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Novum Alpha - Daily Analysis 17 August 2021 (10-Minute Read)

The pandemic isn't over till the fat lady sings, or at least all of us can start singing with masks off.

A terrific Tuesday to you as stocks slowed their ascent due in large part to the slowing economic recovery in China, the world's second largest economy. 

In brief (TL:DR)

  • U.S. stocks entered the week mostly higher on Monday with the Dow Jones Industrial Average (+0.31%) and S&P 500 (+0.26%) up on renewed optimism in the recovery while the tech-centric Nasdaq Composite (-0.20%) was slightly lower, amidst thin volumes in summer trading. 
  • Asian stocks were mixed early Tuesday as traders weighed a record-breaking run in the S&P 500 against concerns that the delta virus variant will choke global growth.
  • Benchmark U.S. 10-year Treasuries declined one basis point to 1.25% (yields fall when bond prices rise) on continued concerns over the economic recovery and the delta variant. 
  • The dollar held a gain.
  • Oil rose with September 2021 contracts for WTI Crude Oil (Nymex) (+0.42%) at US$67.57 but with the outlook looking lower thanks to concerns over Chinese demand. 
  • Gold was flat with December 2021 contracts for Gold (Comex) (-0.12%) at US$1,787.60.
  • Bitcoin (-3.01%) slipped to US$46,235 heading into the week, as U.S. traders took some profits off the table with Bitcoin riding over US$46,000 an important technical level of resistance, and as inflows continued to lead outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Chinese E-commerce Out, Chips In
  2. Guess Who's Back? Supply Chain Woes
  3. U.S. Treasury Department Clarifies Cryptocurrency Taxes

Market Overview

The pandemic isn't over till the fat lady sings, or at least all of us can start singing with masks off. 
In China, where a zero-tolerance policy towards the pandemic has been adopted, infections thanks to the more virulent delta variant, are resurfacing in places like Wuhan, the epicenter of the pandemic, and Beijing, which is taking a toll on the economic recovery. 
Investors say the world's second largest economy has likely continued to lose steam in August, following the shutdown of a key port and the re-introduction of travel restrictions.
Things in the U.S. aren't much better either and dangers lurk around the corner as infections skyrocket in many parts of the country, while companies continue to report robust earnings from the previous quarters, whereas it's the forward quarters that could prove to be the most challenging. 
Asian stocks on Tuesday morning were a mixed bag with Tokyo's Nikkei 225 (+0.18%) and Hong Kong's Hang Seng (+0.10%) up, while Seoul's Kospi Index (-0.57%) and Sydney’s ASX 200 (-0.75%) were lower a the pandemic continued to weigh on sentiment. 

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1. Chinese E-commerce Out, Chips In

  • Global investors betting on the Chinese Communist Party-approved sectors and dialing back investments on embattled sectors like fintech, gaming and ecommerce 
  • Five-year economic plan unveiled by Beijing, provided that they stick with it, should see the focus and shift in Chinese economic priorities likely be durable 
All-in on Chinese chips is what investors appear to be saying with their money. 
Taking a page out of the Chinese Communist Party playbook, global investors are shunning the once hot sectors of ecommerce and fintech, and doubling down on bets in China’s chipmaking sector.
Despite admonitions from Chinese state media, against profiteering in chipmaking and chip distribution, the sector has continued to see a surge in inflows as investors shun China’s more “controversial” sectors that appear susceptible to crackdown.
Over the past year, Chinese President Xi Jinping has led a regulatory assault on internet platforms, targeting food delivery, ecommerce, fintech, gaming and most recently, afterschool education.
Physical technology however, such as semiconductors has been supported by a multibillion-dollar government plan, with Beijing aiming to make 70% of all its own chips domestically by 2025.
To be fair, part of Beijing’s push may also have to do with optics.
Whereas industries like food delivery provide many low-level and low-paying jobs, that are a constant source of discontent among overworked and underpaid delivery workers, the chipmaking industry is often seen as providing high-quality and higher paying jobs.
Global investors have been withdrawing from China’s fintech sector, once a mainstay, since the scuttled IPO of Jack Ma’s Ant Group saw net outflows of US$37 billion and with investment in Chinese fintech companies falling over 36% to US$360 million in the second quarter from the previous one, according to data from Preqin.
The Nasdaq Golden Dragons index, which tracks big U.S.-listed Chinese stocks including ecommerce giant Alibaba Group Holdings (-2.11%) and Chinese search engine Baidu (-3.68%), is down around 23% since the start of July.
Instead, investors bought into shares of electric vehicle makers, renewable energy companies and other areas that have received Beijing’s seal of approval.
The shift is likely to prove durable, especially in the wake of Beijing’s most recent 5-year economic plan, which aims to promote greater social equality.
Whereas the earlier decades of China’s economic story saw the narrative being shaped by then Premier Deng Xiaoping’s call for some to get rich first, the next decade may be something different altogether, with a push towards transformative technologies that are more inclusive.
Over the past several decades, more wealth has been concentrated in the hands of a few than at any other point in China’s history, and the Chinese Communist Party, once seen as a party of the people has increasingly been viewed as the party of the rich and the well-connected.
President Xi and his cadres are eager to shed that image of elitism and so investors need to be on the lookout for industries, sectors and companies which do more to reduce inequality, as opposed to accentuate and encourage it.

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2. Guess Who's Back? Supply Chain Woes

  • Supply chain issues are creeping back into the global economy as China gets roiled by the delta variant, forcing port closures and travel restrictions 
  • Disrupted supply chains could force prices higher and fundamentally force policymakers to intervene, especially if investors no longer buy-in to the narrative that inflation is transitory 
Earlier this year, seemingly endless rows of Ford (-0.96%) pickup trucks were laid up, lying fallow, thanks to the global chip shortage, but as supply chains reopened, chips became more available and production returned to some semblance of normalcy again, until now. 
For weeks this year, production at some of the biggest automakers ground to a halt thanks to a global shortage of chips, with thousands of vehicles sitting on vacant lots, like so many robots without a brain.
But as pandemic restrictions eased, shipping lanes reopened and factories started pumping out goods again, many of the supply chain snarls that marked so much of the pandemic subsided, leading to belief that the worst of shortages was finally over.
Then it was not.
Almost overnight, the far more virulent delta variant of the coronavirus has seen crucial industrial ports in China shutdown and compounded supply chain blockages across Asia, the world’s biggest source for manufactured goods.
A United Nations estimate suggests around 42% of all global exports are sourced out of Asia, which unfortunately lags the U.S. and Europe in vaccinations.
The supply snarls come at the worst possible time, ahead of the crucial Christmas holiday shopping season, when retailers typically restock inventories.
Shipping costs, already elevated, look set to spike yet again as a shortage of containers and raw materials such as chips become pricier and difficult to source against a backdrop of red-hot demand.
There are already concerns that the supply chain disruptions could stoke rising inflation in the U.S. testing expectations among policymakers that recent inflationary data is transitory.
In China, although case numbers are low, a zero-tolerance policy towards the coronavirus has seen domestic consumption flag, and economists are rapidly revising growth estimates for the Middle Kingdom.
All of which are conspiring to prolong measures of inflation that could have an effect on central bank policymaking and ripple through the financial markets.
In the first quarter of 2021, concerns over inflation saw a variety of assets tumble, including tech stocks and cryptocurrencies, while value stocks saw a comeback.
Those inflationary concerns have since been relegated to the back burner, as growth stocks have rallied, while worries over the delta variant hampering the reopening have seen value stocks take a backseat yet again.
That could easily change if the supply chain struggles cause a spike in inflation yet again.

3. U.S. Treasury Department Clarifies Cryptocurrency Taxes

  • U.S. Treasury Department said to be clarifying cryptocurrency provisions in the US$550 billion infrastructure bill to limit the fallout to digital asset brokers only 
  • Greater clarity over cryptocurrency disclosure requirements will be welcomed by the cryptocurrency industry as Washington sees a new source of tax revenue from the nascent asset class 
While a bipartisan push to limit the extent to the cryptocurrency tax disclosures embedded in the US$550 billion infrastructure bill failed to make any inroads, the Biden administration’s Treasury Department looks set to weigh in and save the skins (and some dollars) of cryptocurrency firms.
Concerns over a provision in the bipartisan infrastructure bill passed by the U.S. Senate last week, that would make practically all stakeholders in the cryptocurrency ecosystem liable to report transactions over US$10,000 are likely to be pared down by the U.S. Treasury Department.
According to a Bloomberg report, the Treasury is likely to only require companies it considers brokers to report cryptocurrency transactions to the Internal Revenue Service.
Other firms key to the US$2 trillion cryptocurrency market, from developers to miners, to hardware and software providers likely won’t have any new reporting burdens, so long as they don’t act as brokers.
But the Treasury guidance won’t grant blanket exemptions based on how firms identify themselves and will instead focus on whether a firm’s activities qualify them as a broker according to existing tax law.
The cryptocurrency industry welcomed the prospect of a clarification by the U.S. treasury Department, especially as it appears that proposed amendments to the US$550 billion infrastructure bill to clarify the cryptocurrency provisions at the House, are unlikely to succeed.
At its core, cryptocurrency industry players and advocates objected to what they have described as overly vague language in the infrastructure bill’s cryptocurrency provisions, that could impose burdensome reporting requirements on a nascent industry that is focused on innovation.
But the Treasury guidance could help deliver more clarity over what the definition of a broker is, especially as it relates to cryptocurrencies and will also depend on how aggressively the IRS implements the guidance.
The clarification is part of a broader push by the Treasury Department to crack down on tax cheats, with more officials in the Biden administration pointing to cryptocurrencies as a major loophole in the existing tax system, but may also inspire other governments to follow suit. 

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Aug 17, 2021

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