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Novum Alpha - Weekend Edition 4-5 September 2021 (10-Minute Read)

Economists were predicting as many as 725,000 new jobs would have been created in August, but the U.S. economy only yielded 235,000, which is a mixed blessing. 

A wonderful weekend to you as stocks tapered ahead of any Fed taper on weaker payroll data, with investors rotating into familiar tech stocks as sentiment turned cautious. 

In brief (TL:DR)

  • U.S. stocks were dragged down by payroll data on Friday with the Dow Jones Industrial Average (-0.21%) and S&P 500 (-0.03%) dragged down by cyclicals, while the tech-centric Nasdaq Composite (+0.21%) posted gains on poorer than expected payroll data. 
  • Asian stocks ended mostly higher headed into the weekend. 
  • Benchmark U.S. 10-year Treasury yields rallied up to 1.326% (yields rise when bond prices fall) with investors having to digest the latest U.S. payroll data news. 
  • The dollar was steady.
  • Oil was was flat with October 2021 contracts for WTI Crude Oil (Nymex) (-1.00%) at US$69.29 as traders absorbed the weaker U.S. payroll data. 
  • Gold continued to rise with December 2021 contracts for Gold (Comex) (+1.23%) at US$1,833.70.
  • Bitcoin (+0.89%) rallied to over US$50,000 on the weekend, but may face some selling pressure headed out into the week with inflows leading outflows suggesting a possible selldown on Monday (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices). 

In today's issue...

  1. Delta Variant Hits U.S. Jobs Growth & Increases Uncertainty
  2. Smart Money is Not Just Shifting Out of Chinese Stocks
  3. The Revolving Door of the Cryptocurrency Industry

Market Overview

Economists were predicting as many as 725,000 new jobs would have been created in August, but the U.S. economy only yielded 235,000, which is a mixed blessing. 
On the one hand, investors can gain some comfort that the U.S. Federal Reserve will now need to think long and hard about its plan to taper asset purchases in September. 
However investors will also need to consider the narrative that they've been fed, especially when considering which sectors to allocate to against the backdrop of a slowing economic recovery. 
Asian stocks were mostly higher on Friday close, with Tokyo's Nikkei 225 (+2.05%), Seoul's Kospi Index (+0.79%) and Sydney’s ASX 200 (+0.50%) up, while Hong Kong's Hang Seng (-0.72%) continued to come under selling pressure thanks to Beijing's robust policy measures.

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1. Delta Variant Hits U.S. Jobs Growth & Increases Uncertainty

  • U.S. payroll data falls well short of economist expectations, with just 235,000 jobs created versus 725,000 forecast  
  • Investors will need to be circumspect despite increasing prospects the Fed will stay engaged in the market for longer 
Investors were right to have been worried about the effect of the delta variant on the U.S. reopening and those fears crystalized in a sharp slowdown in U.S. jobs growth.
Despite extremely robust payrolls reports in June and July, August job growth fell off a cliff, with just 235,000 jobs created last month, compared to the staggering 1.1 million in July.
For investors, the poorer payroll data is a mixed blessing.
On the one hand, the U.S. Federal Reserve is likely to adopt a more pensive approach when it comes to tapering its US$120 billion-a-month asset purchases that has helped rally markets to fresh records.
But on the other hand, investors are running out of things to invest in.
With growth stocks attracting eye-watering valuations and cyclical stocks that were expected to see a rebound, now mired in fresh pandemic concerns, some investors may even start taking money off the table.
Cyclical stocks, especially those in the hospitality, travel and leisure business were expected to see a boost, but those sectors saw no job gains for last month, despite peak summer holidaying season in the U.S.
And prior to last month, the leisure, travel and hospitality sectors added 350,000 jobs over the past six months, according to the Bureau of Labor Statistics.
The number of U.S. businesses that shuttered as well rose to 5.6 million in August, from 5.2 million in July.
Prior to last Friday’s payroll report, the economic strain caused by the delta variant was speculative, and central bankers had expected that the fresh wave of infections from the more virulent strain would not derail their plans to return to a more normal monetary policy.
But the latest set of payroll data may put paid to such central bank expectations and the odds of a Fed tapering by this month appear to be less likely.
Investors looking to bet on another fresh equity rally however may need to brace themselves for volatility, on the prospect that the current clutch of vaccines may not be able to provide a clear path out of the pandemic. 

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2. Smart Money is Not Just Shifting Out of Chinese Stocks

  • Hedge funds are paring back positions on U.S. stocks with larger exposure to China 
  • Cautious sentiment from the so-called smart money may be warranted, considering that the risks of abrupt policy shifts will increase ahead of a Chinese Communist Party leadership conclave 
While much has been made about the exodus of funds from embattled Chinese stocks, from high-flying education companies, to formerly unassailable tech giants, less attention has been paid to the American companies that rely very heavily on China for growth and revenues.
It may appear to be excessively cautious, but hedge funds are not taking their chances, with data compiled by the prime brokerage unit of Goldman Sachs (-0.77%) revealing that the smart money is scaling back exposure to U.S. companies that rely heavily on the Middle Kingdom, including Las Vegas Sands and General Motors.
According to Goldman Sachs data, U.S. companies with elevated sales from China were dumped as fund managers cut their net long holdings of such firms by over a quarter, the lowest level since the pandemic first sparked a global selloff in equities.
Those U.S. companies that rely on China for supply weren’t spared either, with hedge fund ownership of such firms falling by 17% and nearing the bottom range for last year.
The cynical move by professional money managers suggests increasing fears of a shift by Beijing to decouple itself from the United States, and goes beyond the sweeping regulatory crackdowns happening now.
China’s economic recovery is already showing signs of a slowdown, and the People’s Bank of China, the country’s central bank, is increasing liquidity to ensure small and medium enterprises have access to credit.
A resurgence of the coronavirus in China is also worrying investors, and the increasing assertiveness of Chinese President Xi Jinping, including the alleged centralization of decision-making around his orbit, are all causing professional investors to have second thoughts on the rosy growth narrative of China that had been consumed over the last three decades.
Few on Wall Street actually believe that Beijing’s crackdown will expand to be a systematic purge of capitalism, but ahead of a major Chinese Communist Party conclave, investors are understandably reluctant to increase exposure to China.
What happens after President Xi makes a push for an unprecedented third term, thereby potentially installing him as a “president for life” however, is less clear.
And for now, the so-called “smart money” is not taking any chances that it will be back to business as usual when Xi tightens his grip on power indefinitely.

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3. The Revolving Door of the Cryptocurrency Industry

  • More ex-regulators joining the ranks of the cryptocurrency industry 
  • Ex-regulators struggle with the freewheeling nature of the cryptocurrency industry and not all have the stomach to stay the course 
A cynical view of how to make it on Wall Street is to go into government, make the necessary connections, then find a job on K Street working to lobby the very powers that you just left behind.
Which is why it’s no surprise that the burgeoning cryptocurrency industry took a leaf out of Wall Street’s playbook to hire as many ex-regulators and former government officials, as authorities tighten the regulatory noose around the sector.
If you’re a former regulator from Washington, chances are the cryptocurrency industry has a job for you, and a well paid one at that.
Pockets flush with the riches of cryptocurrencies like Bitcoin and Ether, embattled cryptocurrency exchanges have been in a mad dash to hire former regulators, in the hopes of fending off legal challenges and shoring up compliance procedures to get the heat off them.
Former Chairman of the U.S. Securities and Exchange Commission Jay Clayton, became only the latest to join the industry he once helped police, taking a seat on the advisory board of cryptocurrency infrastructure firm Fireblocks just last month. 
But the fast-developing cryptocurrency industry, where a new innovation can boom, bust and revive in just a matter of months, is proving to be challenging to the new hires more accustomed to the glacial pace that is Washington.
And the freewheeling “move fast and break things” dynamic of the cryptocurrency industry has led to introspection among some former regulators and lawmakers struggling to figure out where they fit in an industry that for so long has avoided them.
Key appointments of former regulators at some of the biggest cryptocurrency exchanges and firms are known to have lasted just months, like Brian Brooks, former banking head at the Office of the Comptroller of the Currency, who resigned his role as U.S. CEO for cryptocurrency exchange Binance after just three months at the job.
Brett Redfearn a former high-ranking SEC official didn’t fare much better, managing just four months at Binance’s U.S. competitor Coinbase Global (+3.83%) for just four months.
That former regulators and government enforcers can’t stick it out at some of the biggest names in the cryptocurrency industry however does not bode well.
While it’s no surprise that there’s plenty of work to be done behind the scenes to bring cryptocurrency exchanges and other stakeholders in line with the legacy financial services market in terms of compliance and reporting, the very nature of the technology makes it challenging.
Because stakeholders like exchanges, are coming under increasing regulatory scrutiny to be compliant, many of them also know that to do so, could alienate their existing client base.
The nature of the cryptocurrency industry is such that it’s not at all difficult for users to take their business elsewhere, and flows matter, especially for exchanges.
If say Binance was to lower the amount of leverage that they offer so as not to raise the ire of authorities, traders might decide they want to take their trading somewhere else.
Requiring more stringent know-your-customer rules might also add too many stumbling blocks to new users and traders, who may then decide to use more light-touch exchanges or even decentralized exchanges, cutting out the middleman altogether.
But not all former regulators are hanging up their hats and calling it a day, and there are plenty of other high profile names that continue to remain in the industry and no shortage of new ones joining it on an almost daily basis.
The influx of former regulators is just the latest wave of experienced financial markets professionals making the leap into digital assets, with former bankers and forex traders having come over for years.
The potential regulation of cryptocurrencies is also viewed by many as a parallel to the effort to regulate the derivatives industry after the 2008 Financial Crisis, with many who worked on the new rules to reign in the sector, now being called upon to do the same for digital assets. 

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Sep 04, 2021

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