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Novum Alpha - Daily Analysis 4 October 2021 (10-Minute Read)

Asia investors are watching for further news on China Evergrande Group, which faces a maturing bond with little wiggle room for payment and high odds for default.

 
A magnificent Monday to you as investors start to wade cautiously back into the markets. 
 

In brief (TL:DR)

 
  • U.S. stocks ended last week none the worse for the wear with the Dow Jones Industrial Average (+1.43%), the S&P 500 (+1.15%) and the tech-centric Nasdaq Composite (+0.82%) all recovering some lost ground in a shift to risk-on sentiment. 
  • Asian stocks started the week on the back foot, as investors weighed prospects for a pickup in growth against concern over inflationary pressures.
  • Benchmark U.S. 10-year Treasury yields were steady around 1.46% (yields fall when bond prices rise) but with yields likely to face upward pressure as concerns over inflation mount. 
  • The dollar was little changed after two sessions of losses.
  • Oil was lower with November 2021 contracts for WTI Crude Oil (Nymex) (-0.34%) at US$75.62. 
  • Gold inched higher with December 2021 contracts for Gold (Comex) (+0.12%) at US$1,760.50.
  • Bitcoin (+0.58%) maintained its recent gains at US$47,813 heading into the week. 
 

In today's issue...

 
  1. Facebook Faces Its Biggest Challenge Yet
  2. Pandora Papers Highlight the Hypocrisy of Global Politicians
  3. El Salvadorans Acquire a Taste for Betting on Bitcoin
 

Market Overview

 
Asia investors are watching for further news on China Evergrande Group, which faces a maturing bond with little wiggle room for payment and high odds for default. 
 
As investor fears mount about slowing economic growth, U.S. labor data at the end of the week will also be a key focus for markets and whether the U.S. Federal Reserve will need to stay the course on asset purchases and its rate-hike schedule. 
 
Oil traders will monitor comments from OPEC+ which meets virtually amid a spiral higher in crude prices.
 
In Asia, markets tumbled into the week as traders weighed prospects for a pickup in growth against concern over inflationary pressures with Tokyo's Nikkei 225 (-1.09%) and Hong Kong's Hang Seng (-2.39%) down sharply on concerns over the Evergrande Group's potential default on upcoming debt payments while Sydney’s ASX 200 (+1.06%) was up as commodity prices continue to soar and Seoul's Kospi Index was closed for a holiday.
 

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1. Facebook Faces Its Biggest Challenge Yet

 
  • A former Facebook Inc. product manager has become one of the company’s highest-profile critics after exposing thousands of internal documents she said showed the social media giant failed to protect users
  • With a price-to-earnings ratio of just 24, Facebook compares well versus its peers, but if it does become the subject of antitrust action, may be in for a great deal of volatility until the dust settles
 
One of the biggest threats to the relentless ascent of Big Tech has always been the prospect of antitrust action or stiffer regulation.
 
And that threat has crystalized for the world’s biggest social media platform Facebook in the form of a whistleblower.
 
With unprecedented access to inside information, Frances Haugen, a former product manager for Facebook (+1.07%), has turned over thousands of internal documents to U.S. lawmakers and the Wall Street Journal, in a tell-all that reveals how the social media giant prioritized profits over users.
 
One of the more damning revelations was a series of research slides that showed how using Instagram often made things worse for young people with underlying mental health conditions, such as anxiety, or body image issues.
 
Of particular interest to lawmakers will also be information regarding internal discussions over Facebook’s content moderation efforts, including how high-profile accounts are treated differently as well as the spread of Covid-19 misinformation.
 
While Facebook has pushed back on some of the allegations, claiming that the data was “cherry picked” to portray the social media giant in a bad light, it has forced the company to halt plans it had to roll out a separate version of Instagram for children under the age of 13.
 
Instagram was acquired by Facebook in 2012 for US$1.0 billion, but its founders and creators left the company by 2018.
 
In the time since Facebook gained complete and total control over Instagram, the photo and short video sharing platform has grown far more quickly than the parent company and helped make an estimated US$24 billion in ad revenue last year, or over a third of the social media giant’s total  ad revenues.
 
Haugen’s revelations of the inner workings of the social media giant come at the worst possible time for Facebook.
 
With antitrust agitators in the Biden administration itching to train their targets on Big Tech, Facebook has suddenly had a big bullseye painted on its back and the threat of antitrust action being brought against is now a clear and present danger that investors will need to contend with.
 
Although Facebook’s main social media platform continues to grow, albeit at an anemic rate, the bulk of its future growth derives from Instagram, and it will be tricky for the company to acquire new targets at this time, with so much scrutiny on it.
 
With a price-to-earnings ratio of just 24, Facebook compares well versus its peers, but if it does become the subject of antitrust action, may be in for a great deal of volatility until the dust settles.
 

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2. Pandora Papers Highlight the Hypocrisy of Global Politicians

 
  • The hidden wealth of hundreds of rich and powerful people around the world has been exposed in one of the biggest leaks of financial information since the Panama Papers
  • The timing of the leak is particularly embarrassing for leaders in the West who have long railed against the use of offshore vehicles and trusts to avoid taxes or to obfuscate ownership of assets, whilst availing themselves of those exact financial structures
 
It’s trite to suggest most politicians are hypocrites, but to have evidence of that hypocrisy cast into the public spotlight can pierce even the thickest skins.
 
In the biggest leak of financial information since the Panama Papers, the hidden wealth of hundreds of rich and powerful people around the world has been shared with the International Consortium of Investigative Journalists (ICIJ).
 
Dubbed the “Pandora Papers,” the leak reveals the financial transactions of dozens of current and former world leaders, including King Abdullah of Jordan and former United Kingdom Prime Minister Tony Blair.
 
Detailed in the Pandora Papers are how the wealthy and politically connected use offshore tax havens to store and move money.
 
While politicians in the West call for a global minimum tax, transactions like Tony and Cherie Blair’s purchase of a US$8.8 million office in Marylebone, London, through the purchase of a British Virgin Islands company owned by Zayed bin Rashid Alzayani, a Bahrani minister, saved the former U.K. first couple an estimated US$422,466 in property taxes.
 
According to the ICIJ report, no fewer than 330 politicians and senior officials were named in the documents, including 35 country leaders.
 
The timing of the leak is particularly embarrassing for leaders in the West who have long railed against the use of offshore vehicles and trusts to avoid taxes or to obfuscate ownership of assets, whilst availing themselves of those exact financial structures.
 
The Panorama Papers may also provide sufficient steam for those who are pushing back against a global minimum tax, especially given that many of the trusts revealed in the Panorama Papers were established in U.S. states, including South Dakota, Florida and Delaware.
 
As the pandemic has exacerbated income inequality in many countries, particularly in the rich world where asset owners have seen the value of their portfolios soar, while those in lower income brackets have seen their livelihoods decimated, billionaires have parked their wealth in offshore and onshore trusts and shell companies, to help paper over their massive treasure trove.
 
Concerns over a popular backlash against the very rich has led to a proliferation of offshore service providers, even in the wake of the Panama Papers and if nothing else, the pandemic has seen demand for such corporate structures grow.
 

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3. El Salvadorans Acquire a Taste for Betting on Bitcoin

 
  • Bitcoin has unleashed a wave of speculation in El Salvador since its adoption as legal tender last month
  • Beyond speculation, if Bitcoin’s use as legal tender in El Salvador provides tangible benefits for the impoverished Central American economy, it may embolden other countries, especially those that rely heavily on remittances, to adopt the cryptocurrency as well
 
What’s a bit of cryptocurrency if you can’t bet with it?
 
While the rollout of Bitcoin as legal tender in El Salvador was a shambles, with the government’s Chivo app crashing within hours upon launch, El Salvadorans are now gaining a taste of the potential of the cryptocurrency – as a tool for speculation.
 
Since its adoption as legal tender last month, drivers, waitresses and business owners are day-trading Bitcoin on their smartphones, buying the dips and selling on rallies with Chivo, that comes pre-loaded with about US$30 worth of Bitcoin.
 
The goal of Chivo was to facilitate Bitcoin transactions with local merchants, but because users can top up balances and switch easily between dollars and tiny, fractional amounts of the cryptocurrency, it’s a perfect tool for speculation.
 
And while Bitcoin use was initially met with resistance from El Salvadorans, in the capital San Salvador, large chains like Starbucks (+2.37%), McDonald’s (+0.75%) and supermarkets are accepting the cryptocurrency for purchases.
 
Bitcoin is also now accepted at some smaller businesses in El Salvador’s biggest city as well, with merchants using the cryptocurrency to boost profits from the sale of products, by accepting Bitcoin when its price drops, then converting it back to dollars as it rises.
 
Beyond speculation, if Bitcoin’s use as legal tender in El Salvador provides tangible benefits for the impoverished Central American economy, it may embolden other countries, especially those that rely heavily on remittances for income, to adopt the cryptocurrency as well.
 
Remittances account for over 20% of El Salvador’s GDP.
 
 

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Oct 04, 2021

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