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Novum Alpha - Daily Analysis 29 September 2021 (10-Minute Read)

A global equity rally has stalled as investors reel from surging energy costs at the same time central banks are laying down plans to withdraw some of the pandemic stimulus.

 
A wonderful Wednesday to you as markets sank into the red on concerns over a looming energy crisis. 
 

In brief (TL:DR)

 
  • U.S. stocks saw their worst day since May with the Dow Jones Industrial Average (-1.63%), the S&P 500 (-2.04%) and the tech-centric Nasdaq Composite (-2.83%) all sharply lower on concerns that a potential energy crisis could skyrocket inflation. 
  • Asian stocks fell on Wednesday after a jump in U.S. Treasury yields.
  • Benchmark U.S. 10-year Treasury yields advanced one basis point to 1.55% (yields rise when bond prices fall).
  • The dollar held gains on increasing fear in the market. 
  • Oil retreated with November 2021 contracts for WTI Crude Oil (Nymex) (-1.18%) at US$74.40.
  • Gold was steady after declining with December 2021 contracts for Gold (Comex) (-0.01%) at US$1,737.30.
  • Bitcoin (-2.38%) fell to US$41,511 as broader market moves pulled down sentiment and with inflows rising against outflows (inflows suggest that traders are looking to sell Bitcoin in expectation of lower prices). 
 

In today's issue...

 
  1. Can America Really Run Out of Money?
  2. Oil Prices are Soaring & That’s a Bad Thing
  3. Chinese Crypto Investors Prove That Which is Forbidden is Most Desired
 

Market Overview

 
It can sometimes feel like we're living in almost Biblical times.
 
Plagues, pestilence, droughts, storms and now a looming energy crisis, all threaten to derail a tepid economic recovery. 
 
A global equity rally has stalled as investors reel from surging energy costs at the same time central banks are laying down plans to withdraw some of the pandemic stimulus.
 
U.S. consumer confidence dropped in September for a third straight month, suggesting concerns over the delta variant and higher prices continue to weigh on buying activity. 
 
In Asia, markets fell Wednesday after U.S. stocks saw their worst day since May and bond yields spiked on concerns about inflation, with Tokyo's Nikkei 225 (-2.54%), Seoul's Kospi Index (-1.98%), Sydney’s ASX 200 (-1.23%) and Hong Kong's Hang Seng (-0.27%) were all down in the morning session.
 

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1. Can American Really Run Out of Money?

 
  • As the U.S. hurtles yet again towards another debt ceiling debate, the White House is warning that unless the borrowing limit is increased by October 18, the government risks another shutdown
  • As such, investors will need to gird their loins for heightened volatility right up to the very last minute in mid-October
 
Can America really run out of money? If U.S. Treasury Secretary Janet Yellen is to be believed then the answer is "yes."
 
As the U.S. hurtles yet again towards another debt ceiling debate, the White House is warning that unless the borrowing limit is increased by October 18, the government risks another shutdown.
 
But while the U.S. Federal Reserve as well as the U.S. Treasury Department are on Capitol Hill scaremongering and talking up doomsday scenarios should the debt limit not be increased in time, this is hardly the first time that the federal government has shutdown.
 
To put things in context, the U.S. has experienced no fewer than 7 shutdowns starting from 1980 with the last shutdown on record as the longest, from December 2018 to January 2019 over disputes surrounding the funding of the Trump administration’s border wall.
 
And despite rating agency downgrades of U.S. sovereign debt and the ludicrousness of the reasons surrounding the last government shutdown, demand for Treasuries has remained strong.
 
Part of the reason of course is that there aren’t any good alternatives to U.S. sovereign debt.
 
German and Japanese debt are so famously secure that until fairly recently, provided negative yields, at least Treasuries provide some yield, even if it’s below inflation.
 
And Treasuries trade in the most liquid and deepest bond markets on the planet, as does the dollar.
 
A government shutdown, while damaging, is unlikely to have the far-reaching consequences that many bankers and politicians are warning that it will have, and that’s emboldening Republicans to filibuster to the very end in the Senate, where the Democrats have a razor thin majority.
 
As such, investors will need to gird their loins for heightened volatility right up to the very last minute in mid-October.
 
Odds are that a deal will get done, but oftentimes, leaving it to the last minute rattles already jittery investors who have plenty to worry about, from supply chain disruptions, to a tapering Fed, to China’s debt and power crises as well as the specter of rising inflation.
 

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2. Oil Prices are Soaring & That's a Bad Thing

 
  • Coal and European gas prices rally to record peaks as traders brace themselves for winter crunch.
  • Some meteorologists are forecasting a cooler-than-expected winter, but given the unpredictable weather of the past year, it’s too early to call.
 
For all the talk of electrification, the world still very much runs on black gold, Texas Tea, crude oil.
 
Formed from billions of trilobites, oil has been the nectar of modern life for the better part of over a century.
 
But with coal and natural gas prices all hitting record highs recently, crude oil has jumped on the bandwagon, soaring above US$80, in the clearest sign yet that the world could be headed to an energy crisis that threatens to derail the post-pandemic recovery.
 
The timing could not possibly be worse.
 
As the northern hemisphere hurtles into winter, demand for fuel oil and natural gas for heating is expected to soar, even as warmer-than-expected weather has kept a lid on demand for now.
 
Front-month contracts for natural gas are already up almost 200% in a year, the result of less drilling by U.S. shale producers, which generates natural gas as a by-product of the fracking process.
 
Some meteorologists are forecasting a cooler-than-expected winter, but given the unpredictable weather of the past year, it’s too early to call.
 
Climate change has overturned expectations as to what “predictable weather” is and it’s entirely possible that either a very harsh winter could be experienced, or one that is relatively mild.
 
Either way, the combination of soaring thermal coal prices, up 96% this year alone in China and Chinese demand for natural gas which is far cleaner compared to coal, is driving energy prices through the roof and threatening to trigger more persistent inflation.
 
Exacerbating the problem, U.S. crude inventory levels are well below average ahead of peak consumption, and some analysts are even predicting oil shortages, despite minimal demand from the transport industry.
 
If energy costs contribute significantly to inflation and prove to be stubbornly persistent, at some point, the U.S. Federal Reserve may need to intervene to reign in price pressure, including bringing forward the schedule for tapering and hiking interest rates, even as its economic goals have yet to be met. 
 

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3. Chinese Crypto Investors Prove That Which is Forbidden is Most Desired

 
  • Despite China’s central bank banning all cryptocurrency transactions last Friday and vowing to root out the last vestiges of mining activity within its borders, Chinese cryptocurrency investors remain unfazed.
  • Longstanding Chinese investors have established workarounds to buying cryptocurrencies, avoiding centralized exchanges and preferring decentralized ones, which do not require KYC.
 
Whether it’s movies deemed “undesirable” by Beijing, or other “foreign influences,” the Chinese have long been resourceful enough to gain access to that which has been forbidden.
 
And that applies to cryptocurrencies as well, long used as a conduit by enterprising Chinese to spirit wealth out of the Middle Kingdom, where strict capital controls are observed more in their violation than in their adherence.
 
Despite China’s central bank banning all cryptocurrency transactions last Friday and vowing to root out the last vestiges of mining activity within its borders, Chinese cryptocurrency investors remain unfazed.
 
While cryptocurrency exchanges Huobi and Binance closed off access to traders with mainland Chinese mobile numbers from registering for new accounts, sign-ups via Hong Kong are still available on both platforms.
 
And although Bitcoin and other cryptocurrencies fell sharply last Friday, they’ve since recovered to their pre-purge levels, with many investors using the opportunity to so-called “buy the dip.”
 
To be sure, seasoned Chinese crypto investors are used to periodic purges by Beijing and far from dissuading investors, actually spur them to stock up on more cryptocurrencies.
 
Beijing’s recent purge on a variety of industries, which started from ride-hailing app Didi Global (-3.16%), but subsequently spread to Chinese tech firms, afterschool education and property, has led to increased demand from investors for assets which are mobile and can be whisked away at a moment’s notice in the event that the purge should spread to their industry sector.
 
Seasoned Chinese crypto investors have what’s known in industry parlance as “diamond hands” although the world’s second largest cryptocurrency market may have scared off new entrants.
 
Longstanding Chinese investors have established workarounds to buying cryptocurrencies, avoiding centralized exchanges and preferring decentralized ones, which do not require KYC.
 
Some Chinese investors are said to be turning to MetaMask, a more accessible browser-based cryptocurrency wallet that allows trading in a variety of tokens, including non-fungible tokens or NFTs.
 
 

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Sep 29, 2021

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