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Novum Alpha - Daily Analysis 2 September 2021 (10-Minute Read)

Global equities are hovering around record levels, illustrating faith in the durability of the recovery from the pandemic

A terrific Thursday to you as stocks continue to plod along on their upward trajectory. 

In brief (TL:DR)

  • U.S. stocks were mostly higher on Wednesday with the Dow Jones Industrial Average (-0.14%) pulling back slightly, while the S&P 500 (+0.03%) and tech-centric Nasdaq Composite (+0.33%) saw gains after edging back overnight from a record amid mixed data, including weaker consumer confidence and a jump in home prices.
  • Asian stocks were steady Thursday as investors await key U.S. employment data to assess when the U.S. Federal Reserve may start paring the substantial stimulus that has bolstered financial markets.
  • Benchmark U.S. 10-year Treasury yields rose about one basis point to 1.30% (yields rise when bond prices fall).  
  • The dollar held a drop.
  • Oil fell with October 2021 contracts for WTI Crude Oil (Nymex) (-0.83%) at US$68.02.
  • Gold was little changed with December 2021 contracts for Gold (Comex) (-0.03%)  at US$1,815.40.
  • Bitcoin (+6.03%) rallied hard to US$49,709 as flows reversed as expected and outflows galloped ahead of inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of rising prices). 

In today's issue...

  1. Airline Profits May Remain Grounded for Years
  2. China is Lacing Its Banks with Liquidity
  3. SEC Chief Tells Cryptocurrency Sector It Needs 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 were a mixed bag on Thursday as traders balanced the global recovery’s resilience to the delta virus variant and the outlook for central bank stimulus with Tokyo's Nikkei 225 (+0.11%) and Hong Kong's Hang Seng (+1.11%) up, while Seoul's Kospi Index (-0.70%) and Sydney’s ASX 200 (-0.89%) were down in the morning session. 

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1. Airline Profits May Remain Grounded for Years

  • Survey over the likelihood of business travel suggests that airlines may never go back to the freewheeling days of business travel 
  • Airlines will need to find other ways to generate revenues as the pullback on business travel looks to be durable 
There’s nothing quite like a slap on the back, a firm handshake and catching that twinkle in the eye.
One of the harsher aspects of the pandemic has been its ability to strike at the very heart of who we are as humans, social.
Yet even as vaccination rates are increasing and travel restrictions are lifting, there are little indications that companies or their employees are eager to hit the road again.
As the past 18 months have demonstrated that it is possible to do business remotely, a Bloomberg survey of some 45 large companies across the U.S., Europe and Asia shows that a whopping 84% intend to spend less on post-pandemic travel.
While video conferencing has been around for a while, it was only because of the pandemic that everyone was forced to use it, and that has been a major game changer.
But it’s not just Zoom (+0.47%) and Google Meet that has been helping us cross borders digitally, new developments like augmented reality and virtual reality are helping manufacturers visualize factory floors and set ups, engineering teams sync and synergize and doing things that not so long ago seemed to be the stuff of science fiction.
And whereas in the past it may have been socially unacceptable to suggest a video call to a business prospect, now it would appear slightly forward to suggest otherwise. 
The efficiency gains for companies can be staggering but where airlines, especially legacy carriers who have typically depended on the front of the aircraft for the bulk of their profits, may struggle.
Airlines are a challenging business even in the best of times, but the shifts caused by the pandemic may prove durable.
According to the Bloomberg survey, a majority of the respondents were looking at cutting travel budgets by between 20% and 40% with about two in three slashing both internal and external in-person meetings, citing the efficiency, cost savings and lower carbon emissions for the shift.
Spending on corporate trips could slide to as low as US$1.24 trillion by 2024, from a pre-pandemic peak of US$1.43 trillion in 2019, and this covers all aspects of spending, including food, entertainment, accommodation, and transport. 
According to one estimate, of the 30% of commercial air traffic that is corporate-related, only half of that is likely mandatory.
Last year, the world’s biggest airlines collectively lost a staggering US$126 billion and look set to lose another US$48 billion this year, according to the International Air Transport Association.
With much of the world’s airline fleet laid up, a bigger question remains how many of them will take to the skies again, and even if they do, whether they’ll make any money in the process.

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2. China is Lacing Its Banks with Liquidity

  • Chinese central bank providing soft loans to commercial banks to encourage lending to small and medium businesses 
  • China's economy looks set to be battered from many different angles as both policy and economic conditions conspire to challenge the world's second largest economy 
In growing signs that all is not well in the world’s second largest economy, China’s central bank has announced that it will inject some US$46.4 billion in low-cost funding to Chinese banks, to help them offer more support to small and medium-sized companies.
Although China was arguably ahead of the curve when it came to emerging from the coronavirus pandemic, as it was also the epicenter, early gains and vaccines of questionable efficacy against the delta variant of the pandemic, are putting a damper on economic growth.
While China was trying to switch towards a more consumption-led model of economic growth, the pandemic put the kybosh on such moves and the delta variant is now threatening to derail the recovery.
Reported by Chinese state media CCTV, citing a State Council meeting chaired by Premier Li Keqiang, the Chinese cabinet also considered the possibility of using the central bank’s rediscounting facility as part of an effort to aid smaller Chinese firms.
Hundreds of thousands of small Chinese firms have been struggling with the pandemic and as consumption recovery in the U.S., China’s largest market, slows, Chinese factory production, especially smaller component factories, a key source of employment, are slowing.
Supply chain disruptions because of a resurgent delta variant are also throwing a spanner in the works, increasing costs for many Chinese producers ahead of the peak holiday buying season in the U.S. and Europe.
The timing could not be worse as an ill-advised crackdown on some of China’s biggest tech companies and the restriction on under-18s from playing video games is having a dramatic effect on some of China’s otherwise most profitable firms.
Beijing is also tightening its grip on the over-leveraged property sector while the delta variant is forcing the reimposition of travel restrictions.
Chinese officials have signaled in recent weeks that they will selectively loosen monetary policy to offset the slowdown.
Beijing has so far ruled out large-scale stimulus measures, preferring instead to target specific sectors for assistance, and that will put a damper on already moribund Chinese stocks.
With so much uncertainty in the Chinese economy at the moment, and the pace of policy decisions enough to give the average investor whiplash, it’s small wonder that so many are choosing to sit out the current dip until things become clearer.

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3. SEC Chief Tells Cryptocurrency Sector It Needs Regulation

  • U.S. Securities and Exchange Commission Chairman Gary Gensler appeals to cryptocurrency exchanges to submit to existing regulation 
  • Unregulated cryptocurrency exchanges have little incentive to voluntarily submit to regulation
The cryptocurrency space has gone from zero regulation, to avoiding regulation, to now having regulators appeal to stakeholders to actively be regulated.
Much like the amnesty given after a civil war, U.S. Securities and Exchange Commission Chairman Gary Gensler, himself a crypto savvy operator, is asking stakeholders to come forward and lay down their arms to receive clemency.
Whether cryptocurrency industry stakeholders will bite is a different story altogether.
Australia had much success in controlling gun violence when it offered cash for arms and has since avoided the ugly mass shootings that often plague the United States, but cryptocurrencies are an altogether different creature.
While blockchain data analytics firm Chainalysis estimates that just 0.34% of cryptocurrency transactions are illicit, the lack of regulation of many major exchanges has meant that they serve as potential conduits of the bulk of those flows.
Which is why Gensler and his colleagues at the SEC are pushing exchanges and other stakeholders in the cryptocurrency space to work with the U.S.’s existing regulatory framework.
Gensler is technology agnostic, and has suggested on repeated occasions that cryptocurrencies were no different from any other securities when it came to public policy objectives such as investor protection and guarding against fraud and money laundering.
But voluntarily submitting to SEC regulation and audits is anathema to the ethos of cryptocurrencies which by design were meant to circumvent the need for so-called “trusted third parties” and so far some of the largest exchanges have declined to take up Gensler’s offer.
Gensler himself has expressed disappointment with the cryptocurrency sector’s response to his suggestion that trading platforms register with the SEC.
But even those cryptocurrency exchanges which on the surface appear to be regulated, enjoy the benefit of a lack of clarity where it comes to which three-lettered U.S. agency is in-charge of policing them.
Take Coinbase Global (+2.66%) for instance, the largest U.S. cryptocurrency exchange which reported a whopping US$1.6 billion profit in the second quarter, which ostensibly is regulated, but doesn’t appear to report specifically to any U.S. agency.
But exchanges which remain outside the ambit of regulation may know that voluntarily submitting to SEC jurisdiction will also invite unnecessary scrutiny and stifle their ability to increase leveraged offerings or innovative new products. 
Many stakeholders in the cryptocurrency industry are also crossovers from the traditional financial services sector and they will know that regulation and bureaucracy can also slow down the rapid pace of development, which can be the difference between profits or capitulation in this space. 

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Sep 02, 2021

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