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Novum Alpha - Daily Analysis 6 September 2021 (10-Minute Read)

The laggard of Asia has now taken the lead as a massive rally in Japanese stocks is pulling along the rest of Asia with it.

A magnificent Monday to you as traders head back to their desks and students back to school from the long pandemic summer. 

In brief (TL:DR)

  • U.S. stocks closed down 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 modest gains as Big Tech remained resilient.  
  • Asian stocks rose Monday amid an ongoing rally in Japan sparked by the planned exit of the prime minister and as traders mulled slower U.S. hiring that may delay a reduction in stimulus.
  • Benchmark U.S. 10-year Treasury yields rallied up to 1.32% Friday (yields rise when bond prices fall) on expectations of an abundance of U.S. Treasuries to fuel the weaker employment sentiment. 
  • The dollar ticked up.
  • Oil extended loss with October 2021 contracts for WTI Crude Oil (Nymex) (-1.02%) at US$68.58 after Saudi Arabia slashed crude prices for Asian buyers.
  • Gold was lower with December 2021 contracts for Gold (Comex) (-0.23%) at US$1,829.40.
  • Bitcoin (+3.40%) rallied to US$51,796 headed out into the week with outflows racing ahead of inflows, and suggesting that traders are buying into the rally (outflows suggest that investors are looking to hold Bitcoin in anticipation of rising prices). 

In today's issue...

  1. The Summer of Stocks is Over
  2. The Emerging Market Carry Trade is Back
  3. Ether Peeks Over US$4,000 Briefly

Market Overview

The laggard of Asia has now taken the lead as a massive rally in Japanese stocks is pulling along the rest of Asia with it.
For years, Japanese companies had been undervalued, but there's a possibility that the coming decade will usher in a final push to shrug off Japan's lost decade. 
Better pandemic management and greater public spending with a new Japanese prime minister set to take center stage have all buoyed sentiment for what was once the world's second largest economy. 
Following Japan's lead, Asian stocks were mostly higher on Monday's morning trading session, with Tokyo's Nikkei 225 (+1.81%), Seoul's Kospi Index (+0.09%) and Hong Kong's Hang Seng (+0.23%) up, while  Sydney’s ASX 200 (-0.69%) was down.

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1. The Summer of Stocks is Over

  • Uncertainty over the path out of the pandemic has seen investors shun early favorites like video communications companies and home exercise machines 
  • Investors will need to be more picky about the sectors and stocks that they buy moving forward, with Big Tech a safe bet, but beyond that, no clear winners 
With the weather set to cool dramatically and with students headed back to school and traders back to their desks, the world that greets them is one of heightened uncertainty.
Despite thinner volumes, equities rocketed to fresh rallies but as trading volume is set to return, the post-Labor Day expectation of a return to normalcy is being challenged by surging coronavirus infections led by the virulent delta variant.
Whereas there were clear winners from lockdowns last year like Zoom Video Communications (+1.08%) and personal biking solution Peloton Interactive (-2.42%), which provided opportunities for hunkered down populations to retain some semblance of lifestyle in the confines of their homes, the coming period has no obvious winners as the two have already clocked 400% returns last year.
And pandemic darlings have since come under selling pressure, with investors unsure of their positioning against a backdrop of lifted restrictions, but surging cases.
Peloton Interactive is down 41% from its high in January and facing product recalls against shrinking interest in pricey at-home fitness products.
Zoom Video Communications on the other hand, indispensable for social and work meetings, has seen its stock price fall by half since last October, over concerns of slowing growth.
Even with the threat of renewed pandemic restrictions because of the delta variant, there is a reasonable case to be made that these stocks were too expensive anyway.
During times of heightened uncertainty, when there was no clear path out of the pandemic, investors understandably gravitated towards these companies because they offered a sure and shiny solution.
A post pandemic landscape doesn’t quite offer such cut and dried investment narratives.
But tech companies which have only entrenched their indispensability to modern life are likely to continue doing well and that’s because they were “sticky” even before the pandemic, with some of the behaviors fostered around lockdown restrictions likely to be durable.
Why go to a store when you can just get it on Amazon (+0.43%)? Why dress up to go to a restaurant when DoorDash (+0.91%) will just deliver it to your home?
Bored? Why not trade on Robinhood Markets (-2.56%) and make a fortune from your couch?
Insofar as these companies are concerned, the likelihood is that they will continue to do well in the face of an uncertain post-summer and somewhat unsatisfactory post-lockdown landscape.

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2. The Emerging Market Carry Trade is Back

  • Prospect of continued low interest rates in the U.S. ushers in the carry trade in emerging market currencies 
  • Greenback rally likely to remain capped and FX traders can make a decent carry despite the volatility in emerging market currencies, many of which have started to hike rates because of soaring inflation
FX traders could not have asked for a better opportunity.
With U.S. payroll data last week showing that only 235,000 jobs were added in the month of August, as opposed to the forecast 725,000, doves within the U.S. Federal Reserve will probably command the loudest share of voice at the Fed’s interest rate-setting table.
With a virulent delta variant threatening to derail the nascent economic recovery in the U.S., the surety that the Fed will maintain low interest rates just that little bit longer creates the perfect opportunity for a profitable carry trade with emerging market currencies.
In its simplest terms, an FX carry trade is to borrow in one currency, in this case the dollar, where borrowing costs are low, and then to lend it in another currency where interest rates are higher, typically some emerging market.
The risk of course is the exchange rate fluctuations between the two currencies, 
But with central banks in emerging markets like Poland, Russia, Peru and Malaysia set to increase borrowing costs this week, FX traders will be chomping at the bit in anticipation of the “free money” from the carry trade.
According to Bloomberg’s EM Carry Index, the emerging market carry trade returns just 0.5% in the first half of this year, but is already up almost 2% since the beginning of August, with high-yielding,  but volatile currencies such as the Turkish lira and South African rand leading the charge.
For traders able to stomach that volatility, the potential returns are likely to be too great to pass up.
Friday’s payroll data has led many to speculate the Fed will keep rates lower for longer, and with Congress and the Biden administration likely to keep the fiscal spending taps open, the odds of a sharp dollar rally are also diminished, creating the ideal conditions for the carry trade.
Brazil and Russia were some of the first few emerging market economies to hike interest rates, reacting to higher inflation and creating a buffer should economic growth start to slow next year.
With inflation close to peaking in many emerging markets, the prospect of positive real rates will tend to support exchange rates in favor of these currencies.
And as the carry trade roars back, investors may find the yields in countries such as South Africa, Brazil and Turkey just too juicy to resist.

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3. Ether Peeks Over US$4,000 Briefly

  • Weekend rally in Ether pulls along other smart-contract leaning cryptocurrencies like Solana 
  • Upside for Ether remains strong as developments and use cases continue to increase 
Blink and you’d have missed it, but for a brief moment early Saturday morning Asia time, the world’s second largest cryptocurrency by market cap cleared a major technical level of resistance, amid a month long surge around a major blockchain upgrade as demand for non-fungible tokens continues to soar.
Ether cleared US$4,000 based on price data gathered from several major exchanges before ducking below to now trade around the US$3,900 band.
While still off of it’s all-time-high, traders continue to remain bullish on Ether and are looking for the next big breakout, especially given that Bitcoin has already cleared US$50,000 in what looks like a convincing rally.
Up over 50% since the end of July, Ether’s most recent surge is just table stakes for the volatile asset class that is cryptocurrencies, with the Ethereum network’s London upgrade early last month progressively reducing the supply of Ether available while reducing fees.
With EIP-1559, Ether has gone from an inflationary cryptocurrency, to something more akin to Bitcoin, a deflationary cryptocurrency and continues to be the most heavily used cryptocurrency in the ecosystem, thanks in large part to decentralized finance or DeFi and NFTs.
Other smart-contract enabled blockchains are catching up as well, with Solana and Polkadot being pitched as challengers to Ethereum’s dominance and as traders look to find the next big blockchain platform.

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Sep 06, 2021

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