Novum Alpha - Daily Analysis 8 September 2021 (10-Minute Read)
Investors are watching closely as the increase in Covid-19 cases this summer prompts many employers to postpone plans to return to the office.
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A wonderful Wednesday to you as stocks stumble in the midweek.
In brief (TL:DR)
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In today's issue...
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Market OverviewInvestors are watching closely as the increase in Covid-19 cases this summer prompts many employers to postpone plans to return to the office.
The travel industry’s hopes for a resurgence in business trips also appear to be on hold, a pause that may ultimately prove to be indefinite.
U.S. futures were little changed after the S&P 500 fell and the Nasdaq 100 climbed to a record as growth concerns sent investors toward more defensive corners of the market.
Asian stocks were steady Wednesday as a rally in Japan moderated and traders evaluated the risk of a slower recovery from the pandemic due to the delta virus variant.
In Asia, markets were mostly lower on Wednesday's morning trading session, with Tokyo's Nikkei 225 (+0.46%) up, while Hong Kong's Hang Seng (-0.53%), Seoul's Kospi Index (-0.87%) and Sydney’s ASX 200 (-0.31%) were down.
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1. What is China's Common Prosperity Drive?
In a country that prizes control over anything else, Beijing is pushing to shake off former leader Deng Xiaoping’s push to "let some get rich first," and replace it with the amorphous aim towards a “common prosperity” that is leaving both business leaders and investors scratching their heads.
What exactly is “common prosperity”?
Is it capitalism with Chinese characteristics?
Part of the greater problem is that there is now open debate over what the recent sanction of private companies of some of China’s most lucrative sectors means for the broader Chinese economy.
Some are seeing the latest shift as a durable and more widespread one, with blogger Li Guangman, whose commentary last month on Beijing’s regulatory crackdown was widely published by state media,
“The capital market will no longer become a paradise for capitalists to get rich overnight.”
But there are others who suggest that the change is a more measured shift towards social progress, rather than a sweeping campaign akin to the Cultural Revolution.
For global investors though, it might not be entirely unwise to simply take a break from China altogether.
What started last year as a push to rein in China’s Big Tech companies has now expanded into what some are interpreting as a ban on profits in general, with afterschool education companies beinfg forced overnight into not-for-profits, while Beijing tackles rising healthcare and education costs.
Yet China appears to still want to foster technological innovation and some, such as Victor Gao, a former interpreter for Chinese leader Deng Xiaoping, who ushered in sweeping economic reforms that transformed China into an economic powerhouse, are suggesting that the current measures have been overdone.
Given China’s sprawling bureaucracy, often stuffed with sycophants looking to rise through the Party ranks, it’s entirely possible that top Chinese leaders had neither intended such extensive curbs, nor anticipated their fallout.
That much has become apparent as over the past few weeks, more top Chinese officials have sought to reassure businesses that Beijing has no intention of sweeping away the private sector.
China’s Vice Premier Liu He, President Xi Jinping’s top lieutenant and economic aide who led China’s trade talks with the U.S. said on Monday that policies supporting the economy haven’t changed and importantly, “will not change in the future.”
And therein lies a potential opportunity for plucky investors to pick up some of China’s prized companies on the cheap.
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2. European Junk Bonds Go Full Retard
With the delta variant threatening to derail the global economic recovery, investors are turning to European junk bonds and accepting interest payments that are lower than eurozone inflation levels, as options run dry.
The yield on the Intercontinental Exchange Bank of America index of European high-yield bonds has plummeted to 2.34% this past week, marking the first time that buyers have accepted coupon payments below consumer price inflation, which hit 3% in August.
As more money chases fewer investment options, investors appear increasingly willing to fund some of the riskiest borrowers at some of the lowest rates ever, while losing money in real terms.
But investors may also be taking comfort from Europe’s strong economic recovery, as vaccinations get under way and the region emerges out of the pandemic, leading to a bumper earnings season reducing the likelihood of defaults.
The European Central Bank is meeting this week, with most investors expecting a slowdown in the pace of bond purchases in response to an improving economic outlook and a significant drop in financing costs for governments, businesses and households.
Similar to the U.S. Federal Reserve’s US$120 billion-a-month bond purchases, the ECB has been soaking up the equivalent of around US$94.7 billion-a-month in government and corporate bonds, which many analysts expect to taper to around US$71 billion.
But because most investors believe that it will be some time before the ECB stops buying bonds altogether, the demand for yield has led to the perverse situation where investors are actually losing money in real terms.
The ECB’s continued loose monetary policy has led to soaring demand in previously “uninvestable” assets.
Some investors at least are pricing in expected upgrades of some of Europe’s largest companies, which had all suffered downgrades in investment ratings in the wake of the pandemic.
And inflation data right now is “momentary,” in the sense that if an investor buys a bond held to maturity, the after-inflation return will depend on what inflation actually turns out to be over the lifetime of the bond, and not what inflation was in the preceding period before it was purchased.
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3. Bitcoin Gets a C- in Key El Salvador Test
What happens when a new-age form of currency meets creaking infrastructure? Exactly what you would expect to happen that’s what.
Investors pricing in some sort of Bitcoin utopia from El Salvador’s decision to make Bitcoin legal tender may potentially have been ingesting, smoking or snorting some of the Central American country’s key exports.
To be sure, there was plenty of froth in the cryptocurrency markets to begin with, but the disappointment of Bitcoin’s roll out as legal tender in El Salvador served as a major drag.
Yesterday’s selloff is the most significant break in the otherwise relentless rebound in Bitcoin that has seen the benchmark cryptocurrency soar by almost 75% in the last month and a half.
An estimated US$300 billion worth of market cap in cryptocurrencies was shaved off in the past 24 hours alone, according to data from CoinGecko.
To be sure, the Bitcoin rollout in El Salvador was a mess from the start.
The El Salvador government had to take its Bitcoin wallet app temporarily offline as the price of the cryptocurrency plummeted.
The digital wallet app called “Chivo” – Salvadorean slang for “cool” stopped working as server capacity was increased.
Chivo was intended to offer Salvadorean citizens who downloaded it an initial US$30 of free Bitcoin, but crashed soon after it was launched.
Exacerbating the selloff, U.S.-listed cryptocurrency exchange Coinbase Global faced technical issues as Bitcoin started plummeting, delaying or even canceling some customer transactions.
And while the cryptocurrency faithful globally were applauding the use of Bitcoin as legal tender in El Salvador, ordinary citizens took to the streets in process, marching in various protests across the capital San Salvador ruing against Bitcoin as a vessel to steal the riches of the country.
For cryptocurrency proponents however, the bigger story is the prospect of helping El Salvadorans reduce remittance fees, estimated at a fifth of the country’s GDP, and the teething problems from the Bitcoin app, expected.
Even if El Salvadorans lose confidence in Bitcoin because of the early glitches, insofar as the El Salvador government persists in its efforts, it may yield long term results, not just in transforming its economy, but providing a precedent for other countries to follow.
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Sep 08, 2021