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Novum Alpha - Daily Analysis 15 September 2021 (10-Minute Read)

The world's second largest economy is starting to slow, with consumer demand flagging and domestic travel moribund as the delta variant of the coronavirus forced movement restrictions.

A wonderful Wednesday to you as stocks wind lower on weak economic data out of China. 

In brief (TL:DR)

  • U.S. stocks were ticked lower on Tuesday with the Dow Jones Industrial Average (-0.84%) and S&P 500 (-0.57%) up, while the tech-centric Nasdaq Composite (-0.45%) all dragged down by data that the economic recovery in China is slowing amidst lower consumer consumption and delta outbreaks. 
  • Asian stocks fell Wednesday amid concerns about the outlook for the recovery from the pandemic as price pressures filter through the global economy.
  • Benchmark U.S. 10-year Treasury yields fell to 1.28%, narrowing the yield gap between short- and longer-maturity U.S. debt as sentiment grew cautious and traders looked for safe havens (yields fall when bond prices rise).
  • The dollar was steady.
  • Oil rose with October 2021 contracts for WTI Crude Oil (Nymex) (+0.61%) at US$70.89 after a U.S. industry report showed a decline in inventories of crude and gasoline, signaling a tightening market.
  • Gold held a climb with December 2021 contracts for Gold (Comex) (-0.16%) at US$1,804.20.
  • Bitcoin (+4.15%) rose to US$47,073 on heightened global uncertainty as the delta variant continues to wreak havoc on major economies with outflows overtaking inflows (outflows suggest that traders are looking to hold Bitcoin in expectation of higher prices). 

In today's issue...

  1. Buy on New iPhone Rumor, Sell on Launch
  2. Rejoice for Inflation is Rounding the Corner
  3. Cryptocurrencies Are Getting a Mainstream Boost

Market Overview

The world's second largest economy is starting to slow, with consumer demand flagging and domestic travel moribund as the delta variant of the coronavirus forced movement restrictions. 
While much of the Chinese population is vaccinated, the efficacy of China's homegrown vaccine against the delta variant is less certain. 
Much of China had brought the coronavirus to heel but outbreaks caused by the delta variant in many key industrial cities is putting a strain on both domestic consumption and creating supply disruptions.   
In Asia, markets fell on weaker Chinese economic data, with Tokyo's Nikkei 225 (-0.09%), Seoul's Kospi Index (-0.14%), Sydney’s ASX 200 (-0.53%) and Hong Kong's Hang Seng (-1.18%) all down in Wednesday's morning trading session. 

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1. Buy on New iPhone Rumor, Sell on Launch

  • Apple shares predictably tank on unveiling of new range of products 
  • Tech giant is still a recommended "buy" by a vast majority of analysts  
Presenting a new product isn’t quite the same thing as selling it.
Which is why Apple’s stock has had a tradition of poor performance on the day it unveils its new devices.
In the run-up to the launch of new products, Apple (-0.96%) has typically seen its stock price rise, only to see a precipitous correction on the day they are unveiled and yesterday was no different.
As Apple CEO Tim Cook presented the company’s latest lineup of phones and other devices, Apple’s share price fell by almost 1% to close at US$148.12.
Excluding Apple’s one-time 8.3% rally on the iPhone’s inaugural debut in 2007, data compiled by Bloomberg reveals that Apple shares fell on over 75% of the days the company unveiled new iPhones, falling an average of 0.8% each time.
Part of the reason for that of course could be uncertainty over the public reception of Apple’s new products and the other could be innovation fatigue.
Apple has come to be synonymous with innovation, but its products over the past few years seem to be more a result of marketing and design than specs.
With the latest clutch of iPhones sporting features that have been on Android phones from the likes of Samsung for years, Apple has had much to catch up with in the smartphone features department.
Rivals are sporting designs that are often just copies of Apple’s iconic look, but with better features and more powerful cameras.
Compounding Apple’s challenges in the coming periods, a U.S. federal judge ordered the tech giant to alter its App Store business model.
Apple has already responded by making it easier for app developers to generate revenues outside of the Apple ecosystem.
Nonetheless, some 80% of 47 analysts covering Apple have a “buy” rating on its shares, with only two recommending selling it, according to data compiled by Bloomberg.
Analysts on average expect Apple to climb by another 11% over the next 12 months from yesterday’s closing price.

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2. Rejoice for Inflation is Rounding the Corner

  • U.S. inflation data reveals that the rate of price increases is slowing down 
  • Lower pace of increase in inflation provides the perfect circumstance for the U.S. Federal Reserve to justify its continued loose monetary policy and intervention
As traders take in consumer price index data published by the U.S. Bureau of Labor Statistics, markets are likely to be full of good cheer.
CPI data released yesterday showed that prices rose 5.3% in August from a year ago, just below the 5.4% reported previously – the highest since 2008 – and well in line with the forecast by economists.
More importantly, month-on-month price gains slowed in August to 0.3% from July, a significant taper supporting the U.S. Federal Reserve’s narrative that inflation is transient.
CPI data showed prices rose at their lowest pace in months, with a 0.9% jump between May and June and 0.5% from June to July.
Core CPI, which excludes volatile items such as food and energy also increased at the slowest pace since February, with prices rising just 0.1%. 
And most of the price gains seen so far this year have stemmed from sectors most sensitive to supply chain disruptions or bottlenecks and other pandemic-related issues.
To be sure, the pace of inflation is still hovering around multiyear highs, but July’s data was the first sign that the rate of increase is abating.
And with the delta variant threatening to derail the economic recovery, so long as sharply rising inflation is not a major concern for the Fed, it provides the justification to stay engaged with the economy for longer.
Most analysts expect the Fed to taper its US$120 billion-a-month asset purchases before the end of the year and to raise interest rates next year, but the schedule of those moves is less certain.
Recent payroll data shows that the pace of job growth is ebbing and with inflation now showing signs of slowing down, the Fed may need to roll back its return to a more normal monetary policy.
And that will be music to the ears of investors, who can expect to see stocks and other assets continue to rise as the liquidity levels in the market continue to be high.



3. Cryptocurrencies Are Getting a Mainstream Boost

  • Bond investors rush to snap up bonds of cryptocurrency exchange Coinbase Global 
  • Greater acceptance of the nascent asset class is reflected in bond investor appetite for the just-under investment grade rated debt of the U.S. listed cryptocurrency exchange 
Nothing quite says you’ve made it in the world of corporate finance so much as debt and more importantly, the ability to sell it.
Just as a credit card, or specifically a gold credit card in the 80s and 90s was seen as a status symbol, the ability to sell a company’s debt to investors is a sign of having "arrived." 
And junk bond investors have given listed-cryptocurrency exchange Coinbase Global (+0.066%) its biggest endorsement yet by soaking up some US$2 billion of its debt.
As interest in cryptocurrencies increases and despite the recent regulatory crackdown, demand for Coinbase Global’s bonds was so high that at least US$7 billion of orders poured in, allowing it to raise the deal’s size from US$1.5 billion to US$2 billion.
And borrowing costs for the U.S. cryptocurrency exchange were also lower than anticipated, with 7-year bonds at 3.375%, while 10-year bonds were 3.625%.
The demand for Coinbase Global’s debt can also be seen as a coup for cryptocurrency, as fixed income investors, including pension funds and hedge funds look to get in on the action surrounding the nascent asset class.
Bond investors shrugged off the U.S. Securities and Exchange Commission threat to sue Coinbase Global for a prospective product that the former alleges will violate existing securities laws as well as the global regulatory dragnet surrounding the cryptocurrency sector.
Coinbase Global is only the second cryptocurrency-related bond issuer in the U.S. market, with software developer MicroStrategy (-3.77%) having sold some US$500 million of notes in June to fund further Bitcoin purchases.
By some estimates, MicroStrategy’s Bitcoin holdings now dwarf the traditional corporate treasuries of most members of the S&P 500, after its latest purchased swelled the value of the cryptocurrency in its coffers to well over US$5 billion.
With 114,042 Bitcoins worth around US$5.3 billion, MicroStrategy’s treasury is now worth more than the cash held by 80% of the S&P 500, including Starbucks (-0.27%), Verizon Communications (-0.38%) and Home Depot (-0.70%), according to data from Bloomberg.
And it’s not like Coinbase Global’s debt was rated at the lowest levels either, with ratings agencies awarding the cryptocurrency exchange’s bonds just one step below investment grade – not exactly full-on junk.

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Sep 15, 2021

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