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

A rally that took global stocks to records has cooled as investors await more indications that economic reopening can overcome challenges posed by the delta variant.

 
A fantstic Friday to you as U.S. stocks bled red as the rally in equities started to lose steam. 
 

In brief (TL:DR)

 
  • U.S. stocks fell on Thursday, with the Dow Jones Industrial Average (-0.43%), S&P 500 (-0.46%) and the tech-centric Nasdaq Composite (-0.25%) all lower.
  • Asian stocks rose Friday as Chinese technology shares rebounded and Japan resumed a rally, bringing some relief from a bout of weakness in global equities this week.
  • Benchmark U.S. 10-year Treasury yields rose about one basis point to 1.31% (yields rise when bond prices fall). 
  • The dollar was steady.
  • Oil was higher with October 2021 contracts for WTI Crude Oil (Nymex) (+0.19%) at US$68.27 amid a slow return of U.S. production in the wake of Hurricane Ida.
  • Gold was little changed with December 2021 contracts for Gold (Comex) (-0.04%) at US$1,795.90.
  • Bitcoin (+1.76%) rose to US$46,937 as outflows led inflows for the first time in weeks (outflows suggest that traders are looking to hold Bitcoin in expectation of higher prices). 
 

In today's issue...

 

  1. Long Time China Bull Cathie Wood Gets Cold Feet
  2. ECB Becomes Test Case for What Happens When Bond Buying Slows
  3. SEC-Threatened Lawsuit on Cryptocurrency Exchange Coinbase
 

Market Overview

 
A rally that took global stocks to records has cooled as investors await more indications that economic reopening can overcome challenges posed by the delta variant.
 
U.S. futures were in the red after the S&P 500 retreated for a third day and the Nasdaq 100 posted the biggest drop in two weeks. A U.S. central bank survey signaled a moderation in economic growth due to the delta virus strain.
 
In Asia, markets were mostly higher on Friday's morning trading session, with Tokyo's Nikkei 225 (+1.13%), Hong Kong's Hang Seng (+1.65%), Seoul's Kospi Index (+0.30%) and Sydney’s ASX 200 (+0.16%) were all up.
 

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1. Long Time China Bull Cathie Wood Gets Cold Feet

 
  • Ark Investment Management's Cathie Wood sours on Chinese stocks 
  • Pragmatic approach to Chinese equities required as crackdown by Beijing against specific sectors broadens 
 
You know things are dicey in the Middle Kingdom when even long-time China bull Cathie Wood gets cold feet.
 
When Chinese equities were hammered in the wake of a crackdown by Beijing, first on Chinese Big Tech, and then subsequently on its afterschool education companies, investors fled in droves.
 
But not Cathie Wood of Ark Investment Management, she kept her powder dry, looking for opportunities to pounce again.
 
And when Chinese e-commerce giant JD.com (+3.01%) reported a stellar set of quarterly numbers, her Wood’s massive Ark Investment Management pounced, soaking up shares of the company that benefited most from the crackdown on archrival Alibaba (+3.66%).
 
But Wood has since taken on a more pragmatic approach to China, significantly reducing exposure to the world’s second largest economy, while holding only stocks of the companies identifiably currying favor with Beijing.
 
Speaking to an audience of institutional fund managers on Thursday, Wood is schooling her counterparts in the cynical, if not pragmatic way to approach China, which she described as
“quite different” today, compared with late last year.
 
With a key leadership conclave of the Chinese Communist Party on the horizon and Chinese President Xi Jinping looking to cement an unprecedented third term as the indisputable leader of the world’s second largest economy, tensions are running high as authorities focus on social issues and engineering to garner support, at the expense of capital markets and investors.
 
In what appears to be a race to demonstrate and burnish their socialist credentials, billionaires are giving millions of dollars away while companies which are deemed as being “too profitable” are trying to keep a low profile.
 
Wood remains bullish on JD.com however, noting that its logistics arm, JD Logistics is building out infrastructure in third and fourth-tier Chinese cities on extremely low gross margins, in what appears to be an attempt to curry favor with Beijing and take advantage of the heat being felt by Alibaba.
 
Speaking at a Mizuho Securities investor conference, Wood has not become a China bear however, noting,
 
“We think they’ll reconsider some of these regulations with time and we won’t give up on China because they are so focused on innovation and they are so inherently entrepreneurial.”
 
And that view may be supported by the growing numbers of senior Chinese officials coming out to reassure jittery investors that Beijing does not intend to sweep away its vast private sector.
 
For investors however, they may do well to scan the Chinese investment horizon carefully, because today’s darlings may overnight become targets for what at times appears to be arbitrary regulatory crackdowns.
 

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2. ECB Becomes Test Case for What Happens When Bond Buying Slows

 
  • Investors are responding well to the European Central Bank's paring back of bond purchases, with a reset as opposed to a retreat postulated 
  • Investors will be looking to see if the ECB's reset could provide a blueprint for a similar action by the U.S. Federal Reserve 
 
With a strongly recovering economy backed by bumper quarterly earnings, the European Central Bank is about to become the first rich world central bank to start tapering its asset purchases and investors are watching the exercise with bated breath.
 
While the ECB’s bond purchases never quite rivaled that of the U.S. Federal Reserve’s, it did provide the stability and surety that investors were looking for in the wake of a economically debilitating pandemic.
 
But the ECB has reassured bond investors that even as the ECB would buy fewer bonds, in a sign of confidence in the eurozone’s recovery, it wouldn’t vacate the bond market completely.
 
European government bonds rallied sharply in response to the ECB’s reassurance that while it was buying fewer bonds, it’s still buying them.
 
Most analysts agreed that the ECB isn’t tapering in the traditional sense, but rather recalibrating the pace of its asset purchases, a stark difference.
 
Looser monetary policy in the eurozone, at least according to most analysts, is likely here to stay.
 
And this could tee up a trade in the eurozone that sees both bonds and equities rising, akin to what was witnessed in the U.S. in the early days of the pandemic.
 
While European equities have rallied faster and harder this year compared to their cross-Atlantic counterparts, valuations continue to remain attractive.
 
Strong quarterly earnings and a dovish ECB also mean that companies are recovering at a time when monetary policy remains loose, the perfect recipe for an even sharper European equity rally.
 

 

 

3. SEC-Threatened Lawsuit on Cryptocurrency Exchange Coinbase

 
  • The U.S. Securities and Exchange Commission has warned Coinbase that it will sue the cryptocurrency exchange if it launches a new digital asset lending product
  • But the SEC moves could have the deleterious effect of pushing cryptocurrency exchanges offshore and it’s unclear what the ultimate goal of the regulator is
 
The U.S. Securities and Exchange Commission has threatened to sue listed cryptocurrency exchange Coinbase Global (-0.69%), if the latter goes ahead to offer a returns on crypto lending, a practice already common with other major exchanges.
 
This past week the SEC warned that Coinbase’s proposed product, termed simply “Lend” and which would pay out interest on depositor’s cryptocurrencies, would fall afoul of existing security laws for being unregistered.
 
Some see the SEC warning to Coinbase as sign that there’s a new sheriff in town, yet the tactics being used by the current SEC Chairman Gary Gensler, look painfully similar to the previous sheriff, Jay Clayton.
 
A Trump-era appointee, Clayton favored tactical ambiguity, using piecemeal regulatory enforcement action against initial coin offerings while leaving cryptocurrencies like Bitcoin and Ether much to their own devices.
 
Gensler’s SEC however goes even one step further, aggressively using its powers, even going so far as to subpoena documents and other information from Coinbase Global, ahead of it even launching the would-be products that would allegedly be in violation of existing securities laws.
 
Such a “pre-emptive” strike would be unprecedented as typically, the SEC waits for firms to start selling investment before announcing possible sanctions, issuing stop orders and then requiring firms to recompense investors.
 
But the threat of a lawsuit by the SEC could also have a chilling effect on innovation in America’s burgeoning cryptocurrency markets.
 
Gensler, who taught cryptocurrency and blockchain technology at the MIT Sloan School of Management, before taking up the reins at the SEC, was vaunted by the cryptocurrency community.
 
Finally, many thought, a regulator who actually understands and gets the market.
 
But that optimism that Gensler would usher in a new wave of innovation and embrace of cryptocurrencies in the financial markets was all but erased from his repeated speeches about how the industry is the “wild west of our financial system” and “desperately needs rules of the road.”
 
While cryptocurrency advocates in general are not necessarily against regulation, piecemeal enforcement action is not regulation, it’s just saber rattling and fear mongering and takes the industry backwards.
 
The last thing regulators should seek to do is to drive the cryptocurrency industry into the shadows.
 
In June, the U.K.’s Financial Conduct Authority conceded that it wasn't able to effectively police cryptocurrency exchange Binance, which is why it may be more prudent for regulators to work in concert with stakeholders as opposed to against. 
 
 

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Sep 10, 2021

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