Novum Alpha - Daily Analysis 6 October 2021 (10-Minute Read)
Volatility has picked up in global markets as investors brace for a slower but still robust economic recovery from the pandemic and gradual monetary-policy tightening to contain price pressures.
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A wonderful Wednesday to you as markets take the winding road towards recovery.
In brief (TL:DR)
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In today's issue...
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Market OverviewVolatility has picked up in global markets as investors brace for a slower but still robust economic recovery from the pandemic and gradual monetary-policy tightening to contain price pressures.
Political gridlock in the U.S. over the nation’s debt ceiling and U.S. President Joe Biden’s wider economic agenda is contributing to the uncertainty, but so are soaring energy prices and supply chain snarls that are putting upwards pressure on prices.
Worries about China’s highly-leveraged property sector continue to cast a shadow on overall sentiment and soaring U.S. Treasury yields has dampened demand for Asian equities.
In Asia, markets wound lower on Wednesday as traders weighed prospects for a pickup in growth against concern over inflationary pressures and rising U.S. Treasury yields, with Tokyo's Nikkei 225 (-0.93%), Hong Kong's Hang Seng (-0.64%), Sydney’s ASX 200 (-0.54%) and Seoul's Kospi Index (-1.09%) all down in the morning trading session.
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1. Facebook Tries Turning it Off and On Again
“Hello IT, have you tried turning it off and on again?”
US$5.9 billion in market cap and several hours later, Facebook (+2.06%), the world’s largest social media platform came back online after engineers figured a way to literally turn it off and on again.
In what could be described as almost tragically comical, a Facebook spokesperson said that fixing the underlying problem of the outage involved visiting a physical server facility and manually resetting some servers – turning Facebook and its ancillary services off and on again.
The technical issue that Facebook claims was due to a network configuration didn’t just take down Facebook, but Instagram as well as WhatsApp and Facebook Messenger as well.
Over 2.75 billion people globally were impacted, unable to conduct business, communicate or consume news as Facebook and its other services went down.
The latest challenge at the social media giant comes after a damaging dump of sensitive documents and research by a former Facebook product manager, detailing how the social media giant recognized the dangers that its platform posed to users, but put profits ahead of safety.
Facebook’s outage will put wind in the sails of antitrust agitators in the Biden administration who have been increasingly training their sights on Big Tech.
Ironically, the recent fiascoes with Facebook will provide an opportunity for other tech firms.
Beyond the fact that Signal, an alternative to WhatsApp signed millions of new users yesterday, while Telegram surged to top the U.S. iPhone download chart, according to Sensor Tower, regulators and lawmakers may take aim now at the social media giant, instead of firms like Amazon (+0.98%).
While the Chair of the Federal Trade Commission, Lina Khan, has long had it in for Amazon, she may now be forced to look more closely at Facebook, especially given that the recent outage demonstrates the danger when so much activity is concentrated within the hands of one company.
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2. What is Stagflation and is it time to worry?
The promise of breakneck pent-up consumption from months of pandemic restrictions has failed to materialize.
If nothing else, there are increasing signs that the global economy is slowing.
With Beijing seemingly on a crusade against capitalism, the delta variant slowing the reopening of borders, and general economic malaise, central bankers are facing their worst nightmare – slowing growth and inflationary supply shocks that combined, threaten stagflation.
Making matters worse, central banks are limited in what they can do in response.
With rates already so close to zero, flooding the markets with more liquidity is likely to lead to further inflation, yet without the guarantee of spurring on greater economic activity.
The U.S. Federal Reserve, the Bank of England and other major central banks have made moves to either communicate the prospective tightening of monetary policy or already done so.
In contrast, the European Central Bank and the Bank of Japan, where both German and Japanese bonds have paid negative yield for the longest time, are choosing to stand their ground.
The popular view is that central banks should adopt the ECB and BoJ stance – do nothing.
Because inflation caused by supply shocks are likely to resolve naturally over time, a sudden tightening of monetary policy in response, especially given the weak nature of the economic recovery, could derail it altogether.
High prices in and of themselves do not lower economic demand, but raising interest rates dampen the willingness of companies and households to borrow for consumption or investment and could cause far more damage.
In this regard, monetary policy is like being armed with a hammer – everything looks like a nail.
So far, the Fed is showing little signs of losing its nerve.
Although U.S. Federal Reserve Chairman Jerome Powell noted that the central bank had been surprised by the intensity of supply bottlenecks, longer-term market measures of inflation expectations do support his steely resolve that these prices rises are transient.
The danger is that as price increases, especially with the recent spike in energy prices, persist longer than anticipated, more central bankers will feel pressured to raise interest rates and that could not just derail the economic recovery, but the unbroken rally across asset classes.
Now may not be the time to worry about stagflation, but it is certainly the time to start thinking about worrying about it.
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3. Could a Digital Dollar give Crypto a Run for Its Money?
While China has already rolled out its digital yuan, the U.S. has taken a decidedly more measured approach in determining whether a digital dollar is suited for the country and by extension, the global economy.
Three papers to be released in the coming months will provide an insight into the thinking of Washington.
The U.S. Federal Reserve Board is set to release a paper as soon as this month on the U.S. payments system, as well as provide some guidance on whether the country should issue its own digital currency.
The Federal Bank of Boston will also publish its long-awaited research and open-source software code on technology that could potentially underpin a digital dollar.
Finally, and perhaps most significantly for cryptocurrency traders, the President’s Working Group in Financial Markets is set to issue policy recommendations on how to regulate stablecoins – effectively digital dollars created by private companies.
Although an official digital dollar could take years to create, if it happens at all, a clutch of private companies hasn’t bothered to wait and gone ahead to cater to a gap in the cryptocurrency markets.
Dollar-based stablecoins have long filled the need for cryptocurrency pairs that want to trade according to a dollar price, but also have the stability provided by a fiat currency pair.
In the early days of cryptocurrency trading, stablecoins were also a means for traders to “cash out” of their positions momentarily while waiting to move in on the next opportunity.
Although Bitcoin pairs exist for the bulk of most frequently traded tokens, because Bitcoin’s value fluctuates against the dollar, many traders prefer to use dollar-based stablecoin pairs to trade their positions.
Tether, which is the world’s most traded stablecoin and has a market cap of around US$68 billion is heads and shoulders over other dollar-backed stablecoins, including Circle Internet Financial’s USDC.
The trend of privately-issued stablecoins will likely be addressed by the President’s Working Group on Financial Markets, a gather of the leaders of various three-letter agencies, including the Fed and the Treasury.
Federal officials continue to express concern that the reserves of some stablecoins are invested in assets such as commercial paper (liquid corporate bonds) and other related securities, that could experience severe stress if investors were to lose confidence and attempt to cash in all their stablecoins all at once.
Given Tether’s struggle to find stable banking relationships and its decision to skirt around U.S. regulation, the company has been forced to maintain its dollar-peg via other means, for instance by holding on to commercial paper and other securities.
What that does is essentially make Tether “dollar-based” as opposed to its original stated goal of being “dollar-backed.”
U.S. Federal Reserve Chairman Jerome Powell and U.S. Securities and Exchange Commission Chairman Gary Gensler have both likened stablecoins like Tether to money market funds, which also seek to maintain a value of one dollar, a peg that sometimes slips during periods of financial stress.
Given Tether’s holdings of securities, it’s actually estimated to be the sixth or seventh largest holder of commercial paper, and as that number grows, increases the systemic risk it poses to the financial system.
For now at least, USDT is used for very little outside of cryptocurrency trading and U.S. lawmakers and regulators may be keen to bring that bit of the crypto Wild West under supervision.
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Oct 06, 2021