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Novum Alpha - Daily Analysis 1 September 2021 (10-Minute Read)

A wonderful first day of September to you and I hope that your month has got off to a roaring start.


In brief (TL:DR)

  • U.S. stocks ticked lower on Wednesday with the Dow Jones Industrial Average (-0.11%), the S&P 500 (-0.13%) and tech-centric Nasdaq Composite (-0.04%) all lower, edging back overnight from a record amid mixed data, including weaker consumer confidence and a jump in home prices.
  • Asian stocks were mixed Wednesday as traders evaluated the outlook for central bank stimulus and the global recovery’s resilience to the delta virus variant.
  • Benchmark U.S. 10-year Treasury yields rose two basis point to 1.33% (yields rise when bond prices fall).  
  • The dollar ticked up.
  • Oil was higher with October 2021 contracts for WTI Crude Oil (Nymex) (+0.35%) at US$68.74 ahead of an OPEC+ meeting that could result in a rise in output.
  • Gold edged lower with December 2021 contracts for Gold (Comex) (-0.21%)  at US$1,814.20.
  • Bitcoin (-0.14%) fell to US$46,881 as inflows into exchanges slowed against outflows with signs of consolidation ahead of another rally (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices). 

In today's issue...

  1. Europe Hogs the Limelight for Stocks
  2. U.S. Consumer Confidence Could Spell Trouble Ahead
  3. Cryptocurrency Exchange FTX Derives More Profits from Regulation

Market Overview

Global equities are hovering around record levels, illustrating faith in the durability of the recovery from the pandemic. But one question is whether the pace of that rebound is peaking due to the prospect of less expansive stimulus and the spread of the delta strain.
S&P 500, Nasdaq 100 and European futures were in the green. U.S. stocks edged back overnight from a record amid mixed data, including weaker consumer confidence and a jump in home prices.
Asian stocks mostly rose Wednesday as traders assessed the global recovery’s resilience to the delta virus variant and the outlook for central bank stimulus with Tokyo's Nikkei 225 (+1.20%), Hong Kong's Hang Seng (+0.62%) and Seoul's Kospi Index (+0.06%) while Sydney’s ASX 200 (-0.36%) was slightly lower on the morning trading session. 

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1. Europe Hogs the Limelight for Stocks

  • European stocks have had one of their bet winning streaks since the U.S. Federal Reserve’s taper tantrum of 2013.
  • While early and easy gains were clocked initially, the more virulent delta variant and slowing economic growth in both the U.S. and China are tempering expectations. 
Better known for cheese and culture, European stocks have had one of their bet winning streaks since the U.S. Federal Reserve’s taper tantrum of 2013, when then-Fed Chairman Ben Bernanke announced a tapering of asset purchases far faster than expected.
But as U.S equities rocketed to fresh records, many global investors may have missed the strongest winning streak in European stocks as corporate earnings bounced back sharply from last year’s pandemic lows with central banks still pouring stimulus into economies.
In August alone, the benchmark Stoxx 600 European equity index rose 2%, its seventh month of consecutive gains and its longest period of monthly increases since 2013.
Companies on the Stoxx have reported aggregate second quarter net income growth of almost 250% compared to the same time last year when pandemic lockdowns drove the eurozone into its sharpest contraction on record.
And there’s even more good news for investors as the European Central Bank has pledged to keep benchmark rates at historically low levels until inflation persists “durably” above its 2% target, while continuing to purchase large quantities of European government bonds.
That the ECB isn’t blinking despite signs of inflation and a record rally in equities should give some comfort it may set the tone for the U.S. Federal Reserve to maintain the status quo.
Europe instituted more stringent lockdowns than the U.S. and early gains enjoyed in America are now starting to show signs of slowing, with second quarter economic data positive, but the rate of recovery tapering.
But investors pricing in another strong uptick for European stocks may want to review the experience of the U.S.
While early and easy gains were clocked initially, the more virulent delta variant and slowing economic growth in both the U.S. and China are tempering expectations.
Many of the low-hanging post-pandemic fruit may already have been plucked and investors will need to be more discerning about which sectors and which stocks still stand to gain.
Utilities and healthcare for the eurozone may be good defensive picks, while some of Europe’s undervalued tech firms appear right for some allocation.
And while travel hasn’t fully returned to normal in the eurozone, it would be a brave investor to venture into Europe’s embattled hospitality and travel companies, given their significant debt loads as Europe inches closer to a more normal monetary policy. 

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2. U.S. Consumer Confidence Could Spell Trouble Ahead

  • U.S. consumer confidence dropped in August to a six-month low, suggesting concerns over the delta variant and elevated prices are weighing on Americans’ views of the economy now and in the coming months.
  • Inflation and supply chain disruptions is seeing a sharp spike in prices and Americans are naturally concerned both about the recovery story as well as job prospects, with signs that business spending is starting to slow.
It was supposed to have been over by now, done and dusted.
We were supposed to be traveling to exotic locations overseas, traversing the globe and smelling the dewy sweet air of freedom without being behind the veil of a mask.
But somehow the fates have conspired to push us back to where we started and across parts of the United States, one of the first major economies to pushback against the pandemic, mask mandates are being reintroduced while booster shots are being discussed.
And the on-again, off-again pandemic is weighing on U.S. consumer confidence, an important metric especially given that 70% of U.S. GDP is driven by consumption.
The Conference Board Consumer Confidence index has plunged to its lowest level in six months, falling to 113.8 from a 125.1 according to a report on Tuesday.
The figures suggest that the resurgence of the coronavirus in the delta variant has dampened consumer sentiment on the economy and threatens to undermine spending on services and other discretionary forms of spending, at a time when the U.S. was widely reopening.
Restaurant reservations, airline travel and hotel occupancy in the U.S. have all fallen while consumer staples have increased as Americans pay more at the grocery store and the gas pump, which may undermine consumer confidence in the economy.
Inflation and supply chain disruptions is seeing a sharp spike in prices and Americans are naturally concerned both about the recovery story as well as job prospects, with signs that business spending is starting to slow.
None of this bodes well for investors at a time when the U.S. Federal Reserve is looking at historical data and trying to plot a course for a return to normal monetary policy.
So far at least, it appears the doves have the upper hand at the Fed, with Fed Chairman Jerome Powell seeming to suggest that there is no interest at least at the current moment to taper asset purchases or increase rates ahead of schedule.
Third quarter data out of the U.S. will be key in determining if the worst of the malaise is behind the U.S. and that the pullback because of the delta variant was just a speedbump in the overall recovery narrative.


3. Cryptocurrency Exchange FTX Derives More Profits from Regulation

  • FTX.US has agreed to acquire LedgerX for an undisclosed sum, a move that’s set to expand the crypto exchange’s product offerings to futures and options trading in the U.S.
  • The acquisition is well in line with FTX CEO Bankman-Fried's frequent advocacy of regulatory engagement.
To understand the power of derivatives, let’s do a simple bit of math. Now assume that a stock costs $1 today and you expect that it will be worth $2 by the end of the month, wouldn’t it be great if you could pay just 10 cents for the option to purchase that stock for $1 today, and have the luxury to only exercise it at the end of the month?
Your profit would amount to $2 (selling the stock in the market if it hits that price) - $1 (cost of stock after exercising the option) - $0.10 (cost of the option) = $0.90
Now if you were able to buy that option at just $0.10 and the market had played out as you expected, you’d have made a cool $0.80 on your investment, or eightfold your outlay.
The reality of course is far more complex, because markets don’t always move in the direction that we expect and options aren’t always priced the way we want, which is why traders make so much more money by writing options and selling them and so many of them expire worthless.
But as tools for hedging and trading, options, futures, swaps and the family of other instruments known as derivatives are indispensable.
Which is why cryptocurrency exchange FTX’s acquisition of LedgerX is so significant.
Contrary to popular belief, the bulk of cryptocurrency transactions don’t revolve around the underlying asset, but through derivatives.
Given how most of the cryptocurrency space is unregulated, traders can obtain massive amounts of leverage to speculate on any manner of digital asset.
But as regulators have circled around major cryptocurrency exchanges like Binance, there has been increasing pressure to offer access to regulated forums to trade and transact in digital asset derivatives.
While FTX has an offshore cryptocurrency exchange that is not regulated, FTX.US is, and seeks to offer investors in the U.S. access to derivatives trading as well through its acquisition of LedgerX, a regulated cryptocurrency derivatives exchange and clearinghouse.
Unlike the CME which offers cash-settled cryptocurrency futures, LedgerX offers physical settlement of all contracts, as well as algorithmic trading for institutional investors such as family offices who may not have that in-house capability.

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Sep 01, 2021

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