Novum Alpha - Daily Analysis 1 October 2021 (10-Minute Read)
U.S. and European futures started October on the back foot alongside Asian stocks, after overnight losses in the S&P 500 capped its biggest monthly selloff since March 2020.
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In brief (TL:DR)
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In today's issue...
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Market OverviewU.S. and European futures started October on the back foot alongside Asian stocks, after overnight losses in the S&P 500 capped its biggest monthly selloff since March 2020.
As investors brace for the Federal Reserve to wind down its stimulus, fears are mounting about slowing economic growth, elevated inflation, supply-chain bottlenecks, a global energy crunch and regulatory risks emanating from China.
Elsewhere, China Evergrande Group started returning a small portion of the money owed to buyers of its investment products, weeks after people protested against missed payments.
In Asia, markets fell with Tokyo's Nikkei 225 (-0.41%), Hong Kong's Hang Seng (-0.36%), Seoul's Kospi Index (-2.13%) and Sydney’s ASX 200 (-1.55%) were all down in the morning session.
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1. Could Big Tech be the Investment for All Times?
When U.S. equities rebounded on Wednesday, there was a discernible clutch of companies that were left out of the rebound – Big Tech.
As the darlings of the stock market for most of the pandemic, analysts watch closely for setbacks like these to try and divine whether they and symptomatic of a longer-term shift in sentiment towards tech stocks, or merely another buying opportunity.
But short of a large spike in interest rates (unlikely at this juncture) it’s still hard to see what will end Big Tech’s dominance and resilience.
The so-called reflation trade that was to be married with the broader reopening of the economy has come and gone, with the Delta variant helping to stop that trade in its tracks and by the summer, Big Tech was once again firmly in the driver’s seat.
Instead, the half-baked reopening was the perfect setup for the U.S. Big Tech, with spectacular second-quarter earnings providing ample evidence that the sector was best placed to lead a path out of the pandemic.
And even though the pressure to raise interest rates is inching up, which could send convulsions through “growth” stocks like Big Tech, valuations aren’t as astronomical as may be believed.
Take Google (Alphabet) (-0.50%) for instance, whose shares have risen by over 86% in the past 12 months, but where the price to earnings has remained a relatively constant 30.
Facebook (-0.065%) on the other hand could even be argued of as being cheap, with concerns over Apple’s changes to privacy rules hammering the social media giant to a P/E ratio of just 24.
Compared against the broader S&P 500 with a current P/E ratio of 33.6 (as of 30 September 2021), Big Tech could scarcely be deemed exorbitant, bearing in mind though that tech has an outsized weighting on the benchmark index.
The “unknown unknown” however is regulation.
For now, Wall Street is still betting that the Democrats who control Washington won’t immediately train their sights on Big Tech, turning their rhetoric into real legislation.
But the recent appointment of hawks in the Biden administration such as Lina Khan, the new chief of the U.S. Federal Trade Commission and who has made clear her intent to bust up Big Tech remain an outside risk.
If the Microsoft (-0.73%) antitrust actions of the 1990s was anything to go by, there is the risk that Big Tech could get battered, but not broken up.
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2. Dollar Soars on Possible Rate Hikes
With U.S. headline inflation now running at about a 13-year high, and even U.S. Federal Reserve officials conceding that supply chain disruptions and soaring energy prices could be a precursor to a slightly prolonged period of higher prices, investors are betting that the central bank will be forced to raise interest rates and have poured into the dollar.
The greenback traded yesterday at its highest level against major trading currencies in a year.
Last week, the Fed raised its inflation forecasts and indicated that it would reduce its US$120 billion-a-month bond purchases that have helped boost lending and spending during the pandemic, a move that could happen as soon as next month, when the Fed meets again.
On Wednesday, Fed chairman Jerome Powell, who for the most part appeared to be wishing inflation away has now had to warn of “frustrating” inflationary pressures that were likely to persist.
By preparing the market for the Fed’s withdrawal of asset purchases, it leaves open the possibility of a rate hike as early as the second half of next year, a far more aggressive pace of tightening than had been earlier envisaged.
Equities took a beating in response and the yield on the benchmark U.S. 10-year Treasury fell below 1.5%, with most of the move happening later Wednesday, with some suggesting the reason for that being portfolio rebalancing.
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3. Could Central Bank Digital Currencies Themselves Destabilize the System?
As cryptocurrencies have entered the consciousness, central bankers globally, who had been initially dismissive of the phenomenon, have been quick to embrace their very own digital currencies.
And while China has been the first to issue its own central bank digital currency (CBDC), a clutch of the foremost central banks, including the U.S. Federal Reserve, Bank of England, European Central Bank and Swiss National Bank are warning of potential systemic stability risks from a CBDC.
But to understand what that risk is, it’s first necessary to understand how money is created.
In most modern financial systems, the citizenry don’t have a direct relationship with the central bank.
Instead, governments issue debt, that commercial banks buy and then sell to the central bank, which in return creates money to pay to the commercial banks, the bulk of which go back to the government for spending, and a fraction of which goes to fund mortgages, credit cards, student loans and the gamut of other financial services.
But because people have a relationship with their commercial bank, in the event that there should be times of financial stress, a CBDC could “be perceived as a safe haven” according to the report published Thursday by the Bank for International Settlements.
“Evidence from previous systemic bank runs indicate how powerful the impetus of a bank run is, and therefore how the reduced transaction costs of a CBDC could exacerbate bank runs.”
The central banks also warned that CBDCs had the potential to undermine the commercial banking system, taking a major bite out of commercial deposits and jeopardize the industry’s access to funding sources.
Nonetheless, the U.S. and other major economies are likely to press on with their CBDC initiatives, with U.S. Federal Reserve Chairman Jerome Powell noting at a news conference last week,
“The ultimate test will apply when assessing a central bank digital currency and other digital innovations. Are there clear and tangible benefits that outweigh any costs and risks?
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Oct 01, 2021