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Novum Alpha - Weekend Edition 11-12 September 2021 (10-Minute Read)

What a weekend it's turning out to be with U.S. equities clocking their biggest weekly decline since mid-June in volatile trading as traders came back to their desks in full force. In the wake of the summer holidays, investors are having to assess the latest read on the economy after analysts weighed in with more cautious comments on the market. 

A wonderful weekend to you as stocks take a turn lower into the weekend. 
 

In brief (TL:DR)

 
  • U.S. stocks fell on Friday, with the Dow Jones Industrial Average (-0.78%), S&P 500 (-0.77%) and the tech-centric Nasdaq Composite (-0.87%) all lower as sentiment soured on technical indicators and uncertainty over the path of the U.S. economy. 
  • 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 surged to 1.341% (yields rise when bond prices fall) as traders weighed the prospect of a sooner-than-expected tapering of asset purchases by the Fed. 
  • The dollar was steady.
  • Oil continued to rise with October 2021 contracts for WTI Crude Oil (Nymex) (+2.32%) at US$69.72 as winter demand was priced in alongside the slow resumption of production in the Gulf of Mexico in the wake of Hurricane Ida. 
  • Gold was little changed with December 2021 contracts for Gold (Comex) (-0.44%) at US$1,792.10.
  • Bitcoin (-2.24%) slipped to US$45,252 (GMT 1000, Saturday, September 11, 2021) as traders continue to sell on the botched rollout of BTC as legal tender in El Salvador with inflows continuing to lead outflows (inflows suggest that traders are looking to sell Bitcoin in expectation of lower prices). 
 

In today's issue...

 
  1. China's Tech Stock Rally Encounters a Glitch
  2. Economists Think they have the Answer to a Trillion-Dollar Question
  3. U.S. Authorities Set their Sights on Stablecoins 

 

 

Market Overview

 
What a weekend it's turning out to be with U.S. equities clocking their biggest weekly decline since mid-June in volatile trading as traders came back to their desks in full force.
 
In the wake of the summer holidays, investors are having to assess the latest read on the economy after analysts weighed in with more cautious comments on the market. 
 
Against this backdrop, the prospect of a U.S. Federal Reserve tapering of asset purchases looms on the horizon at the most inopportune time. 
 
Nonetheless, Asian markets were able to shrug off the malaise, buoyed by a continued rally in Japan and a resurgence of buying activity in embattled Chinese tech stocks with Tokyo's Nikkei 225 (+1.25%), Hong Kong's Hang Seng (+1.91%), Seoul's Kospi Index (+0.36%) and Sydney’s ASX 200 (+0.50%) all entering the weekend higher.
 

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1. China's Tech Stock Rally Encounters a Glitch

 
  • Chinese tech stocks see a rebound in buying, but some macro investors are warning that the rebound may be premature 
  • Investors must accept heightened levels of volatility in Chinese tech companies, it may be some time before the dust finally settles 
 
Plucky investors looking to “buy the dip” on embattled Chinese tech giants were in for a rude surprise this past week as Beijing took aim at gaming companies yet again.
 
After stellar quarterly by Chinese ecommerce giant JD.com (+5.24%) and news that Cathie Wood’s Ark Investment Management had doubled down on the firm, investors started to pick up on Chinese tech shares on the assumption that the worst was over.
 
That assumption however proved premature as Chinese regulators hauled in gaming giants Tencent Holdings (-1.41%) and Netease (-0.52%) to admonish them for putting profits ahead of “social responsibilities.”
 
News of Beijing’s latest action sent the Hang Seng Tech Index, a key gauge for Chinese tech stocks, plummeting to its lowest level in six weeks, at a time when most traders had already priced in a bottom.
 
Chinese stocks in general and tech in particular, are likely to stay volatile for the coming weeks.
 
Even legendary macro investor George Soros, who famously predicted the demise of the British pound’s peg to the German Deutsch mark, warned it was a “tragic mistake” to put money into the Middle Kingdom.
 
But it may not be all doom and gloom either, with bargain hunters returning to Chinese tech last Friday, pushing up the Hang Seng Tech Index by 2.8% and keeping alive hopes that a bottom had been found after Chinese state media clarified that Beijing was not halting new video game approvals, but merely slowing down their rate of advance.
 
Chinese Vice Premier Liu He also affirmed support for private enterprise this week, reassuring investors that Beijing had no intention to “sweep away private enterprise.” 
 

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2. Economists Think they have the Answer to a Trillion-Dollar Question

 
  • Majority of academic economists surveyed by the Financial Times predict a U.S. Federal Reserve rate hike in 2022 
  • Postponement of a rate hike could occur if the U.S. economic recovery gets derailed by the delta variant 
 
Virtually everything we pay on a loan depends on it.
 
From the amount we pay on our mortgages, to student debt and auto loans, almost every form of borrowing takes reference from the U.S. Federal Reserve’s interest rates.
 
In the wake of the pandemic, the Fed kept interest rates low to help the economy recover, but now that there are signs inflation is picking up and things are on the mend, economists are predicting a return to a more normal interest rate policy.
 
According to a snap poll of leading academic economists conducted by the Financial Times, the majority opinion was that 2022 would be the year rates would increase, which suggests a far more aggressive approach to tightening monetary policy than the Fed’s own projections.
 
Just over 70% of respondents to the Initiative on Global Markets at the University of Chicago Booth School of Business, conducted in partnership with the Financial Times, said they believe the Fed will raise rates by at least 0.25% in 2022, with 20% expecting that to happen in the first half of next year.
 
While the Fed has committed to the current pace of asset purchases until it sees “substantial further progress” towards an average 2% inflation and maximum employment, some economists believe that rate hikes will dovetail with a tapering of the Fed’s US$120-billion-a-month purchase of Treasuries and asset-backed securities.
 
Inflation has already well exceeded the Fed’s 2% target, but it’s the employment number that is slightly trickier.
 
The U.S. economy sputtered out just 235,000 new jobs last month, a far cry from the 725,000 that economists had forecast and Goldman Sachs has revised downwards U.S. economic growth for this year.
 
And while the delta variant is to be blamed for at least some of the pullback, business spending in the U.S. is tapering at a time when the economic outlook has grown increasingly uncertain.
 
Regardless, 40% of economists surveyed believe that the Fed will announce some form of tapering at its meeting in November, while 31% expect it to happen in December.
 
Many economists however recognize that the timeline will slip if coronavirus infections spread further and hiring stalls, as August payroll data appears to suggest.
 
Much will hinge on whether it’s the hawks or the doves who take over the narrative in the coming months.
 
A worst-case scenario would be if the Fed suddenly turns hawkish, at a time when the U.S. economy starts to feel the full effects of the delta variant. 
 

 

3. U.S. Authorities Set their Sights on Stablecoins

 
  • U.S. authorities set to move in to more closely scrutinize stablecoins and their issuers 
  • Move could be a godsend especially as it could shore up confidence in the currency hybrid and foster greater adoption and use of the vehicle for more cryptocurrency trading 
 
With over US$68 billion in market cap, and coming in around the sixth or seventh largest holder of commercial paper in the U.S., Tether, issuer of the dollar-based stablecoin USDT, is the elephant in the room when it comes to financial markets.
 
As the go-to stablecoin for the cryptocurrency markets, Tether has in many ways reached terminal velocity, and attained a size where it has the potential to destabilize financial markets in hitherto inconceivable ways.
 
Part of Tether’s risk to the global financial system was of the system’s own making.
 
By denying normal banking services and relationships to the stablecoin, Tether was forced to use other means to back up its stablecoin issuances, and that’s created a situation where despite a lack of clear regulatory framework to oversee the entity, it could upset the commercial paper market (the market for short term corporate borrowing) simply by dint of its considerable size.
 
Which is why U.S. officials are discussing the prospect of launching a formal review into whether Tether and other stablecoins threaten financial stability, scrutiny that could lead to dramatically ramped up oversight and mandatory reporting. 
 
The U.S. Treasury Department and other federal agencies, after weeks of deliberation, are nearing a decision on whether to launch an examination by the Financial Stability Oversight Council (FSOC), according to Bloomberg sources.
 
The FSOC has the power to deem companies or activities as systemic threats to the financial system, a determination that typically imposes tough rules and aggressive monitoring by regulators.
 
Stablecoins have long been a halfway house for traders looking to cash out of cryptocurrencies momentarily before going back into the markets again.
 
Given the clunky nature of fiat-crypto ramps, stablecoins have blossomed into a US$120 billion market cap industry, according to data from CoinMarketCap.com, and are increasingly being used for transactions that resemble traditional financial products, including savings accounts, without offering anything near typical consumer protections.
 
For instance, stablecoin deposits can pay as high as 7% per annum, compared to the average U.S. savings rate of just 0.06%, but are not backed by FDIC protection.   
 
But far from undermining stablecoins, closer scrutiny of the sector may be just what the cryptocurrency industry needs.
 
As stablecoins serve a key role in the crypto space, investors are better off knowing that the actual dollars they pour into stablecoins like Tether are safe and even more importantly, could help prevent a potential financial crisis sparked by a run on something like Tether’s massive commercial paper holdings. 
 
 

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Sep 11, 2021

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