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Novum Alpha - Daily Analysis 7 September 2021 (10-Minute Read)

Most Asian stocks rose Tuesday as Japan extended a rally and traders took heart from indications that the global recovery is weathering challenges from the delta virus variant.

 
A terrific Tuesday to you as stocks take a tentative foot forward towards the midweek. 
 

In brief (TL:DR)

 
  • U.S. stocks closed down on Friday and markets remain closed for the Labor Day weekend 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 were mixed Tuesday as Japan extended a rally and traders weighed the resilience of a global recovery supported by central bank stimulus but facing challenges from the delta virus strain.
  • Benchmark U.S. 10-year Treasury yields rose about two basis points to 1.34% (yields rise when bond prices fall).
  • The dollar dipped.
  • Oil extended losses with October 2021 contracts for WTI Crude Oil (Nymex) (-0.27%) at US$69.10 amid Saudi Arabia’s price cut for Asian buyers and demand threats from the outbreak of the delta variant.
  • Gold was lower with December 2021 contracts for Gold (Comex) (-0.31%) at US$1,828.10.
  • Bitcoin (+1.98%) rallied to US$52,701 headed out into the week with outflows continuing to lead 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 Covid is Seeing an Autumn Revival
  2. ETF Investors Balk on China
  3. Bitcoin Becomes Legal Tender in El Salvador
 

Market Overview

 
Most Asian stocks rose Tuesday as Japan extended a rally and traders took heart from indications that the global recovery is weathering challenges from the delta virus variant.
 
In the U.S., S&P 500 and Nasdaq 100 futures edged up ahead of a resumption in U.S. markets after the Labor Day long weekend.
 
Global shares are at a record, overcoming concerns that the delta strain is hampering economic reopening and exacerbating supply snarls that are fueling inflation. 
 
In Asia, markets were a mixed bag on Tuesday's morning trading session, with Tokyo's Nikkei 225 (+0.88%) and Hong Kong's Hang Seng (+0.93%) up, while Seoul's Kospi Index (-0.59%) and Sydney’s ASX 200 (-0.06%) were down.
 

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1. The Summer of Covid is Seeing an Autumn Revival

 
  • According to a Goldman Sachs report, supply chain disruptions ahead of the peak holiday buying season in the U.S. are also expected to put a damper on third quarter growth.
  • There’s a significant risk that excess liquidity will dull investor sensitivities and assets will continue to require ever more amounts of cash to keep rising
 
It was supposed to be over by now.
 
Vaccines were supposed to have ushered in a summer of revival and renewal and investors were bracing themselves for a gradual return to a more normal monetary policy.
 
But it was the summer that was not to be, with Goldman Sachs (-0.77%) once again revising its economic growth forecast for the U.S. this year to just 5.7%, down from 6% just last month.
 
Behind the revision has been a resurgent delta variant that is cooling consumer demand, which makes up some 70% of the U.S. economy, fading fiscal support as stimulus checks dry up and a switch from demand for goods to services, at the most inconvenient time.
 
According to the Goldman Sachs report, supply chain disruptions ahead of the peak holiday buying season in the U.S. are also expected to put a damper on third quarter growth.
 
Significantly, Goldman Sachs also raised its forecast unemployment rate for the U.S. for 2021 to 4.2% from 4.1%, a key metric for the U.S. Federal Reserve in the consideration of its monetary policies.
 
Doves at the Fed will find further justification for maintaining the central bank’s loose monetary policy and asset purchases for that much longer as the U.S. economic recovery is showing signs of faltering, thanks to the delta variant.
 
And while investors may cheer the added liquidity in markets already drowning in cash, like how drug abuse can dull dopamine receptors, there’s a significant risk that excess liquidity will dull investor sensitivities and assets will continue to require ever more amounts of cash to keep rising.
 
Unlike the period immediately post-pandemic, when central banks and governments could be counted on to boost markets with spending, the next phase is less clear and sentiment could very quickly turn cautious, which investors will need to look out for.
 

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2. ETF Investors Balk on China

 
  • Assets of the top five emerging market ETFs excluding China surged some 41% to US$1.5 billion last month, taking their year-to-date growth to 442% having ended last year with just US$277 million.
  • Some analysts are suggesting that China may have bottomed out, but it just may be too early to call, especially ahead of a leadership conclave of the Communist Party.
 
Students of financial history will know that crises have more often than not been sparked by flaky economies in far flung corners of the world.
 
From the Russian debt default that brought down Long Term Capital Management, to the Asian Financial Crisis, investors from rich economies will do well remembering the lessons learned from those episodes.
 
But what happens when the world’s second largest economy starts flaking out?
 
They do the best they can.
 
With investors pouring money into emerging market funds that steer clear of China, in the wake of Beijing’s crackdown on targeted stocks and sectors, equities in countries like India have been soaring.
 
Assets of the top five emerging market ETFs excluding China surged some 41% to US$1.5 billion last month, taking their year-to-date growth to 442% having ended last year with just US$277 million.
 
Weaker payroll data out of the U.S. and the belief by investors that the Fed will continue its dovish stance is making emerging market assets increasingly more attractive, as several countries increase interest rates in response to inflation, with the greenback likely to stay flat for longer.
 
Rising rates in Russia, Brazil and Turkey are helping fuel a popular carry trade in these countries (borrowing the dollar to lend in these markets) while China keeping its rates low as the economy slows, is another reason to avoid the Middle Kingdom.
 
Investors are growing weary of Beijing’s crackdown on the private sector, which has already hit e-commerce, education, fintech, ride-hailing and now the gaming industry.
 
Beijing’s putsch of its private sector stalwarts has also dragged down Hong Kong’s benchmark index by over 11% in the past three months, far more than China’s CSI 300 which slipped 8%.
 
But risk may be building up in other areas in an investor’s portfolio, especially with an increasing concentration in U.S. Big Tech, which could suffer pullbacks as antitrust action gets underway.
 
Investors will do well to recall the days when Microsoft (-0.0033%) was battered by antitrust action and the years when its stock languished before a stark revival.
 
Some analysts are suggesting that China may have bottomed out, but it just may be too early to call, especially ahead of a leadership conclave of the Communist Party that may yet throw up even more surprises.
 

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3. Bitcoin Becomes Legal Tender in El Salvador

 
  • Bitcoin is undergoing the biggest test in its 12-year history as El Salvador becomes the first country to adopt it as legal tender Tuesday. 
  • El Salvador bought some 400 Bitcoins ahead of the roll-out, with a market value of just US$20 million at current prices, but has plans to buy more of them.
 
Like so many other watershed moments, what happens next could make all the difference.
 
Take for instance the decision to invade Afghanistan and Iraq or El Salvador’s move to make Bitcoin legal tender, a major coup for the cryptocurrency set, but what happens when you get what you wish for?
 
As the first country in the world to make a decentralized cryptocurrency an accepted legal tender, Bitcoin is facing its biggest test in over a decade, more significant than any hard fork. 
 
The world will be watching to see if Bitcoin can rival the dollar in terms of transaction volume in the impoverished Central American nation.
 
El Salvador bought some 400 Bitcoins ahead of the roll-out, with a market value of just US$20 million at current prices, but has plans to buy more of them.
 
If El Salvador’s Bitcoin experiment is a success, and that remains a big “if” there is the prospect that other countries may follow suit, to reduce reliance on the dollar.
 
But El Salvadoreans may be reluctant to spend any Bitcoin that they receive, especially as it is widely expected to increase in value, as opposed to the dollar, which is an inflationary currency.
 
The El Salvador government has so far rolled out its own Bitcoin wallet called Chivo, which comes preloaded with around US$30 worth of Bitcoin, in an effort to boost adoption.
 
Making Bitcoin “legal tender” means that businesses in El Salvador will be required to accept the cryptocurrency in exchange for goods and services and the government will also accept it for payment of taxes.
 
With a large portion of El Salvador’s economy supported by remittances, estimated at US$6 billion last year and around a fifth of GDP, it’s youthful president is hoping the move to make Bitcoin legal tender, will help lower the cost of sending money across borders.
 
El Salvador President Bukele’s administration has so far installed 200 Bitcoin ATMs around the country that can be used to exchange the cryptocurrency for U.S. dollars.
 
The El Salvador Finance Ministry has also created a US$150 million fund at state-run bank Banco de Desarrollo de la Republica de El Salvador, Bandesal, to back the transactions. 
 
If El Salvador wants to get its impoverished population to start spending that Bitcoin however, the odds are against it happening as according to Bloomberg. two-thirds of respondents said that they would like to see the law repealed while an overwhelming 70% still preferred the dollar, the national currency of El Salvador.
 

 

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Sep 07, 2021

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