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Novum Alpha - Daily Analysis 16 September 2021 (10-Minute Read)

U.S. stocks reversed all of Tuesday's losses as solid economic data and rising oil prices helped to temper pessimism over the pace of the economic recovery or concerns over the delta variant.

A terrific Thursday to you as markets take a turn for the better. 

In brief (TL:DR)

  • U.S. stocks ticked higher on Wednesday with the Dow Jones Industrial Average (+0.68%), S&P 500 (+0.85%) and the tech-centric Nasdaq Composite (+0.82%) all up as investors solid economic data and rising oil prices tempered pessimism on the recovery.
  • Asian stocks were steady Thursday amid a climb in energy shares and as traders assessed risks from the unfolding debt crisis at China Evergrande Group.
  • Benchmark U.S. 10-year Treasury yields dipped to 1.29%, narrowing the yield gap between short and longer-maturity U.S. debt (yields fall when bond prices rise).
  • The dollar remained lower.
  • Oil rose with October 2021 contracts for WTI Crude Oil (Nymex) (+0.08%) at US$72.67 after a U.S. industry report showed a decline in inventories of crude and gasoline, signaling a tightening market.
  • Gold was little changed with December 2021 contracts for Gold (Comex) (+0.09%) at US$1,796.40.
  • Bitcoin (+2.04%) rebounded sharply to US$48,026 on robust economic growth fueling a healthy round of risk taking with outflows overtaking inflows (outflows suggest that traders are looking to hold Bitcoin in expectation of higher prices). 

In today's issue...

  1. Hedge Funds Come Out Short on Bonds Too
  2. Cosmetic Surgery in China May be Next on Beijing’s Hit List
  3. Cryptocurrency Hedge Funds are Cashing In

Market Overview

Make American Stuff Again! 
U.S. stocks reversed all of Tuesday's losses as solid economic data and rising oil prices helped to temper pessimism over the pace of the economic recovery or concerns over the delta variant. 
Gains in equities were broad-based and the advances came as the U.S. Federal Reserve revealed data showing a sharp increase in U.S. industrial production in August, despite disruptions caused by Hurricane Ida. 
Separate data from the U.S. Bureau of Labor Statistics also showed the first monthly drop in import prices since last October, helping to create the ideal conditions for further stock rallies - good growth and lowered inflation expectations. 
Asia was a different story however as the potential fallout of a credit crisis at China's largest real estate developer China Evergrande Group has investors jittery with Tokyo's Nikkei 225 (-0.43%), Seoul's Kospi Index (-0.72%) and Hong Kong's Hang Seng (-1.30%) all down while Sydney’s ASX 200 (+0.76%) was higher in Thursday's morning trading session. 

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1. Hedge Funds Come Out Short on Bonds Too

  • Short sellers take wrong side of bet on inflation and get burned by short positions betting against U.S. Treasuries 
  • Sustained shorting of U.S. government debt could ultimately pay off, but investors will nurse losses for awhile as signs of inflation appear to be slowing  
Short sellers have had a rough run this past year, from the ill-timed bets against stocks like AMC Entertainment (-0.97%) and GameStop (+2.65%), and now bets that inflation will lead to a painful selloff in Treasuries which has failed to materialize. 
On both accounts and despite the pandemic, this year has been a tough one for short sellers who have once again found themselves on the wrong side of bets on inflation.
After a report on Tuesday that showed the pace of consumer price growth was less than forecast in August and on growing signs that the pace of price increases is ebbing, U.S. Treasury yields ticked lower (bond yields fall when prices rise).
The benchmark U.S. 10-year Treasury fell to 1.28% yesterday, defying expectations that rebounding growth and inflation are set to push yields higher.
But far from walking away with their tail between their legs, short sellers are remaining defiant, with the so-called short duration bet proving hard to resist, despite recent losses.
After shrinking to a four-year low in late August, the aggregate of net short non-commercial positions across all Treasury maturities has increased for three straight weeks, according to the latest data from the U.S. Commodity Futures Trading Commission.
But bad bets on both rising interest rates and inflation denting demand for Treasuries have proved painful for macro hedge funds this past year, with Alphadyne Asset Management alleged to be one of the biggest casualties of this summer’s short squeeze according to Bloomberg.
Looking ahead, shorting Treasuries may require a strong constitution.
As growth is slowing and with the delta variant threatening to undo whatever progress has been made by vaccinations, there are signs that growth in equities may be tapering off which will bode well for fixed income.
Some analysts suggest that the market pricing will soon reflect stronger inflation and growth, but with signs that the world’s second largest economy is slowing, that wait may be a long one, and investors will need to stay the course on this investment thesis to see light at the end of the tunnel. 

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2. Cosmetic Surgery in China May be Next on Beijing's Hit List

  • Investors are betting that China's lucrative cosmetic sector may be the next target for a crackdown by Beijing 
  • Approach may be more nuanced than previous approaches to regulating China's runaway cosmetic surgery sector, as not all procedures are purely elective 
First came tech, then afterschool education and video gaming, and now, investors are betting, cosmetic surgery could be next.
Investors already roiled by China’s purge of its various industries are taking positions that the lucrative cosmetic surgery industry is ripe for a crackdown.
Ahead of a key leadership conclave in the Middle Kingdom next year, Beijing has been keen to address income inequality and move towards a more socialized form of prosperity.
In a country where your face is literally your fortune, the obsession with cosmetic surgery has boomed into a US$50 billion-a-year market, with Chinese women hankering for more defined jawlines, plumper lips and higher cheekbones.
But Chinese President Xi Jinping’s “common prosperity” drive has seen the market value of China’s three biggest publicly traded medical aesthetics companies fall by over a third, with over US$17 billion in market cap wiped out, despite the popularity of cosmetic procedures.
Analysts are now warning that investors should beware of catching “falling swords” by buying into the cosmetic surgery industry, especially if it becomes a target of Beijing’s ire, considering that it could potentially be viewed as a negative social influence.
Even online gaming, which most would consider as relatively innocuous has come under siege, with President Xi having referred to the sector as “evil.”
That having been said, China’s leader has not been known to have explicitly mentioned the cosmetic surgery industry, especially given that not all such surgeries are elective – reconstructive surgery after an accident, is an important rehabilitative tool.
Nonetheless, the for-profit cosmetic surgery industry may be restructured into one that shuns the lucrative elective elements, for those which are deemed medically necessary.
In recent months, Chinese state media has stepped up criticism of the cosmetic surgery industry for promoting the idolization of physical appearance and “piling misery” on young people who are already self-conscious about their looks.
But a purge of the Chinese cosmetic surgery sector could see a proliferation of illegal, unlicensed and unauthorized practitioners.
With respect to the cosmetic surgery sector, Beijing is caught in a Catch-22 situation, crack down too hard, and you risk driving the industry underground, with its attendant risks and almost guaranteed undesired healthcare outcomes.
But leave the sector to its own devices, and you risk allowing it to become a potential flashpoint that adds to growing resentment, inequality and rising dissatisfaction, even as Xi looks to cement his grip on power next year.
There is almost no doubt that Beijing will intervene in its cosmetic surgery industry, but the approach may be more nuanced than the outright obliteration of the sector as was witnessed in the afterschool education market.



3. Cryptocurrency Hedge Funds are Crashing In

  • Cryptocurrency hedge funds deliver strong returns over the past year and this year
  • Traditional hedge funds are being forced to explore the sector as returns in other asset classes taper 
Dissatisfied with your stock picker’s returns? How about a cryptocurrency hedge fund instead?
Given the strong pace of gains from the likes of Bitcoin and Ether, data from Eurekahedge has revealed cryptocurrency hedge funds returning an average of 145% so far this year.
While digital assets remain a niche corner of the hedge fund industry, the runaway returns available in the nascent sector have been too attractive to ignore as industry stalwarts eye opportunities to gin up their returns that traditional asset classes have been wont to provide.
Hedge funds that play off the volatility and inefficiency inherent in cryptocurrencies have faired particularly well in recent months and cryptocurrency hedge funds on average returned over 200% last year.
With gains on average of around 24% in August alone, cryptocurrency hedge funds look to be in a completely different league when compared against other funds that specialize in currency trading that eked out 0.59%, and stock pickers that delivered just 0.8% in the same period, according to data from Eurekahedge.
While Bitcoin is still well off its all-time-high of US$65,000, the volatility has been perfect for momentum and arbitrage trading strategies, whereas the relative quiet and low interest rates in equity markets have made it particularly difficult for stock pickers to stand out against their benchmarks.
And the outsized moves in cryptocurrencies has caught the eye of some of the biggest names in the hedge fund industry, including Brevan Howard, one of the world’s largest global macro hedge funds, which announced at the start of this week that it was setting up a digital business to explore opportunities in cryptocurrencies.
Strategies employed by cryptocurrency hedge funds are also getting more sophisticated, with traditional buy-and-hold continuing to deliver, but managers looking at more market-neutral and arbitrage strategies as well.

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Sep 16, 2021

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