capitalism taken to its logical conclusion.
Against this backdrop, a little regulation could go a long way to normalizing an otherwise freewheeling economy constrained by little more than avarice.
While Chinese President Xi Jinping’s predecessors may have been happy to look the other way on industries acting uncompetitively or with few scruples, he has proved that he’s willing to put the people before profits, provided of course that the Communist Party maintains its legitimacy in the process.
For investors at least, a 5-year crackdown gives them food for thought, knowing that things could get a lot worse before they get a lot better, many may choose to vote with their feet.
After all, 5 years is a long time for investment monies to lay fallow or worse, be battered by the at times apparently arbitrary exercise of power.

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


2. Have ETFs Gotten Too Big to Fail?

  • Record ETF flows beg the question of whether they are feeding into their own self-perpetuating feedback loop 
  • Specialist ETFs in niche sectors pose the biggest risk to investors in the event that they have limited liquidity to cash out 
It’s a number so big it’s difficult to wrap your head around – US$9.1 trillion – that’s the amount sloshing around in ETFs or exchange traded funds covering the entire gamut of the asset universe.
Investors as a whole poured some US$705 billion into ETFs through the first seven months of this year alone, with the bulk of flows heading into cheap, index-tracking funds, with large-cap and short-term bond ETFs as well as products offering inflation protection the most popular destinations, according to data from Morningstar.
U.S. ETFs accounted for the bulk of investor monies, with some US$519 billion inflating U.S. ETFs to some US$6.6 trillion.
By tracking a basket of securities, ETFs allow investors to obtain the benefit of low fees while obtaining access to an instrument that trades like a stock.
But ETFs also belie a hidden danger that’s lurking in plain sight.
As more money chases returns, many investors have doubled down on ETFs, but narrow thematic funds can concentrate billions of dollars in assets in a small roster of companies, making them especially susceptible to a liquidity crunch in volatile markets.
And when ETF investors sell their stake in the ETFs, their issuers need to unwind the underlying assets – something that may not be possible in illiquid markets.
The other issue is that as more monies flow into ETFs, those that track popular stocks like Big Tech, have to start snapping up shares of those companies and given the size of many ETFs, exert an upward pressure on the price of those stocks.
That upward pressure then feeds into the narrative to buy more of that ETF tracking those stocks which leads into a self-perpetuating cycle that feeds off its own echo chamber, pushing stock prices even higher.
The risks of such unbridled upward cycles cannot be overemphasized and investors should be wary when buying blindly into these products. 

3. Hackers Return Proceeds "Borrowed" from DeFi Hack

  • PolyNetwork hackers return almost half of the stolen cryptocurrency proceeds 
  • Change of heart by the hackers may be more of a function of the cryptocurrency ecosystem policing itself rather than any genuine remorse
Whether it was threats from the decentralized finance or DeFi community to “unrecognize” the ill-gotten proceeds of the PolyNetwork hack, or because Tether, Binance and even Ether miners were mulling the prospect of not validating the transactions from the hack, in a bizarre twist, hackers had a change of heart and returned about half of the US$610 million pilfered on Tuesday.
Claiming to have hacked the PolyNetwork for “fun” and that whoever the hacker was could not afford for someone else to have taken advantage of the exploit, the hackers returned some US$260 million worth, according to blockchain forensics firm Elliptic.
The hackers claim to have been acting as vigilantes, hacking the PolyNetwork and exploiting its smart contract vulnerability to “keep it safe” after spotting the bug in the smart contract code.
And while the hackers allege that they will be impossible to trace, Blockchain security research SlowMist claims to have already found the attackers’ email and IP address and device fingerprint.
As cryptocurrencies have gained in popularity, so has a cottage industry of blockchain analysis companies from Singapore-based Merkle Science to the U.S.-headquartered Chainalysis, blossomed to cater to the needs of stakeholders.
Scores of cryptocurrency exchanges and trackers have been on an active hunt for the PolyNetwork hackers, in a display of decentralized vigilantism that could serve as a test for how the digital asset ecosystem polices itself.
The response from the cryptocurrency community has been encouraging, and demonstrates that even if you can steal digital assets, laundering them and cashing them out may prove exceedingly difficult because everyone can see what’s happening on the blockchain.
And it’s likely that the hacker couldn’t really make off with the ill-gotten proceeds of the hack that may have encouraged them to return the funds.
The alleged altruism of the hackers, who claim they had stolen the funds to secure them seems doubtful, especially when, according to Chainalysis, they attempted to launder at least part of the cryptocurrencies by using PolyNetwork to cash in Dai and USDC and converting all of them back to Dai, a stablecoin.

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Aug 13, 2021

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