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Novum Alpha - Daily Analysis 23 September 2021 (10-Minute Read)

It came right down to the wire but nobody was really expecting Beijing to just sit back and let a real estate developer bring down the rest of the economy were they?

A terrific Thursday to you as markets rebound sharply as concerns over a potential implosion of China's Evergrande Group subsides. 

In brief (TL:DR)

  • U.S. stocks rebounded on Thursday with the Dow Jones Industrial Average (+1.00%), S&P 500 (+0.95%) and tech-centric Nasdaq Composite (+1.02%) higher on lowered concerns over China's Evergrande Group defaulting on its debt repayments. 
  • Asian stocks were steady early Thursday after U.S. shares took in their stride the prospect of a reduction in U.S. Federal Reserve stimulus as early as November.
  • Benchmark U.S. 10-year Treasury yields declined two basis points to 1.30% (yields fall when bond prices rise) on the prospect of a Fed tapering of asset purchases.
  • The dollar edged higher.
  • Oil pared a rally with November 2021 contracts for WTI Crude Oil (Nymex) (+0.19%) at US$72.37.
  • Gold held a retreat with December 2021 contracts for Gold (Comex) (-0.85%) at US$1,763.60.
  • Bitcoin (+6.03%) recovered to US$43,261 with inflows slowing and on renewed positive sentiment that the worst of the Evergrande Group crisis may have been averted (inflows suggest that traders are looking to sell Bitcoin in expectation of lower prices). 


In today's issue...

  1. Beijing Defuses the China Evergrande Debt Bomb
  2. Autumn Temperatures Usher in a Cooler Fed
  3. Can you impose sanctions on a Cryptocurrency Exchange?

Market Overview

It came right down to the wire but nobody was really expecting Beijing to just sit back and let a real estate developer bring down the rest of the economy were they? 
Investors heaved a collective sigh of relief as embattled Evergrande Group said that it would be paying on its interest payments. 
In Asia, markets were a mixed bag in Thursday's morning trading session, with Tokyo's Nikkei 225 (-0.67%) and Seoul's Kospi Index (-0.60%) down, while Sydney’s ASX 200 (+1.04%) and Hong Kong's Hang Seng (+2.26%) rebounded sharply on signs that the Evergrande Group will now implode under the weight of its own crushing debt. 

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1. Beijing Defuses the Evergrande Debt Bomb

  • Evergrande Group agrees to settle interest payments with lenders  
  • People's Bank of China continues to inject cash into the banking system to prevent contagion from Evergrande Group spilling over into the broader Chinese economy 
Investors are breathing easier (for now) as China’s embattled real estate developer Evergrande Group (+27.31%) agrees to settle interest payments on a domestic bond yesterday.
The People’s Bank of China (PBoC) continued to inject cash into the banking system, soothing fears of imminent contagion from the US$305 billion-debt-laden Evergrande Group.
But the drama isn’t over yet as US$83.5 billion in dollar-bond interest payments are due today with no sign of what Evergrande Group intends to do.
The risks of financial contagion may also have been overplayed somewhat, with just US$20 billion of Evergrande’s US$305 billion in outstanding debt is owed offshore, according to data from Refinitiv.
Key to China's second largest real estate developer’s survival is cutting deals with onshore creditors.
For now, moves by the PBoC to shore up liquidity in the banking system seems to suggest that Beijing is not going to allow a messy implosion of Evergrande Group.
Retail investors with their savings sunk in either Evergrande’s properties or wealth management products are putting pressure on Beijing to act and rescue the embattled real estate developer, which is the most heavily geared in the world.
And while U.S. Federal Reserve Chairman Jerome Powell has downplayed the contagion risks for an Evergrande Group collapse, investor confidence may be rattled significantly should the real estate developer go under, even though the offshore exposure is minimal.

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2. Autumn Temperatures Usher in a Cooler Fed

  • U.S. Federal Reserve lays out a broad timeline for the tapering of asset purchases with the move likely to happen as soon as November 
  • Markets took the prospect of tapering in their side and U.S. Treasuries barely reacted to the news 
The U.S. Federal Reserve has laid out a plan for scaling back its US$120 billion-a-month asset purchases and so far, markets seem to be taking it well.
Speaking with reporters on Wednesday, U.S. Federal Reserve Chairman Jerome Powell noted that tapering of asset purchases could come as soon as November, though he left the door open to waiting longer if needed.
The Federal Open Market Committee meeting in November could be the window when the central bank will start tapering asset purchases, but Powell stressed that it was not meant to serve as a countdown to a liftoff from zero interest rates.
Significantly, Powell made clear he didn’t expect the Fed to being lifting interest rates until completing the taper process, which he explained would wrap up “sometime around the middle of next year.”
Powell’s comments were well within market expectations and the muted market reaction was welcome.
Importantly, the Fed’s comments on the taper and clear-ish timetable on what is supposed to happen and when, have helped to avoid the messy “taper tantrum” of 2013, when then-Fed chairman Ben Bernanke announced the Fed was tapering asset purchases in the wake of the 2008 Financial Crisis and the suddenness of the move led to a sharp market correction.

3. Can you impose sanctions on a Cryptocurrency Exchange?

  • U.S. Treasury Department imposes sanctions on cryptocurrency exchange 
  • Unclear if the sanctions will have any discernible effect on the activity of the offshore entity 
It’s no big secret that centralized exchanges remain one of the biggest targets for authorities looking to stem illicit flows or crackdown on money laundering allegedly facilitated by cryptocurrencies.
In a novel approach, the U.S. Treasury Department has imposed sanctions on a cryptocurrency exchange that it says allowed ransomware hackers to launder extortion payments from victims.
Working in conjunction with the FBI, the U.S. Treasury’s Office of Foreign Assets Control announced the curbs on an exchange called SUEX, which it alleges deliberately “facilitated illicit activities for own illicit gains.”
The sanctions are aimed at blocking U.S. citizens and companies from transacting with SUEX, on pain of penalties such as fines.
Whether or not the sanctions will ultimately bite is a different story altogether.
Authorities across many jurisdictions have struggled to bar their citizens from accessing unregulated cryptocurrency exchanges.
In June, the U.K.’s Financial Conduct Authority (the equivalent of the U.S. Securities and Exchange Commission), wrote that it was not capable of exercising any meaningful discipline or oversight of the world’s largest cryptocurrency exchange by traded volume, Binance.
And multiple jurisdictions which have either banned specific cryptocurrency exchanges or barred their citizens from accessing them, have seen those barriers circumvented through the use of virtual private networks (which obscure the geographical location of a user’s IP address) or other means.
Nonetheless, it will be interesting to see whether the Treasury’s initiative to sanction SUEX will bite and what it means for cryptocurrency exchanges in general.
According to the U.S. Treasury Department, some 40% of SUEX’s transactions can be linked to illicit actors, while the company is alleged to have facilitated the laundering of funds from over eight known ransomware attacks.
Wally Adeyemo, deputy secretary of the U.S. Treasury has said the agency is also “investigating” the role of mixers – third party services that mix in illicit cryptocurrency flows with legitimate ones, before redistributing them, to obfuscate their sources and destinations.
Mixers are not entirely full proof, with a rising number of blockchain data analytics companies and the FBI able to track back cryptocurrency flows to their sources in many cases.
During the Polychain Network hack, Chainalysis, as well as Elliptic, two leading blockchain data analytics companies, were able to detect that the hacker had sent some of the stolen cryptocurrency into mixers.

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Sep 23, 2021

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