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Novum Alpha - Daily Analysis 20 September 2021 (10-Minute Read)

Markets are facing the Monday blues as concerns over the potential implosion of China's real estate giant the Evergrande Group weighs on sentiment while the Fed's tapering of asset purchases is causing jitters amongst investors.

A magnificent Monday to you as markets moved lower on concerns over China's Evergrande Group defaulting on its debt rippling through other asset markets. 

In brief (TL:DR)

  • U.S. stocks closed lower on Friday, with the Dow Jones Industrial Average (-0.48%), S&P 500 (-0.91%) and tech-centric Nasdaq Composite (-0.91%) all marking their second consecutive week of falls. 
  • Asian stocks fell Monday, hurt by a slump in Hong Kong property developers roiled by Evergrande Group's crisis. 
  • Benchmark U.S. 10-year Treasury yields rose to 1.36% (yields rise when bond prices fall) ahead of the U.S. Federal Reserve meeting this week where policy makers are expected to start laying the groundwork for paring stimulus.
  • The dollar continued to rise amidst uncertainty. 
  • Oil slipped with October 2021 contracts for WTI Crude Oil (Nymex) (-0.92%) at US$71.31 as the demand outlook remains uncertain. 
  • Gold edged lower with December 2021 contracts for Gold (Comex) (-0.14%) at US$1,749.00.
  • Bitcoin (-4.08%) was lower into the week at US$46,068 with inflows racing against outflows and as risk sentiment soured (inflows suggest that traders are looking to sell Bitcoin in expectation of lower prices). 

In today's issue...

  1. The Fed Taper is Nothing Compared to the Fiscal One
  2. Is China’s Evergrande too Grand to Fail?
  3. Solana’s Setback is Fuel for Ethereum

Market Overview

Markets are facing the Monday blues as concerns over the potential implosion of China's real estate giant the Evergrande Group weighs on sentiment while the Fed's tapering of asset purchases is causing jitters amongst investors. 
Global investors are concerned that the debt-saddled Evergrande Group, with over US$300 billion in liabilities could go under, leading into a broader crisis in the world's second largest economy China. 
While the People's Bank of China, the Chinese central bank, has pumped in US$14 billion into its banking system, it needs to do far more to secure the borrowings that Evergrande Group needs to weather the impending debt storm. 
In Asia, markets were a mixed bag, with Tokyo's Nikkei 225 (+0.58%) and Seoul's Kospi Index (+0.33%) higher, while Sydney’s ASX 200 (-2.22%) and Hong Kong's Hang Seng (-3.74%) were sharply lower on concerns that major trading partner China could have serious issues. 

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1. The Fed Taper is Nothing Compared to the Fiscal One

  • Investors are focusing on the U.S. Federal Reserve taper, but the bigger challenge will come from the fiscal slow down 
  • U.S. economy expected to churn out tepid growth in 2022 and 2023, at a time when interest rates are expected to rise and monetary stimulus would be pared down   
While investors may be obsessing over the U.S. Federal Reserve’s upcoming slowdown in its US$120 billion-a-month asset purchases, the elephant in the room is the upcoming fiscal tapering.
With stimulus checks all but spent, the U.S. recovery looks set to slow in the second half of 2022 as measures that propped up the economy during the pandemic, from support for households to no-cost loans for small businesses start to fade out.
And that’s even if the Biden administration wins Congressional approval for its US$3.5 trillion Build Back Better fiscal package, which will be spread across several years and funded at least in part by higher taxes that could curb the nascent recovery.
The coming news that the U.S. economy will slow in 2022 and 2023 will not sit well for investors who have bid up equities to record levels and it could usher in a period of political uncertainty as the Democrats face midterm elections next November to hold on to their razor-thin majorities in both houses.
One potential upside though is inflation, as growth slows, price pressures are also likely to diminish.
The Fed is widely expected to discuss tapering plans this week, with the likelihood that the asset purchases will be reduced in 2022, roughly around the time when the economy is also expected to slow as well.
Households have however increased their savings during the pandemic, with data from the Fed revealing a war chest of over US$2 trillion.
And although investors have turned markedly less optimistic on the economy, they continue to remain all-in on stocks, increasing the risks of sudden shocks, especially as policymakers contemplate a return to a more normal monetary policy.
For investors who are already sitting atop decent returns from the past year, this might be a good time to at least consider the thought of taking some money off the table.

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2. Is China's Evergrande too Grand to Fail?

  • Investors are growing concerned that Chinese real estate giant Evergrande Group could fail 
  • Prospect of a bailout by the Chinese government, or at least one that is organized by Beijing is high, as the implosion of Evergrande Group will have far reaching consequences on the Chinese and global economy 
Paying “favored” investors ahead of others is pretty much the oldest trick in the book when insiders have firsthand knowledge of impending trouble.
Which is why a clutch of six senior Evergrand (-15.35%) executives are said to be facing “severe punishment” for securing early redemptions on investment products that the indebted Chinese property giant subsequently told retail investors that it could not pay on time.
The discovery of this “favored” prepayment could not have come at a worse time, as Chinese President Xi Jinping pushes for more inclusive growth and ahead of a critical fortnight for Evergrande which is struggling to repay investors, banks and bondholders, as well as complete flats for homebuyers who had paid for their properties in advance.
Last week, hundreds of investors gathered outside Evergrande’s headquarters in the southern industrial city of Shenzhen, after executives at the beleaguered real estate firm said they needed more time to pay the principal on high-yielding wealth management products issued by the group.
The Evergrande Group is China’s second largest real estate developer, founded by Xu Jiayin, who was born to a rural family in Henan, but whose father was a retired soldier and participated in the Second Sino-Japanese War in the 1930s and then again in the 1940s. 
And while Xu is far from a “princeling” (children of prominent Communist Party members), he was as recently as July of this year, spotted among the crowd attending the Communist Party’s centenary celebrations in Beijing, providing comfort for the investors betting on him.
The sight of the wealthy real estate mogul at the Communist Party’s most important event this year where Communist Party Chief and President Xi delivered a keynote speech has at least some analysts betting that top policymakers are softening their stance on the company.
Speaking with the South China Morning Post, money manager Dai Ming, from Huichen Asset Management in Shanghai noted,
“Typically, the attendees are meticulously picked for such an important political event, not randomly. It makes sense to guess that there may be some political intention behind it.”
Beijing has thus far been reluctant to bail out Evergrande, although time is running out and a failure to do so could have wide-ranging consequences on the entire Chinese economy.
Many Chinese have their net worth heavily tied to the real estate market which for decades has only known growth.
Evergrande bonds are trading as low as 20 cents on the dollar, and that has seen yields on debt at other property groups rise sharply.
Beijing is already assisting, albeit indirectly, with the People’s Bank of China flooding the banking system with liquidity, in a bid to get banks to lend.
With the value of Evergrande’s Hong Kong-listed shares at a tenth of what they were a year ago, the plucky investor could consider picking it up on bets that the government will eventually have to bailout the embattled real estate giant.
Beijing is not averse to bailouts, having recently rescued China Huarong Asset Management, a heavily-indebted state-owned asset manager, through other government controlled asset managers and banks.
And while authorities would be loathe to rescue a large private-sector company such as Evergrande, the American experience with the 2008 Financial Crisis will not be far from their minds either.
As growth in the world’s second largest economy starts to slow, China can ill-afford a massive collapse of Evergrande and while Beijing may not intervene directly, it may lean on other large private sector companies to work out a rescue plan for the real estate giant.



3. Solana's Setback is Fuel for Ethereum

  • Solana's blockchain essentially stops processing transactions for 17 hours last Tuesday
  • Blockchain failure cannot be considered "teething troubles" as it undermines the fundamental immutability and reliability of the technology 
Adding to the longest chain – that’s one of the fundamental tenets of how the blockchain is secured.
As miners add blocks of transactions, the longest chain becomes the “truth” and helps to secure one version of that truth.
Which is why despite Ethereum’s at times high gas (transaction) fees, the vast majority of developers still build their smart contracts or dApps (decentralized applications) atop the Ethereum blockchain – it’s the oldest smart contract-enabled blockchain and the most heavily utilized – it’s the "longest chain" for developers.
Even as the market cap for Solana blew past US$62 billion earlier this month, and the price of Solana’s token rose by 6,000% over the past year, for 17 excruciating hours last Tuesday, no one could buy or sell Solana’s SOL token – the blockchain which it runs on, touted as the world’s fastest, had gone offline.
Solana’s blockchain simply couldn’t process any transactions with the people behind it putting the blame on “resource exhaustion.”
Say what you will about Ethereum and Bitcoin, but in their histories, the two blockchains have never had to face anything even remotely close to the gumming up of transactions.
To be sure, there have been times when surges in demand for transactions in both Bitcoin and Ethereum did lead to longer processing times, under no circumstance were transactions not processed altogether, a major no-no in the cryptocurrency space.
Centralized exchanges may crash, and smart contract exploits hacked, but the underlying blockchain itself, the stuff that cryptocurrencies ride on, is supposed to be sacrosanct, otherwise the entire justification for a decentralized and immutable ledger becomes questionable.
While Solana’s creators may have shrugged off last week’s incident as “growing pains” it will certainly provide food for thought for developers and investors alike that are betting on the latest and shiniest blockchain that is making sweeping promises.
Marketing buzz aside, for investors looking at the latest and greatest blockchain can consider the same principle that miners use – reliance on the longest chain. 

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Sep 20, 2021

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